Issue link: https://maltatoday.uberflip.com/i/1007543
13 maltatoday | WEDNESDAY • 25 JULY 2018 OPINION BUSINESS George M. Mangion gmm@pkfmalta.com The writer is a partner in PKF an audit and business advisory firm THERE is tide of legislation in a growing number of coun- tries such as Malta, Gibraltar, Switzerland, Isle of Man and India which are paving the way for use of virtual curren- cies and mandating the rules concerning due diligence and AML basic requirements for coin offerings. Blockchain is an innovative platform – it is distributed over a number of servers thus avoid- ing the risks of having all our eggs in one basket. Which leads to more transparency linked to digital asset ownership for users. The disruption from this wave of technology is forcing opera- tors to redefine their branding in a new market of Millennials who expect a new experience in an everchanging digital environ- ment. Can the entertainment, gambling and possibly financial sectors resist the challenge of users armed with virtual reality headsets? These render a whole- some experience complete with onsite holograms articulated by the uniqueness of Artificial Intelligence. We all agree that hiding away or taking an ostrich attitude is not advisable as one hopes to avoid the experience of Kodak which collapsed by not keeping up with advances of digital photography. Locally, the media reported about the posi- tion taken by the Malta Financial Services Authority which is still trailing behind to issue full guidelines when compared to Switzerland with its faster pass- ing of the Blockchain laws. Only recently MFSA has been cautioning enthusiasts to wait until a formal public announce- ment to operators is issued. It is telling applicants not to send requests for approvals and authorisations because the regulator is not ready. In its endeavour to baptise the island as the pioneer in Blockchain, the MFSA last month started gath- ering stakeholder opinions on various topics and as can be ex- pected it is busy sifting the data. Fair enough, perhaps the situ- ation will improve and become more user-friendly when a new regulatory body is appointed by the end of this year. This is branded as the Malta Digital Innovation Authority – fully empowered to decide and monitor inter alia, cryptocur- rency exchanges and companies under the auspices of the Inno- vative Technology Arrangement and Services Act. One hopes that the appoint- ments at the board of gover- nors will be fully qualified and technically proficient members. Many ask if cryptocurrencies are a cover up for ill-gotten gains. A kind of wolf in sheep's clothing ready to scowl at hapless inves- tors who are lured to the club which offers superior returns. Is there a shady veil of decep- tion that shields Bitcoin and other tokens? Can you blame the doomsayers given that the price of one Bitcoin, valued at over $19,000 in December, now fell to a low of $5,947. Really and truly, Bitcoin can be defended as having a solid online verification which is handled through algorithms and consen- sus among multiple computers so that the system is presumed immune to tampering, fraud, or political control. Undoubtedly the jargon is complex and as can be expected the technology is prone to rapid change so that it is difficult to predict what shape it will ultimately take. As it moves into the main- stream, it will be important to actively manage the risks that arise from its use. It is possible to register on a Blockchain different kinds of activities but the most common is the settlement of financial transactions. An early starter in this sector is Switzerland. Crypto start-ups have been attracted to Switzerland by its efficient regulatory and tax environment, within the tiny canton of Zug, close to Zurich. Like Malta it proudly promotes itself as the heart of "crypto". One notes, how a platform recently built by the Six ex- change is designed to be used for cryptocurrencies such as bitcoin, and other digital assets, and will be operated on Block- chain distributed ledger technol- ogy. This is not a stand-alone feature since apart from the Six initiative, Swiss regulators are promising to remove obstacles in the near future which prevent conventional banks from provid- ing services to crypto compa- nies. Finma, the Swiss financial supervisor has set out guidelines to help local initial coin offer- ings, where start-up companies can start to sell digital tokens to investors. Cryptocurrency exchanges in Switzerland are beginning to copy the safeguards commonly used by their securities and de- rivatives counterparts after a sad story of multi-million hacks and asset thefts. Equally interesting is how a major private bank in India has launched its inaugural accelerator program for Fin- tech start-ups with 12 chosen candidates from an interna- tional screening process. The 12 start-ups stand to gain access to funding up to $1 million through Venture Capital partners associ- ated with the program, without any commitment to upfront equity for capital. It is encouraging to note that two Indian start-ups named Signzy and R Imo, are leverag- ing Blockchain technology. However, India is itself living in a state of denial. Only recently the government's intention is hell- bent to crack down on the use of cryptocurrency as a means of payment. Officially the Reserve Bank of India (RBI) stated that "the government will take steps to make crypto illegal as a pay- ment system." Hot on the heels of an issue of a circular, RBI gave commercial banks three months to comply with its directive to ban the virtual currency motivated with its duty to protect consumers and prevent money laundering. At this stage when questioned why the complete ban cannot be lifted, the Central bank stated that it was caught unaware and admitted it had done no proper research into cryptocurrencies before issuing its circular. To add salt to the wound, the tax department is very suspicious that tax evasion is prevalent due to undeclared gains of investors dealing in such currencies. In India, it is common knowl- edge that the Income Tax Department had conducted nu- merous surveys into the opera- tions of India's cryptocurrency exchanges in order to ascertain the scale of the tax evasion being conducted. Bona fide operators had put the crypto business on hold. They have taken the authorities to court and expect an early decision from govern- ment to effectively introduce legal requirements particularly for know your customer proce- dures and regarding ways how to record transactions. These guidelines are now reputed to be issued by a Court decision expected at the end of September. So, who knows, perhaps India may actually have a full set of guidelines very soon. One waits to see who will be the first to open the doors to cryp- tocurrencies, Coin exchanges, ICO's and related business. George Mangion is a senior partner of an audit and con- sultancy firm, and has over twenty-five years' experience in accounting, taxation, financial and consultancy services. His efforts have seen that PKF has been instrumental in establish- ing many companies in Malta and placed PKF in the forefront as professional financial service providers on the Island Many ask if crypto- currencies are a cover up for ill-gotten gains George Mangion Cryptocurrencies – are they a wolf in sheep's clothing?