The Cryptocurrency Market And Its Legal Aspects: is here to stay. Virtual money is becoming increasingly important; therefore, it has brought certain legal problems to the table. Next, we analyze how cryptocurrencies work and the new challenges they pose.
How The Cryptocurrency Market Works
To know what cryptocurrencies are, it must be taken into account that digital currencies are chains of encrypted data that work like money. They are obtained by mining, which limits the amount of currency on the market. This scarcity element allows them to be used as money in commercial exchanges. However, one of its most effective uses is speculation.
Cryptocurrency mining takes the place of traditional currency issuance. But to understand what it consists of, you must know how cryptocurrency works.
Digital currencies work using blockchain technology. Its translation would be “chain of blocks” and offers a very intuitive idea of its mechanics. Blockchains are information records (in this case, transactions) accessible and collaboratively produced.
Thus, the concept is similar to an account book, although all market participants have their copy here. Of course, the information is encrypted to ensure the participant’s anonymity and the operation’s confidentiality. The Cryptocurrency Market And Its Legal Aspects
In short, each block corresponds to a set of operations. The creation of a block consists of closing a package of operations. Therefore, each time this set of operations is encrypted, a block is created, and the user who has managed to encrypt it obtains a small amount of currency in exchange for this work. The Cryptocurrency Market And Its Legal Aspects
Once the block is created, the following operations must be packed into the next block. These packets are concatenated in an orderly fashion, thus ensuring the chain’s integrity (as occurs with the numbering of transactions in a ledger).
The computing power required to obtain the algorithm that closes the blocks is greater at each step in the chain. This is due to the increasing complexity of the procedure. For this reason, today, large equipment and data centers are necessary for mining to be profitable.
In return, this escalation in complexity and need for resources introduces the scarcity factor that prevents excessive currency issuance, avoiding inflation… although only in principle. The Cryptocurrency Market And Its Legal Aspects
Benefits And Risks Of Cryptocurrencies
The power of cryptocurrencies is associated with certain benefits, of which the following can be highlighted: The Cryptocurrency Market And Its Legal Aspects
- Easy access.
- Trading opportunities.
However, these benefits are also associated with risks such as price fluctuation and lack of regulation. It is precisely these risks that put on the table the need to face new legal challenges. The Cryptocurrency Market And Its Legal Aspects
Cryptocurrencies Are Easily Accessible To Everyone
Mining and payment with cryptocurrencies can be practiced from anywhere on the globe. This may be their strongest point since they are free from national politics or economies. It is enough to have a pen drive or a memory card to store and use cryptocurrencies.
Cryptocurrencies Are Decentralized
Because of their global nature, cryptocurrencies are not subject to any official market. This implies the possibility of constantly operating, favoring factors like the one described below.
They Offer Trading Opportunities.
Cryptocurrencies are ideal for trading, a concept inherent to them. If you need to learn what trading is, we remind you that it speculates the movements of cryptocurrency prices through an account. Speculative bids and offers determine its price.
As an intangible asset backs the price, cryptocurrency trading has proven to be incredibly elastic, impacting the volatility of its value. The Cryptocurrency Market And Its Legal Aspects
Transparency is at the base of the blockchain concept. As already explained, this does not imply compromising certain information. However, the chain allows tracing the integrity of the system, which guarantees the transparency of the transactions.
Large Price Fluctuations
This is the main risk of cryptocurrencies. Being open to constant speculation, their value is extremely volatile. This has led to great investment opportunities but also the sinking of many inexperienced investors. After all, speculation is essential in setting the prices of digital currency. The Cryptocurrency Market And Its Legal Aspects
Are Not Regulated
This is the second notable risk of cryptocurrencies. As in the previous case, it is not indicated as a disadvantage since a national or transnational regulation would limit some of the tool’s advantages, such as ease of access or speculative use.
However, the lack of regulation makes it difficult to control operations and guarantees against fraud and technical or human errors.
It should be noted that the absence of regulation will be temporary. Thus, Directive 2018/843/UE already defines the concept of virtual currency (differentiating it from electronic money), although it does not regulate its use or operation.
What Are The Legal Aspects Of The Cryptocurrency Market?
As noted, regulating cryptocurrency can remove some features that make it attractive to investors. In addition, it would be a challenging task since although they are titled coins, they are data sets. That is, they operate as intangible assets.
The first challenge in knowing how to trade cryptocurrencies will be determining if it is a financial product, a commodity, or a proprietary currency. In this sense, a first pronouncement of the CJEU qualifies bitcoin as an atypical currency. Thus, it is conceived as a conventional but not legal means of payment suitable for financial operations.
The question is not trivial since the nature of the asset will determine the rights and obligations associated with it, such as:
- The obligations of information and transparency of the seller or issuer.
- Consumer rights, such as withdrawal or contractual termination.
- The tax regime of the currency and its operations.
In short, the regulation of the cryptocurrency market is just around the corner. And it must cover such important aspects as supervision and control entities, inter partes relations, or the nature of operations based on virtual currencies.