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34
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34 (129) 2018
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Finance & Financial Services

Digital currencies: How should they be served and seasoned?

By Prof Konrad Zacharzewski, chair of the Department of Commercial Law, Faculty of Law and Administration, Nicolaus Copernicus University; attorney at law, of counsel at Wierzbowski Eversheds Sutherland
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For the average person in Poland today, digital currencies have negative connotations. But it doesn’t have to be that way.

Just two years ago Poland was fairly regarded as a member of the advance guard, competing with tech superpowers for a leading position, innovation by innovation. The digital currency business and distributed-ledger technology (blockchain) are developing unevenly around the world. Countries from the Far East and the Americas have taken the lead. Meanwhile, Polish programmers and providers of services related to digital currencies have taken to defending the technological progress against the traditionalists.

For several years knowledge resources about digital currencies grew unnoticed. This was a window for aficionados of new technologies and early adopters enthusiastic about innovations. At first digital currencies were available only to the initiated who were in on the secret. Then suddenly a great furore arose around digital currencies. Everybody had heard something about them, and maybe even knew something about them. Digital currencies became a hipster thing. Digital currencies hit the cafés, among the latte drinkers, smoking hand-rolled cigarettes and wearing their jeans hemmed high over red sneakers.

But all the notoriety is doing digital currencies no favours. The biggest tech phenomenon of recent years has piqued the interest of the public administration. That’s good and bad news. Good because it’s a significant social phenomenon and must be addressed. Bad because an official picture of digital currencies has formed with scant knowledge; in my view it’s an inaccurate picture.

In their pronouncements, public officials stress primarily the danger associated with digital currencies. They regard them as a 'detergent' for laundering untaxed money, as the cause for depletion of people’s savings through financial pyramid schemes, or more generally as a breeding ground for cyber crime, such as illegal processing of personal data.

Unfortunately, traces of this understanding are all too common in statements by public officials. However, they do not succumb to a one-sided assessment. For example, I would highlight draft laws defining digital currency (under the misleading name 'cryptocurrencies') and digital current accounts (or 'wallets'). I am referring to the proposed Central Database of Accounts Act and the proposed new Anti-Money Laundering Act (both bills are currently undergoing inter-ministerial consultations). The idea of oversight of trading in digital currencies is beneficial and deserves support. The problem is that in these bills, concepts of fundamental relevance for applying the law are defined inconsistently.

Another example is the joint position on digital currencies of the National Bank of Poland and the KNF, Poland's financial supervision authority, issued in July 2017. This document was written objectively, but as stated in the preamble to the communiqué, it was primarily aimed at warning the public of risks. It was the first official position in Poland on digital currencies, written jointly by the central bank and a central administrative authority. It influenced the direction of subsequent legislative processes as well as commercial practice – unfortunately negatively. This is because the communiqué was framed conservatively, creating a stifling atmosphere around digital currencies.

That atmosphere thickened in December 2017 when the KNF issued another warning and began a broad informational campaign. KNF observed “gradual development of virtual ‘currencies’ arising among other things from a progressive growth in price.” At the same time, it pointed to “a potential threat to users of these ‘currencies.’” The noose tightened around digital currencies in early April this year when the Ministry of Finance published a position on the rules for taxation of income earned using digital currencies. There are no specially designed legal regulations in force in this area, while the ministry’s stance is extremely unfavourable to taxpayers.

These are just a few of the most striking examples of the impact public authorities have had on the economic phenomena connected with trading in digital currencies. But criticism doesn’t solve problems. From the start of my own adventure with digital currencies I have striven to increase the knowledge of this topic. It has been a scholarly pursuit and a professional pursuit, as a professor of commercial law at the university and as a practising advocate. I wrote some of the first scholarly articles on digital currencies in Poland. I took part in public consultations in the parliament and at the government level (Ministry of Finance and Ministry of Digital Affairs). The Department of Commercial Law which I head at Nicolaus Copernicus University in Toruń has organised several conferences on digital currencies, and I have spoken on this topic at a dozen or more conferences at the invitation of people who are knowledgeable about digital currencies or would like to know as much as I do.

This is why I dare put forward two additional questions about digital currencies: “What do you serve them with?” and “With what seasoning?” And I know the answer to both questions. The basic problem with the perception of cutting-edge solutions of any type (technical, organisational, social etc) involves breaking a taboo. Every new solution requires a pioneer. And trailblazing solutions are always approached with mistrust at first. That’s how it was with the horseless carriage, which went on to change the world. And it was the same with the internet—originally they wanted to tax internet use.

The boundary of fear of new solutions is crossed only with time, but it also requires the development of a general belief in their usefulness. Digital currencies are now undergoing this phase of evolution. The discovery phase is definitely over. The phase of debate is developing, and along with it, the phase of criticism and prohibitions. We are still awaiting passage to the phase where it is commonly accepted that digital currencies have more public advantages than public drawbacks. This is indeed the case, and it is essentially certain that this moment will come. The technology of distributed ledgers (blockchain), which is the IT foundation of digital currencies, is regarded as revolutionary. Visionaries claim that along with digital technologies, the era of Internet 2.0 has arrived—that the distributed ledger technology can change society for the better. Applications mooted for blockchain include ID documents, circulation of administrative papers, international money transfer, registration of real estate and ocean-going transport.

That’s why we must take the trouble to adapt to digital currencies. What this requires is knowledge. Sound knowledge, built on conservative, classical scientific foundations (legal, economic, social and so on), as well as practical knowledge arising from empirical experience, observation of the operation of the mechanisms we seek to understand, and which, once we understand them, can be the subject of regulation.

So, to answer the questions posed in the title, what should digital currencies be served with? Knowledge. And how should they be seasoned? Also with knowledge.

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