Authors: Esko Cate and Dr. Oliver Massmann
Late October 2017, in a written notice to the public media, the State Bank of Vietnam re-affirmed that the issuance, supply, and use of ‘virtual’ currency is strictly prohibited in Vietnam. In support of the prohibition, the State Bank of Vietnam relied on provisions of Decree 101/2012/ND-CP on non-cash payment as amended by Decree 80/2016/ND-CP. These clauses state that payment instruments which are not stipulated by the State Bank (i.e. – implicitly, Bitcoin and other forms of virtual currency) are illegal. In assigning a penalty for violation, the State Bank relied on article 27 of Decree 96/2014/ND-CP on administrative sanctions for monetary-banking infringements, which prescribes a fine of between 150-200 million VND for a violation the prohibition.
This broad order encompasses all forms of virtual currency including, and most notably, cryptocurrencies. The most renowned cryptocurrency is Bitcoin which was the first cryptocurrency and has gained the most public recognition; however, since the creation of Bitcoin, many different kinds of cryptocurrencies have been created.
What are Cryptocurrencies?
Cryptocurrencies are digital forms of currency which are not connected to any government or central bank. Each cryptocurrency is contained within its own network; anytime a person interacts with that cryptocurrency, their computer joins that cryptocurrency’s network. When a transaction occurs using a cryptocurrency, that transaction is recorded in a permanent, public digital “ledger” which is constantly being updated and shared with all the computers in that cryptocurrency’s network.
To ensure that the ledger is never tampered with, computers in the cryptocurrency’s network, owned by companies and individuals from all corners of the world, are constantly sealing off the recorded parts of the digital ledger by encrypting the record using complex mathematical equations. Batches of transactions are sealed off at a time. A useful analogy would be to compare these batches of recorded transactions to pages in a ledger. When enough transactions are recorded to fill a page, that page is then sealed off. The technical terminology for these pages is a “block.”
As an added measure of protection, the sealing off process is compounding. This means that the mathematical equations used to seal off new blocks require information from the previously sealed off blocks in the ledger. This can be conceptualized as a chain with each block as a link. Because each link in the chain relies on information from the previous link, any tampering with a sealed link will be evident in all subsequent links because the entire chain would be altered. These aspects are the reason that the technology used to create cryptocurrencies is called “Blockchain” technology.
As a reward for recording and sealing off a block of the ledger, the software is programmed to award computers or groups of computers with newly created cryptocurrency. Accordingly, the process of recording and sealing off the ledger is called “mining.” Computers that accomplish more of the sealing off process are awarded more of the currency. This makes the mining process competitive. The entire process consumes a lot of electricity so computers that are specially designed for mining are required in order to make mining profitable.
Because all transactions occur within the cryptocurrency’s network, every transaction is visible to everyone in the network, the encryption step relies on information from the sealed off blocks, and the data ledger is stored on every computer in the network rather than on a central server, the cryptocurrency theoretically cannot be counterfeited. This aspect, along with the rarity of the cryptocurrency and its ability to be used in digital transactions gives the currency value.
For these reasons, cryptocurrencies arguably function more similarly to commodities such as gold or oil. In fact, cryptocurrency has been classified as a commodity by the U.S. Commodity Futures Trading Commission and is accordingly regulated as such in the U.S.A. The major difference between cryptocurrency and most commodities is the ability to use cryptocurrency to accomplish small transactions. As the infrastructure for cryptocurrency grows, cryptocurrencies are increasingly able to be used to directly purchase goods.
As with most technologies, Blockchain technology has been updated, perfected, and is beginning to be used for a variety of different applications. Private companies are beginning to create new cryptocurrencies designed for specific applications such as real estate transactions and the recording of contracts and security obligations. These currencies are often referred to as “altcoins” and sometimes differ from the style of cryptocurrency described above in several respects including the distribution method and economic model.
It is unclear from the State Bank of Vietnam’s declaration whether use of all of these other altcoins is similarly prohibited in Vietnam. Part of the confusion stems from ambiguous rationale for the prohibition. The official release by the State Bank simply states that Vietnam has already created a legal framework for means of payment and that virtual currencies fall outside the scope of that framework.
