The South African Revenue Service (SARS) recently announced its position on Bitcoin and other cryptocurrencies, confirming that they will be subject to tax in South Africa.
While this may feel like the taxman has just found another way to target your wealth, general regulation may not ultimately be bad thing, according to Christine Rodrigues, partner at Hogan Lovells.
Rodrigues notes that some jurisdictions that have taken active steps to regulate cryptocurrency.
“The United Kingdom, as an example, has set up several cryptocurrency organisations to bring more legitimacy to the industry,” she said.
“In addition, there are some securities rating agencies (for example Weiss Ratings) that have taken it upon themselves to offer the first ratings on cryptocurrencies.”
Rodrigues said that ratings are likely to give sceptics some confidence in the value of the cryptocurrency, but until such times as cryptocurrencies are not rated, value will continue to be determined by:
- Supply and demand;
- Security of the block chain;
- The difficulty of “mining” to get more coins;
- Use of the cryptocurrency as a form of payment or investment;
- Media attention; and
- The value of fiat currency (fiat money, although considered a legal tender by governments, is not backed by a physical commodity such as gold or silver like traditional currencies. The value of fiat money is based solely on the faith and credit of the economy).
Despite popular belief cryptocurrency, although not regulated in a traditional sense, is in fact regulated through its community of users, added Rodrigues.
“Peer-to-peer regulation exists. Governments are only now intervening on the basis of taxing it as income or gains from trade and investment and with the intention of driving down the rate of fraud and other illicit activities that may be funded by cryptocurrency.
“Legitimate regulation on cryptocurrency may increase confidence on existing users and possibly induce an investor appetite for potential users and thereby cause a rise in demand and, as mentioned above, the more demand for and confidence in the commodity, the more value it will earn,” she said.