Regulating Blockchain – Bitcoin SV Wales
The statement from the LTDP views blockchain and native crypto assets largely through the lens of simple payments and the use case of exchange.
To approach the topic with this perspective is quite natural, and betrays the many of the popular narratives that have surrounded Bitcoin since its inception in 2008. However, the views laid out by the panel may in fact be only the first step of a longer journey toward a full regulatory understanding of the blockchain.
HMRC does not consider cryptoassets to be currency or money.
— Cryptoassets: tax for individuals, 20/12/2019
In the governmental policy paper on the taxation of cryptoassets, most recently updated in December, it is made abundantly clear that, as far as HMRC is currently concerned, Bitcoin does not qualify as a ‘money’ of any kind. Instead, the UK classification of Bitcoin is that of an exchange token.
To contextualise this, the paper broadly defines three classes of token:
- Exchange tokens — these are to be used as a means of payment but do not provide access to or rights over goods and services.
- Utility tokens — these provide access to goods and services on a particular platform, whereby the utility tokens can be accepted as payment for those goods and services.
- Security tokens — these provide the holder with interests in a business, such as shares or profits.
At first glance one would be forgiven for thinking that the current HMRC classification of Bitcoin as an exchange token is entirely appropriate. In general, Bitcoin tokens are typically used as a means of payment and peer-to-peer exchange between willing participants, but do not ostensibly grant access or rights to goods and services on their own, to the untrained eye at least.
However, as Deryk Makgill writes, this classification seems to fly in the face of the original vision for Bitcoin, and the purposes for which its inventor created the system.
Satoshi wrote he believed Bitcoin would bootstrap because it had utility and defined its earliest uses in an email on the Cryptography Mailing List as a utility token, not a collectible.
— Deryk Makgill, 02/01/2020
The emphasis of Bitcoin, and its raison d’etre, was always in its utility as an electronic cash system. This is probably evidenced most convincingly in the Nakamoto white paper that birthed the technology, and we need only take a cursory glance at its title — Bitcoin: a peer-to-peer electronic cash system — to remind ourselves of that fact. Bitcoin was always designed to be a sound monetary system that would enable micropayments and replace the trust in intermediaries that is required in contemporary payment systems.
A subtle caveat to this is that ‘Bitcoin’ is a system, rather than just a crypto asset. That system does of course include a cryptoasset, the Bitcoin tokens themselves, but it also comprises something else — a ledger. The fact that Bitcoin is more than just the native token is where the present regulatory view of Bitcoin, as expressed by HMRC and in part by the LTDP, is limited.
The interplay between these components of the system, the tokens and the ledger that keeps an unalterable record of them, is where there is a strong argument to reframe the regulatory perspective on Bitcoin. The ledger is the component of the system commonly termed the ‘blockchain’, simply because it is itself made up of many discrete blocks of data that are cryptographically linked in a sequence (or ‘chain’), with a new block being appended to the chain every 10 minutes on average.
However we stated above that each of these blocks is discrete, meaning that each will be distinct from one another and each of a particular variable size. The size of a block is effectively a proxy measure of how many people can use Bitcoin at once, and the size of a given block is largely dependent on two factors, measured at the time at which the block is created:
- The demand for block space i.e. how many people want to use Bitcoin at that time; and
- The processing capacity of the mining network.
Both of these factors are clearly economic in nature. The former is subject to, in a simplified sense, basic supply and demand economics, while the latter is subject to mining costs as well as the total fees paid by users of Bitcoin to the miners. The graphic below demonstrates the variation in block size between the three major competing forks of Bitcoin:
Published at Tue, 07 Jan 2020 04:12:04 +0000
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