What is Crypto Currency?

We live in a fast paced, energy driven world where transactions happen in less than 30 seconds. We can buy things, pay off debts, transfer funds all at the click of a button.

“Time is money” has never been a truer statement.

It therefore comes as no surprise that how we view currency has changed. Has evolved. Has metamorphosed into something that fits our fast-paced lives.  

Sure, money is still money, that will never change. It’s how we view it in all it’s varying forms that will.

What do we mean? Well, “money” whether it’s in the form of a VISA, Debit and Mastercard or paper cash – is still a thing that we can hold in the palm of our own hands. Just like gold, it’s a tangible thing that we can see and touch.

But what about money that is transferred between accounts and is somewhere out in the ether somewhere? In a digital format. We may not be able to see or even touch money in its digital form, but we understand that it has a value. Because we can see its value in our bank account. Even if we cannot touch it, it’s at least something we understand.

But what about crypto currency?

What is crypto currency?

Where crypto currency is concerned, the fact that we cannot physically see it – even if that’s on a computer screen - makes it hard for us to understand its value. And that can make a lot of us a little nervous, a little suspicious, a little disbelieving.  

Kapersky defines crypto currency as –

“sometimes called crypto-currency or crypto, is any form of currency that exists digitally or virtually and uses cryptography to secure transactions. Cryptocurrencies don't have a central issuing or regulating authority, instead using a decentralized system to record transactions and issue new units”.

And Investopedia as -

“a digital or virtual currency secured by cryptography, which makes it nearly impossible to counterfeit or double-spend. Most cryptocurrencies exist on decentralized networks using blockchain technology—a distributed ledger enforced by a disparate network of computers.

A defining feature of cryptocurrencies is that they are generally not issued by any central authority, rendering them theoretically immune to government interference or manipulation”.

And lastly, Nerdwallet defines crypto currency as –

“a digital currency used as an alternative payment method or as an investment. Cryptocurrencies get their name from the cryptographic techniques that enable people to buy, sell or trade them securely without the need for a controlling authority, such as a government or financial institutions”.

Repeating points from the above definitions include –

1. It’s a digital or virtual currency,
2. Issued by a decentralised authority, and
3. Secured by cryptography (mathematical and computational practice of encoding and decoding data).

Bitcoin may be the best example of what a crypto currency is. According to Nerdwallet, Bitcoin is -

“Bitcoin is a form of digital currency that aims to eliminate the need for central authorities such as banks or governments. Instead, Bitcoin uses blockchain technology to support peer-to-peer transactions between users on a decentralized network.

Transactions are authenticated through Bitcoin’s proof-of-work consensus mechanism, which rewards cryptocurrency miners for validating transactions.

Each Bitcoin is a digital asset that can be stored at a cryptocurrency exchange or in a digital wallet. Each individual coin represents the value of Bitcoin’s current price, but you can also own partial shares of each coin. The smallest denomination of each Bitcoin is called a Satoshi, sharing its name with Bitcoin’s creator. Each Satoshi is equivalent to a hundred millionth of one Bitcoin, so owning fractional shares of Bitcoin is quite common”.

BDO USA describes Bitcoin as follows–

“While there have been several attempts to create cryptocurrencies since the 1990’s tech boom, Bitcoin is the first to gain widespread public notoriety. Leveraging opensource peer-to-peer technology, the transaction and issuance of Bitcoin is collectively managed by the network, effectively cutting out the middleman.

Introduced by an anonymous programmer or group of programmers under the alias “Satoshi Nakamoto,” Bitcoin has consistently dominated the crypto market since it became available to the public in 2009. It has remained relatively unchallenged until the introduction of the Ethereum platform in 2016. Cryptocurrencies, including Bitcoin and Ethereum, are more volatile than traditional fiat currencies. Fiat currencies are declared to be legal tender by a government and are not backed by physical commodities”.

So, now that we know what a crypto currency is (by also having a real-world example), the questions that follow pose some interesting legal standpoints.

How does one acquire crypto currency?

Through a process called “mining”, which according to Investopedia is the process by which new crypto currency, like Bitcoin are -

“entered into circulation. It is also the way the network confirms new transactions and is a critical component of the blockchain ledger's maintenance and development. "Mining" is performed using sophisticated hardware that solves an extremely complex computational math problem. The first computer to find the solution to the problem receives the next block of bitcoins and the process begins again.”

