finalreport (17110077)

IntroductionAccording to an October 30th statement1, the State Bank of Vietnam SBV said that Bitcoin is not a "lawful means of payment" in the country, and the "issuance, supply, use of

Viet Nam–Japanese University Viet Nam National University

PUBLIC POLICY FORMULATION AND IMPLEMENTATION

FINAL ASSIGNMENT

The risks for Bitcoin users and suggestions for

Bitcoin management policies in Vietnam

Program : Master of Public Policy

Hanoi, January 2018

1 Introduction

According to an October 30th statement1, the State Bank of Vietnam (SBV) said that Bitcoin

is not a "lawful means of payment" in the country, and the "issuance, supply, use of Bitcoin and other similar virtual currency as a means of payment is prohibited" From 2018, illegal use of Bitcoin in payments will be subject to penalties of between 150 million ($6,600) and

200 million ($8,800) Vietnamese dong (VND) The central bank states: "As from January 1,

2018, the act of issuing, providing and using illegal means of payment (including Bitcoin and other similar virtual currency) may be subject to prosecution." 2

The reason for the policy is to protect the interests of the state bank in issuing money and regulating monetary policy In addition, it also prevents money laundering, delinquency, and social harm As can be seen, this is a temporary policy issued by the central bank to limit the rapid development of Bitcoin in the recently However, the delay of the SBV on the regulatory status may prove to be damaging Bitcoin has gained wide acceptance around the world, so this industry would need to be regulated in Vietnam

Bitcoin users in Vietnam included Vietnam-traders, exchanges, and merchants who accept payments in Bitcoins have grown rapidly In this situation, they will face a number of risks

in using Bitcoin such as legitimacy, price fluctuations, trust, security, and consumer protection This paper will shortly introduce about Bitcoin, further analyze the risks that Bitcoin users may encounter, thereby providing some policy implications in the current Vietnamese context These policies not only will benefit and protect Bitcoin users but also help to promote the development of Bitcoin “innovation clusters” in Vietnam

2 Bitcoin

 Bitcoin

Bitcoin is a virtual currency introduced in 2008 by a person or group calling “Satoshi

Nakamoto” It’s an open peer-to-peer cryptographical system which allows online payment

to be sent directly without an intermediary Transactions happen through a public ledger

called blockchain, handling users’ data anonymously Eight years since its introduction,

Bitcoin becomes the most widely used and accepted thedigital currency Now, Bitcoin is considered as the financial products associated with technology

 Bitcoin pricing

Since pricing in Bitcoin transactions is demand based, Bitcoin pricing is dependent on the trading i.e demand and supply factors More the demand, higher is the price Until late

2015, the price remained US$ 300, and around December 2017, the price rose to over US$ 20,000 Following the similar trend, the price of Bitcoin in Vietnam crypto-market has recently gained remarkably in recent months

1 https://www.coindesk.com/vietnams-central-bank-announces-ban-on-Bitcoin-payments/

2 https://thuvienphapluat.vn/van-ban/Tien-te-Ngan-hang/Nghi-dinh-96-2014-ND-CP-xu-phat-vi-pham-hanh-chinh-linh-vuc-tien-te-va-ngan-hang-254293.aspx

Chart 1: The price of Bitcoin

Source: http://www.coindesk.com/price/

 Bitcoin in circulation

Since 2009 till January 2018, the number of Bitcoins in circulation has only increased, the figure has reached to 16,802,587 in number.3

 Market capitalization of Bitcoin

The market capitalization of Bitcoin as on 15 January 2018 has been computed to come up

at US$ 226,476,054,493, while the maximum supply in the market is limited to 21,000,000 BTC as of now

Table 1: Market Capitalisation of Bitcoin

Source: https://coinmarketcap.com/currencies/Bitcoin/ dated 15th January 2018

 Bitcoin exchanges 4

A Bitcoin exchange is a business platform that facilitates the exchange of Bitcoins for another currency such as VND or USD Thereby allowing the users to trade and make profit Bitcoins exchange quickly in the market, as more and more people started exchanging Bitcoins, mostly for speculative purposes With the high volatility and a

3 : https://coinmarketcap.com/currencies/Bitcoin/

4 Vallari Dubey & Team, Vinod Kothari Consuntants, Bitcoin India Report 2017, 2017.

market without any regulatory intervention, people find it suitable to invest, hold, trade and make profits out of the same

Bitcoins are not backed any particular asset or security, because of which its value is not driven by any factor but demand and supply in the market

Business model

Bitcoins exchanges quickly spread into the market At a preliminary level, the exchange is simply a common platform to the users for the purpose of buying and selling while matching mutual needs, in order to earn profits

