• Advokat Jeppe R. Stokholm

What is a crypto currency - and what is the difference between commodities, fiat and crypto?

Updated: Jan 26, 2018

#Cryptolaw


As a starting point, #cryptocurrencies can be classified as a subset of digital currencies and can also be classified as a subset of alternative currencies and #virtualcurrencies. Crypto currencies can be found in multiple functions representing an asset, including coins etc.


Tokens vs. Coins


In this respect, #coins and #tokens are not the same. Coins represents a store of value, a medium of exchange and a unit of account and can be defined by their use:


A) Coins can be used as a payment

B) Coins can be traded between parties


Tokens can also perform as coins, i.e. be used as payment and be traded between parties, but tokens are more than just coins. A token is a multi-purpose instrument and can be found in multiple functions, such as: A smart contract giving rights and obligations, a mining reward to miners, a crypto currency (coins), a digital share, a payment, a right to an (in)tangible asset, a right to real estate etc. Tokens can be used in new protocols and networks (protocol tokens) to create distributed application (app tokens). Tokens are not the same as coins, since tokens can perform more features, than a coin, including representing a store of value, a medium of exchange and a unit of account, i.e. be used as coins.


In the following, when talking crypto currencies, we will talk coins.


How to transfer and receive crypto currencies?

The transfer of crypto currencies is carried out differently from “classical” money transfers, that can be done online (e.g. by e-banking, payment with a credit card, payment by use of a money transfer operator etc), since the transfer is done directly and peer-to-peer without the use of any intermediate.


When transferring crypto currencies, a “push” model is used, transferring the funds directly from the account holder to the receiver, i.e. without the use of an intermediate (trusted third party) that uses a classical “authorize and pull” model.


To ensure that the transfer of digital assets is well protected and maintains to be secure without the use of any intermediate, different cryptographic techniques are used. For instance, Bitcoin uses the U.S. National Security Agency’s SHA-256d cryptographic hash function, and Litecoin uses a password-based key derivation known as Scrypt.


As a general rule, crypto currencies can be acquired in three ways:

  1. By exchanging a fiat currency to a crypto currency

  2. By being paid in a crypto currency

  3. By issuing a new crypto currency


Tip: Focus on the difference in attributes


Since crypto currencies can be classified as a subset of both 1) digital currencies, 2) alternative currencies and 3) virtual currencies, and since no uniform definition of these different currencies exists, a way to describe crypto currencies is to focus on the differences in attributes between:


A. Traditional commodities, i.e. assets or things of value (grain, cobber, silver, gold, oil etc.), vs.


B. Fiat currencies, i.e. government-issued currencies that are designated as legal tender in their country of issuance through government decree, regulation or law (USD, EUR, CHF, GBP, DKK etc.), vs.


C. Crypto currencies, i.e. encrypted digital assets designed to work as a medium of exchange (BTC, ETH, BCH, XRP, LTC etc.)


This seems to be the approach by the US FinCEN, that defines “virtual currencies” as:


“…a medium of exchange that operates like a currency in some environments, but does not have all the attributes of real currency”[1].

The European Parliament also focus on the difference between commodities, fiat and electronic payments in their definition of “virtual currencies”:


”…a digital representation of value that is neither issued by a central bank or a public authority, nor necessarily attached to a fiat currency, but is accepted by natural or legal persons as a means of payment and can be transferred, stored or traded electronically[2].

What "virtual currencies" does NOT mean


A more detailed definition of “virtual currencies” can be found at the US Financial Action Task Force (FATF). Interesting is, that the FATF-definition also include a negative description of what “virtual currencies” does NOT mean:


”a digital representation of value that can be digitally traded and functions as: (1) a medium of exchange; and/or (2) a unit of account; and/or (3) a store of value, but does not have legal tender status (i.e., when tendered to a creditor, is a valid and legal offer of payment) in any jurisdiction. It is not issued or guaranteed by any jurisdiction, and fulfils the above functions only by agreement within the community of users of the virtual currency. Virtual currency is distinguished from fiat currency (a.k.a. “real currency,” “real money,” or “national currency”), which is the coin and paper money of a country that is designated as its legal tender; circulates; and is customarily used and accepted as a medium of exchange in the issuing country. It is distinct from e-money, which is a digital representation of fiat currency used to electronically transfer value denominated in fiat currency” [3].

A crypto currency is not only a medium of exchange, that is different from a fiat currency with legal tender status, it is an asset, and must be classified as such, cf. the Swiss Federal Council in its 2014-report on virtual currencies:


“A virtual currency is a digital representation of a value which can be traded on the Internet and although it takes on the role of money – it can be used as a means of payment for real goods and services – it is not accepted as legal tender anywhere. These currencies have their own denominations. They differ from e-money in that they are not based on a currency with legal tender status. Virtual currencies exist only as a digital code and therefore do not have a physical counterpart for example in the form of coins or notes. Given their tradability, virtual currencies should be classified as an asset”[4].

"Let it become, it will become"


A common feature of crypto currencies is, that they are organic by nature: Crypto currencies are issued by independent entrepreneurs in open and decentralized networks, and the quantity and pricing of the different currencies are not subject to regulation through a central database or a closed monetary system (contrary to fiat currencies: The term “fiat” derives from Latin used in the sense of an order or decree: “Let it become, it will become”).


Simply put, crypto currencies are valued according to simple supply and demand in the specific market, they are featured in, and they are not (yet) issued, backed or priced by a central bank.



Advokat Jeppe R. Stokholm is based in Zürich, Switzerland. The area of expertise is corporate affairs, including M&A, Venture Capital, Private Equity and Crypto Law. Advokat Jeppe R. Stokholm represents several international oriented Law Firms, Auditors and Family Offices on a case-by-case basis and provide discretionary counselling to global operating companies and private UHNW clients. 



NOTES:

[1] FIN-2014-R001: Application of FinCEN’s Regulations to Virtual Currency Mining Operations


[2] https://www.ecb.europa.eu/ecb/legal/pdf/en_con_2016_49_f_sign.pdf.


[3] FATF Report: ”Virtual Currencies, Key Definitions and Potential AML/CFT Risks”, Financial Action Task Force (June 2014): http://www.fatf-gafi.org/media/fatf/documents/reports/Virtual-currency-key-definitions-and-potentialaml-cft-risks.pdf


[4] Schweizerische Eidgenossenschaft: ”Federal Council report on virtual currencies in response to the Schwaab (13.3687) and Weibel (13.4070) postulates”, 25 June 2014, p. 7



​Zürich, Switzerland