You can also acquire crypto assets by exchanging local currency for a crypto asset (or vice versa), using crypto assets exchanges (markets for crypto assets), through private transactions as well as through bartering i.e., goods or services can be exchanged for crypto assets (normal barter transaction rules apply).

Is crypto currency “money” like a debit card or credit card?

The article by Forbes Bitcoin Is A Cryptocurrency, But Is It Money? Answers this question quite succinctly for us -

“Economists say that money performs three functions. It serves as:

• A unit of account: It helps people understand how much wealth they have.
• A medium of exchange: People use it to facilitate trade, to carry out transactions.
• A store of value: People feel comfortable holding their wealth in it.

Does Bitcoin do any or all these things? In brief, no.

A unit of account: Even individuals who have been very successful in trading Bitcoin quote their wealth in dollars, not Bitcoin. Cryptocurrency markets are sized in dollars, not Bitcoin or other cryptocurrencies. While Bitcoin may serve this function someday, it doesn’t yet.

A medium of exchange: Bitcoin has been used and is currently used to buy goods and services. However,

• Many of the offerings are “gimmicky.” For example, the Oakland Athletics recently offered (behind paywall) one full-season package for a six-seat suite for one Bitcoin.  
• Prices are almost always set in dollars, not Bitcoin.
• Few vendors will accept Bitcoin. PayPal PYPL +1.3% recently announced that it will support the use of select cryptocurrencies in users’ PayPal accounts. However, “when a consumer selects cryptocurrency as the funding source, the cryptocurrency will be instantly converted to fiat currency and the transaction will be settled with the PayPal merchants in fiat currency.” The fiat currency (dollars in the US) is the medium of exchange, the cryptocurrency is not.
• Dollars and other currencies are legal tender (must be accepted if offered in payment of a debt), cryptocurrencies such as Bitcoin are not.

A store of value: While many people hold Bitcoin, its frequent large price fluctuations make it very risky as an asset for holding one’s wealth.

Cryptocurrencies have been designed to serve as currencies, but they don’t yet fulfill the central functions of money. In a subsequent article, I’ll explore whether and how they might evolve in that direction”.

And if we look to our local shores, it would seem (at least on the face of it at least), that our local authorities would agree.

For example, if we look at the definition of money, as per the South African Reserve Bank (SARB) Act 90 of 1989, money is defined as legal tender which at Section 17 is defined as follows –

• “A tender, including a tender by the [South African Reserve] Bank itself, of a note of the Bank or of an outstanding note of another bank for which the Bank has assumed liability in terms of section 15 (3) (c) of the Currency and Banking Act or in terms of any agreement entered into with another bank before or after the commencement of this Act, shall be a legal tender of payment of an amount equal to the amount specified on the note.”
• “A tender, including a tender by the Bank itself, of an undefaced and unmutilated coin which is lawfully in circulation in the Republic and of current mass, shall be a legal tender of payment of money”.

Applying the above definition, we can clearly see that the answer to whether crypto currency is money is likewise a resounding no. This is echoed by the following local authorities –

1. the Generally Accepted Accounting Practices or GAAP, which states (according to U.S. BDO) that “Cryptocurrencies are not cash because they are not legal tender and are not backed by a government or other legal entity. For similar reasons, they are also not cash equivalents or foreign currencies under U.S. GAAP”.
2. The South African Institute of Professional Accountants or SAIPA in their paper on Accounting for Cryptocurrency, goes on to describe crypto currency as such –

“Cryptocurrency has no intrinsic value in that it is not redeemable for another commodity (such as gold), has no physical form (such as physical coins), is not legal tender and is not currently backed by the government or a legal entity.

Your cryptocurrency is not held by a bank or other entity; it’s stored in your ‘wallet’ on your computer, cellphone or in the cloud. Cryptocurrency, such as Bitcoin, is pseudonymous in that the cryptocurrency is not tied to a person, but rather one or more specific keys, and thereby the owner is not identifiable, while all transactions are publicly available in the blockchain”.

Ok. We have established it’s not money. But then, what is crypto currency?

We will be looking at whether crypto currency is an asset or not as well as how it’s regulated in our next article. Look out for it!

In the meantime, if you have any questions on the information we have set out above or have a personal issue which you want to discuss with us, please don’t hesitate to contact us at NVDB Attorneys.

We are a law firm that considers honesty to be core to our business. We are a law firm that will provide you with clear advice and smart strategies - always keeping your best interests at heart!