Take an idea of a stock exchange, a Bitcoin exchange works by providing service to its users In the case of Bitcoin, there is no party involvement, the service is provided by the exchanges which thereby charges commission for the trade conducted and earns revenue

Service provided by Bitcoin exchanges in Vietnam

In Vietnam, Bitcoin is not accepted as a payment, but there are some services for Bitcoin users that are common in the market:

-Storing Bitcoin in a Bitcoin wallet after deposit and receipt

-Exchange of Bitcoin with other currency

-Some service used to pay to merchants in Bitcoin and acceptance by them thereon

-Sending Bitcoins stored in the wallet to another wallet

-Mobile applications providing ease of accessing Bitcoin information

Regulatory status of Bitcoins Wordwide

Picture 1

Source: http://www.coindesk.com/Bitcoin-legal-map/

From the picture above, countries in the light green are those where have permitted the use and trade of Bitcoin explicitly Vietnam is one of the countries in yellow are considered as contentious markets for Bitcoin Besides that, marked in red have declared Bitcoin to be hostile or illegal

 Countries that have legalized Bitcoin

Table 2: Legal status of Bitcoin in some countries have legalized.

Country Legal status

Japan In the process of legally recognizing as money5

Australia Proposed in budget speech 2017-18 to treat Bitcoins as money6

European Union Convertible decentralized virtual currency7

Canada Digital currency8

Indonesia Digital currency9

United States “funds” under 18 U.S.Code 1960 (virtual currency in general)10

Russia Virtual currency (monetary surrogate)11

5 http://www.fsa.go.jp/news/28/ginkou/2 0170324-1.html

6 http://www.budget.gov.au/2017-18/content/glossies/factsheets/html/FS_innovation.htm

7 http://www.ecb.europa.eu/pub/pdf/other/virtualcurrencyschemes201210en.pdf

8 https://www.canada.ca/en/revenue-agency/news/newsroom/fact-sheets/fact-sheets-2015/what-you-should-know-about-digital-currency.html

9 http://www.bi.go.id/en/ruang-media/siaran-pers/Pages/SP_160614.aspx

10 https://cdn.arstechnica.net/wp-content/uploads/2016/09/murgio-order.pdf

11 http://npaed.ru/images/downloads/translation_letter_from_the%20Federal_Tax_Service.pdf

China Virtual commodity12

3 Risks for Bitcoin users in Vietnam

Firstly, this part presents an SWOT (strengths, weaknesses, opportunities, and threats) analysis on Bitcoin which is summarized in table 3

In this table, we can see that Bitcoin have many advantages They eliminate transaction costs, safer than cash, harder to forge than other forms of currency Additionally, all payments are final and irreversible, preventing fraudulent transactions Bitcoin technologies are brand new and currently developing, so legitimizing the currency will promote innovation in the industry and catalyse the creation of new financial instruments and services based on the currency This will create new jobs and spur the development of expert and knowledge based in Vietnam

Aside from strengths and opportunities, Bitcoin has weaknesses that create doubt in its target users’ minds Bitcoin’s openness has provided Bitcoin with potential opportunities and anonymity is a double-edged sword, both creating threats, and opportunities

Table 3 Bitcoin an SWOT analysis 13

In my opinion, the potential of Bitcoin outweigh the threats However, Bitcoin users also need to know more detailed about the risks that can happen, especially when Vietnam has

no legal framework for managing and using Bitcoin It is not accidental that many financial experts oppose Bitcoin, many countries banned Bitcoin, some countries accept Bitcoin but are extremely cautious At the moment, we do not know what is going to happen to Bitcoin, the bubble may break and a financial crisis will spread throughout the system Meanwhile, Vietnam will also be affected because nowadays, according to Similarweb.com, Vietnam's traffic on some Bitcoin exchanges is always in the top five along with countries like the US, Russia and Japan

12 http://beijing.pbc.gov.cn/beijing/132005/3230072/index.html

13 Sahar Mirzayi, Mohammad Mehrzad, Bitcoin, An SWOT Analysis, 2017

 Legitimacy

In Vietnam, Bitcoin is being considered legitimate, but it needs to be apperception that it is commonly used by law-abiding parties to transact business Unfortunately, Bitcoin has a history with illegal activities, such as black market (Wannacry virut14) and money laundering

On July 21, 2017, the SBV sent official letter 5747NNNN-PC15 to the government office to respond to the issue of virtual currency SBV does not accept virtual money as a means of payment Previously, the State Bank of Vietnam (SBV) has presented the Government with Decree No 80/2016 / ND-CP16 amending and supplementing some articles of Decree No 101/2014 / ND-CP on non-cash payment