Possible Rationale for Vietnam’s Prohibition of Virtual Currencies
There are several theories regarding the underlying rationale for the State Bank’s Prohibition. One theory is that the prohibition is a protectionist measure for Vietnam’s current currency, the Vietnamese Dong (VND). While VND has remained stable in recent years, it has experienced significant fluctuation and devaluation over the course of its existence which makes VND more difficult to trust than other more stable currencies. As internet penetration steadily increases in Vietnam, ecommerce has similarly been steadily becoming more predominant. If enough people begin using methods of payment other than the domestic currency, it could potentially lead to a collapse of VND. Historically, collapse of a state currency is accompanied by severe repercussions such as civil unrest.
Another possible rationale looks to the strong correlation between countries that have banned cryptocurrency and the levels of corruption in their government. From its inception, cryptocurrency has been touted as an anti-corruption tool designed to circumvent the control of corrupt governments. Other countries that have placed prohibitions on the use of cryptocurrencies include Bolivia, Ecuador, Kyrgyzstan, Bangladesh, Nepal, and China, with Russia likely to officially follow soon. As of 2016, Vietnam was ranked 113 by Transparency International’s Corruption Perception Index, which awards countries with little perceived corruption the best ranks. For context, Denmark, which was found to have very little perceived corruption, was ranked first, and Somalia was at the very bottom of the list, ranked 176th.
With the exception of China which was ranked 79th, none of the countries that have banned cryptocurrency were ranked in the top 100 countries with the least perceived corruption. Vietnam and Bolivia tied for 113th, while Bangladesh took up the rear in the 145th spot. While there is a clear correlation, it should be noted that all of these countries are generally considered low-income countries. Based on International Monetary Fund data, none of the countries that have banned cryptocurrency have a per capita nominal GDP greater than $9,000. If China, Russia, and Ecuador are excluded, that number is reduced to $3,200. The correlation between countries that have banned cryptocurrency and low per capita nominal GDP gives the first rationale discussed above more traction.
The third rationale may lie in the State Bank of Vietnam’s careful and slow approach to this matter. While this body may be fully aware that the application of blockchain technology and the use of cryptocurrencies are an irreversible trend, it needs more time to check all possible impacts. This is to ensure that such trend must be fully under its control. Just two months before the State Bank of Vietnam’s above statement, the Prime Minister of Vietnam gave greenlight for a scheme on creation of a legal framework for management and handling of cryptocurrency and virtual property. One should not however expect that a complete legal framework on cryptocurries could be available before 2020.
A forth rationale, and the one that is most regularly cited by countries that have banned cryptocurrency, is the attempt to combat the nefarious, illegal activity for which cryptocurrencies are often used. Because of the anonymous, decentralized nature of cryptocurrency, cryptocurrency is well-suited for illegal online transactions. Particularly at the genesis of cryptocurrency, it is no secret that its primary use was the purchase of illegal goods and services in a murky segment of the internet commonly referred to as the Darkweb. Despite a severe lack of data related to these underground online marketplaces, it is well documented that cryptocurrency is the primary form of payment. The idea is that if country prohibits the means of purchasing goods and services on these markets, it will be easier to stamp out the activity all together. As cryptocurrency has evolved and more legitimate uses have been developed, this rationale for prohibition has become weaker.
At this point, it remains unclear whether any one of these rationales, or some combination, was the driving factor for the State Bank of Vietnam.
Moving Forward
Moving forward, it would benefit the Vietnamese government to clarify their position on cryptocurrency and, more generally, Blockchain technology. As noted above, the technology has significant applications beyond pure ecommerce. It is clear from the media penetration and ever-increasing value of cryptocurrencies that the technology is shifting from the margins into centerstage. As more and more large businesses embrace the technology and more countries develop legal framework for cryptocurrency, it is evident that cryptocurrencies are here to stay. Vietnam should think twice about repercussions of turning its back on what is promising to be a key aspect of the digital future.
Creating a well thought out legal framework for regulating cryptocurrency and Blockchain technology, as other developed countries are doing, would signal to the international community that Vietnam is in-step with the international frontrunners in commercial technology and development. Phrased another way, it would announce to the world that, as the future of commerce unfolds, Vietnam is here and Vietnam is ready to play.
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Please do not hesitate to contact Esko Cate and Dr. Oliver Massmann under omassmann@duanemorris.com if you have any questions or want to know more details on the above. Dr. Oliver Massmann is the General Director of Duane Morris Vietnam LLC.
Thank you!