Virtual Assets and Virtual Assets Service Providers (VASPS): From The Zambian Perspective

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 1. INTRODUCTION

Global trends are changing both the technology businesses use and the tools and techniques regulators need to adopt in order to help manage the risks they are exposed to by these new technological advancements. Without a doubt, the changing landscape in global technology is in itself a good thing for efficiency and being able to compete in this fast changing world. Change in technology has the potential to spur financial innovation and efficiency and improve financial inclusion, but it also creates new opportunities for criminals and terrorists to launder their proceeds or finance their illicit activities. One of the most prominent technological developments in the last decade has been the launching of Virtual Assets (VAs) which are in a form of decentralized digital currency or virtual currency. Examples of Virtual Assets are cryptocurrencies such as bitcoins.

The subject of cryptocurrencies has been scrutinized by various policy makers and different international organizations, which have each touched upon the subject in a different way. Below, we summarize some of the definitions of cryptocurrencies:

i. The European Central Bank (“ECB”) has classified cryptocurrencies as a subset of virtual currencies. it defined such currencies as a form of unregulated digital money, usually issued and controlled by its developers, and used and accepted among the members of a specific virtual community.

ii. The International Monetary Fund (“IMF”) like the ECB, has categorised cryptocurrencies as a subset of virtual currencies, which it defines as digital representations of value, issued by private developers and denominated in their own unit of account.

iii. The Committee on Payments and Market Infrastructures (“CPMI”), a body of the Bank for International Settlements (“BIS”), has qualified cryptocurrencies as digital currencies or digital currency schemes. These schemes are said to exhibit the following key features: i. they are assets, the value of which is determined by supply and demand, similar in concept to commodities such as gold, yet with zero intrinsic value; ii. they make use of distributed ledgers to allow remote peer-to-peer exchanges of electronic value in the absence of trust between parties and without the need for intermediaries; and iii. they are not operated by any specific individual or institution.

iv. The European Banking Authority (“EBA”) has suggested to refer to cryptocurrencies as virtual currencies, which it defines as digital representations of value that are neither issued by a central Bank or public authority nor necessarily attached to a fiat currency but are used by natural or legal persons as a means of exchange and can be transferred, stored or traded electronically.

v. The European Securities and Markets Authority (“ESMA”) has recently also referred to cryptocurrencies as virtual currencies, in a pan-European warning issued in cooperation with the European Insurance and Occupational Pensions Authority (“EIOPA”) and the EBA. Fully in line with the EBA’s definition, virtual currencies are defined as digital representations of value that are neither issued nor guaranteed by a central bank or public authority and do not have the legal status of currency or money.

vi. The World Bank has classified cryptocurrencies as a subset of digital currencies, which it defines as digital representations of value that are denominated in their own unit of account, distinct from e-money, which is simply a digital payment mechanism, representing and denominated in fiat money. Contrary to most other policy makers, the World Bank has also defined cryptocurrencies itself as digital currencies that rely on cryptographic techniques to achieve consensus.

vii. The Financial Action Task Force (“FATF”) like many other policy makers has approached cryptocurrencies as a subset of virtual currencies, which it defines as digital representations of value that can be digitally traded and function as (1) a medium of exchange; and/or (2) a unit of account; and/or (3) a store of value, but do not have legal tender status (i.e., when tendered to a creditor, are a valid and legal offer of payment) in any jurisdiction. It further suggests that virtual currencies can be divided into two basic types: i. convertible virtual currencies that have an equivalent value in real currency and can be exchanged back-and-forth for real currency; ii. Non-convertible virtual currencies that are specific to a particular virtual domain or world. Cryptocurrencies like Bitcoin are virtual currencies of the first type, that can, according to the FATF, be defined as math-based, decentralized convertible virtual currencies that are protected by cryptograph.

The main conclusion that can be drawn from the different perspectives set out above is that there is no generally accepted definition of the term cryptocurrencies available in the regulatory space. However, amongst those cited above, only the World Bank and the FATF have put forward a clear-cut definition which are globally preferred. If we try to summarize all the above definitions, a good summary could be that a cryptocurrency is “a digital representation of value that (i) is intended to constitute a peer-to-peer (“P2P”) alternative to government-issued legal tender, (ii) is used as a general-purpose medium of exchange (independent of any central bank), (iii) is secured by a mechanism known as cryptography and (iv) can be converted into legal tender and vice versa”.

In June, 2019 the FATF updated its Recommendations and defined Virtual Assets (VAs) as a digital representation of value that can be digitally traded, or transferred, and can be used for payment or investment purposes. VAs does not include digital representations of fiat currencies, securities and other financial assets that are already covered elsewhere in the FATF Recommendations. The FATF further defines Virtual Asset Service Providers (VASPs), as any natural or legal person who is not covered elsewhere under the FATF Recommendations, and as a business conducts one or more of the following activities or operations for or on behalf of another natural or legal person:

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