We also realize that the government has not made a significant ruling on Bitcoin to argue that the currency cannot be trusted, and could even become illegal in the future This lack of clear regulation also means that many Bitcoin users exist in a legal gray area, this makes investing in Bitcoin even riskier, and limit the growth of blockchain technology which related

on the Bitcoin industry

 Volatility

Bitcoin price fluctuates dramatically and depends substantially on public sentiment These large upswings and downswings have caused many economists to questions the viability of digital currency In December 2018, Bitcoin prices in Vietnam peaked at over $ 20,000, and only a week later hit bottom at $ 10,000, which could cause huge losses for investors

Currently, users of fiat money trust the stability of the authorizing country Bitcoin’s decentralized nature means that is faces volatility without stabilizing institutions in place Therefore, the risks of owning and trading Bitcoin raise barriers to mass adoption

 Trust

While volatility and lacks of legitimacy certainly undermine public trust in Bitcoin, we can realize that Bitcoin is a new and emerging technology based on complex cryptographic protocol In addition, Bitcoins are not regulated by a centralized agency till date, make them less reliable To invest in Bitcoin, users must place significant faith in the cryptographic security, trust any third parties involved, such as wallet services or exchange Therefore, the central obstacle to Bitcoin’s widespread adoption is social trust

Recently, when the profit from virtual currency investment is growing some companies have raised capital in the form of ICO (Initial Coin Offering), using virtual money to deceive investors, causing economic losses as well as negative impact to Bitcoin in Vietnam

 Security of Bitcoin wallet

14 The WannaCry ransomware attack was a May 2017 worldwide cyberattack by the WannaCry ransomware cryptoworm, which targeted computers running the Microsoft Windows operating system by encrypting data and demanding ransom payments in the Bitcoin cryptocurrency.

15 https://thuvienphapluat.vn/cong-van/Tien-te-Ngan-hang/Cong-van-5747-NHNN-PC-2017-tra-loi-kien-nghi-ve-thiet-ke-trung-tam-may-tinh-Bitcoin-Litecoin-368960.aspx

16 http://vbpl.vn/nganhangnhanuoc/Pages/vbpq-van-ban-goc.aspx?ItemID=111655

Vietnam government works hard to prevent fraud, forgery, and scams, but can’t do much about stolen wallet on a street Bitcoin security also has the problems It specifically pointed out, that since they are stored digitally, Bitcoin wallet can be hacked, attacked independently.17

Bitcoin is a safe protocol, but the Internet is an unsafe place If security standards are applied to the Bitcoin wallet, exchanges, and market, it could become the safest way to transact money online Unfortunately, Bitcoin exchange and marketplace technology is still

in its infancy, and security is subpar

In Vietnam, some Bitcoin-related sites have been hacked, and thousands of Bitcoins have been stolen from sites and services such as Bitcoinica, and Bitfloor

 Consumer protection

Vietnam government maintains an interest in protecting Bitcoin users Even if Bitcoins were recognized and regulated by the government, Bitcoin’s decentralized and irreversible nature presents many challenges to consumer protection

Many of the Bitcoin companies and Bitcoin institutions are established, they have a higher risk of abruptly shutting down or being hacked Similarly, if Vietnam government seizes Bitcoins from a marketplace, there is no assurance money will be returned

Finally, there is no forum, where users can possibly reach out for any help or grievance, as a result of which Vietnam’s consumer are being exposed to informative risks

4 Legal status of Bitcoin in Vietnam and Policy recommendation

According to the scheme, in Vietnam, the Prime Minister assigned the Ministry of Justice to take the main responsibility and coordinate with the State Bank, the Ministry of Information and Communications, the Ministry of Public Security, the Ministry of Industry and Trade, the Ministry of Finance to review the current legal framework Then, the Ministry of Justice assessed comprehensively the current situation in order to propose the Government to resolve as well as amend the law on electronic money accordingly

The report assessing the current situation to revise the legal framework needs to be completed before August 2015 and by the end of 2018 must develop legal documents on virtual property At the same time, to June 201919, it was necessary to complete the proposal for a legal framework on taxes on virtual property In addition, recommendations for the prevention and treatment of violations related to Bitcoin were also completed by the Government by September 2016

These regulations represent a very cautious view of the government on the Bitcoin issue At present, although Bitcoin is banned, ownership, creation or exchange Bitcoin as other goods

is not regulated So, it can be seen that, in the era of technology 4.0, Vietnam still create a chance to develop blockchain platform which built up Bitcoin

17 Puneet Kumar Kaushal, Dr Amandeep Bagga, Dr Rajeev Sobti , Evolution of Bitcoin and Security Risk in

Bitcoin Wallets, 2017

After reviewing and synthesized a number of documents, this paper will make some suggestions on the policy for protecting Bitcoin users and managing of Bitcoin in Vietnam

