August 2, 2021 | Max Atallah

Cryptos & Blockchain

#6 Legal Analysis of Litecoin (LTC)

Since February 2021, we have been publishing articles on top 12 cryptocurrencies (as of January 2021) and their legal framework. Last time we wrote about the decentralized blockchain platform Cardano and its native token ADA. This time we will cover Litecoin (LTC), one of the earliest altcoins and often referred to as ‘silver’ within the crypto sphere.

Litecoin (LTC) in a Nutshell

Litecoin (LTC) was created in 2011 by the U.S. citizen Charlie Lee, previously employed by Google and Coinbase. As Lee saw the Bitcoin protocol to include numerous flaws, he wanted to create a more scalable, cheaper, and lighter version of Bitcoin (BTC). The main purpose of Litecoin is to become a global payment system, i.e., create a decentralised system where people can send and receive funds both locally and internationally, free from the necessity of a third party, such as a bank. The Litecoin Foundation develops and finances the ecosystem, with Lee functioning as its Managing Director.

Being four (4) times faster than Bitcoin, i.e., able to process up to 56 transactions per second (7 transactions maximum for Bitcoin), Litecoin gained early popularity for peer-to-peer transactions between crypto holders. With a maximum supply of 84 million tokens, and a circulating supply of 66,7 million tokens, LTC’s current market capitalization is 9,6 billion USD (14th biggest market cap according to today’s rate).

Meanwhile, in addition to the function as a value transporter, holding LTC has since its creation been regarded as holding ‘silver’, whereas BTC has been deemed as ‘gold’. Nevertheless, LTC as well has been subject to the characteristic volatility of the crypto market, surging recently from its all-time-high of 410 USD (May 2021) to its current value of 144 USD. Despite its history as one of the first well known cryptocurrencies, it remains to be seen how LTC can survive the increasing competition and retain its market share as a relevant go-to medium of exchange.

U.S. Regulation of Litecoin

Given the varying legislation between the different States and different authority interpretations on cryptocurrencies, it is hard to picture a uniform regulatory approach on crypto in the U.S. For example, the Internal Revenue Service (IRS) sees cryptocurrencies as property and has issued tax guidance on the matter, whereas the Commodities Futures Trading Commission (CFTC) encompasses cryptocurrencies to be commodities as described in the Commodity Exchange Act. Simultaneously, the Securities and Exchange Commission (SEC) has been indicating that it considers certain cryptocurrencies to be securities by applying the so-called Howey Test. These inconsistent viewpoints make the U.S. crypto sphere unclear and leaves cryptocurrencies in an ambiguous legal territory.

On the positive side, there is new legislation in the making. Lawmakers in the U.S. have introduced a bill known as the ‘Eliminate Barriers to Innovation Act of 2021’, that seeks to clarify crypto regulation by establishing a working group of representatives from the SEC and the CFTC. The legislation is ultimately aiming to clarify the definition of what makes cryptocurrency a security or a commodity, and to solve the current ambiguous situation regarding jurisdiction areas of U.S. authorities, striving to make a clearance on the rules deciding whether the SEC or another regulatory agency has jurisdiction over a particular token or cryptocurrency. The bill has passed the U.S House of Representatives and has been received by the Senate, being currently reviewed by the Committee on Banking, Housing and Urban Affairs.

Another topical example in addition to the above mentioned is the ‘Digital Asset Market Structure and Investor Protection Act of 2021’, a bill proposed by the U.S. Representative Don Beyer of Virginia on 28th July 2021. The proposal includes a far-reaching regulatory and legal framework for digital assets, primarily aiming to establish statutory definitions for digital assets and digital asset securities – indeed a very welcomed step of development. The proposed bill also seeks to formalize the regulatory requirements under the Bank Secrecy Act, classifying both digital assets and digital asset securities as ‘monetary instruments’. Moreover, the bill proposes that the Federal Reserve would be the only authorized institution permitted to issue a digital dollar and calls for the U.S. Treasury Secretary to have the power to permit or prohibit stablecoins based on USD and other fiat money.

The proposed bills are naturally coming with their pros and cons, depending on the viewpoint and philosophy one has on the concept of crypto. However, it can for sure be widely approved that unified definitions would bring more transparency to the whole industry and ease the current situation where U.S. crypto service providers are often forced to live with authority demands based on different interpretations. It remains to be seen if the regulatory aims are reached as initially proposed.

EU Regulation of Litecoin

Within the EU, LTC has a clearer regulatory situation than in the U.S. and is therefore easier to portray. Being an altcoin, LTC falls within the scope of the EU Fifth Money Laundering Directive (5AMLD, EU 2018/843) and is considered a cryptocurrency. According to the 5AMLD, cryptocurrencies are defined as a digital representation of value i) that is not issued or guaranteed by a central bank or a public authority, ii) is not necessarily attached to a legally established currency and does not possess a legal status of currency or money but is accepted by natural or legal persons as a means of exchange and iii) which can be transferred, stored, and traded electronically. Thus, the EU’s anti money laundering regulations including customer due diligence, risk assessments, fitness and properness test for managers and other regulations apply to cryptocurrency exchange operators and custodian wallet providers.

Certain EU Member States, such as Finland and Malta, have established national cryptocurrency license systems imposing more rigorous regulations to cryptocurrency exchanges, custodian wallet providers and other cryptocurrency service providers. These can include stricter capital requirements, customer protection schemes and stricter data security obligations. This means simultaneously that forum shopping is also occurring in Europe, typically to enable service providers easier compliance standards and less bureaucracy.

However, as an upcoming EU Regulation is going to make the EU-wide cryptocurrency regulatory framework more united and quite like the frameworks of the stricter Member States, it is from a longevity standpoint recommendable to already comply with the stricter rules.

02.08.2021 MAX

Nordic LawPioneer in Web3 and Fintech law