 Recognize Bitcoin and Bitcoin Advocates & Stakeholders

-Define Bitcoin in the Law 18 First, Vietnam government should define Bitcoin more carefully

At present, Vietnam government do not have any official opinions exist explaining Bitcoin’s status in the law We also need issue a clear and unified set of policies and regulations regarding Bitcoin and other decentralized cryptocurrencies In its opinion, State Bank also defined certain classes of Bitcoin users as being analogous to money service business, like Visa or MasterCard Additionally, we need released a paper that certain types of transactions involving virtual currencies may be taxable, this makes Bitcoin community have more responsible for their using and investing Finally, we need to develop thought, nimble and sensible policies that protect the public without stifling innovation and economic growth

-Involve Bitcoin Stakeholders To avoid overly strong and broad regulation of the Bitcoin

market, law-makers must ensure that they involve a variety of Bitcoin stakeholders in the regulatory process, so that their vision and needs can be fairly balanced with government interests The government should work closely with Bitcoin businesses, users, miners and advocates when creating and enforcing law

 Regulate Bitcoin Market and businesses

- Push states to clarify money service business Licensing Laws The government should

clarify their legislation surrounding licensing requirements for entities which purchase virtual currencies To prevent money laundering activities, I urge that companies which engage in Bitcoin purchases be required to register with Ministry of Finance and maintain records of their transaction histories

- Consumer Protection in Online Wallet Service Companies which maintain online wallets

for Bitcoin users operate within a legal grey zone under law In this case, the value is being stored on the severs of company in the form of text files If a user’s wallet becomes compromised, its contents are lost or stolen, the companies would be the ones issuing refunds to users whose wallets are compromised, not the government

- Clarifying Tax code Taxation is the question surrounding Bitcoin Bitcoin have the dual

properties of a highly-liquid instrument like cash in one’s local currency and an exchange instrument such as foreign currency or even stock Moreover, a user has the capability to generate new Bitcoins through mining, which makes it completely unlike any existing financial instruments According this, I propose three guidelines for taxing Bitcoin:

+ Capital gains tax should be levied when users exchange VND for Bitcoins or vice versa + Sales tax should be levied when companies offer goods or service in exchange for Bitcoins,

calculated using value of the transaction in VND

+ Bitcoin miners should not be taxed.

18 T Alcom, A Eagle, E Sherbondy, Legitimizing Bitcoin: Policy Recommendation, 2017

- Combatting illegal Markets: Money laundering and illegal trade in Bitcoin is one of the

reasons why Vietnam government did not accept Bitcoin However, regarding business which accepts Bitcoins, I suggest that the government treat the currency as cash to all intents and purposes The government should combat illegal markets by targeting unlawful business, rather than consumers By working with technology experts and developing algorithms to analyze the ledger, the government could spot illegal activities in Bitcoin more effectively than they can in cash

 Vietnam Bitcoin reserve

I recommend that Vietnam government help to stabilize the currency by maintaining a reserve of Bitcoins They could buy and sell to moderate supply and demand, smoothing out dramatic shifts in the market The government can also help to ensure that the Bitcoin network remains honest by providing computational power to honest nodes in the network

 Lessons learned from other countries.

- Vietnam need to learn and consider the mode of issuance, operation mechanism, impact factors, modes, methods, and behavior This experience is extremely important to the government For example, in Korea, to avoid speculation, the Korean government is rushing

to establish rules related to Bitcoin as limit the amount of investment, as well as the age limit for investors

- Bitcoin can be considered as money in a specific community but only in this community If Bitcoin moves from a community to the whole society and the country, it should be strictly managed Even in countries with modern facilities and good management like Japan, the shift from investment to real money has to go through strict regulatory authorities, which are only recognized in some jurisdictions like few areas of investment

- Since virtual currency can be a scam to the community, we need to guide the population, equipped with knowledge or even ban capital raising activities with virtual currency as in China

- In some developed countries, Machine Learning, Artificial Intelligence, and blockchain technology are the subjects of general education

5 Conclusion

Bitcoin users need to understand Bitcoin’s weaknesses and need to understand how this digital currency is originated and gets its value Bitcoin has already demonstrated a great deal of promise as a technology capable of reshaping how we view and use money The insufficient knowledge of economy and crypto may make people destroy economy made up

of digital currency The purpose of bitcoin is to create a currency through public ledger without the need of the third party and to establish a trust through peer to peer collaboration Bitcoin is just the beginning of new technologies based on the blockchain platform, which will impact all areas of finance, banking, healthcare and education and so