E-money / Digital Currency, Virtual Currency, Cryptocurrency
Virtual currency can be traded electronically, real money or fiat currency), issued by the private sector and lacking Legal Tender Status, and can be viewed as Speculative Assets without State Support.
There are two kinds of virtual currency. A centralized virtual currency has a single administrator who sets the rules and can accept fiat currency payments. Cryptocurrency is a kind of decentralized virtual currency. Without the involvement of a financial institution, cryptocurrency can be transferred electronically.
Anonymous transactions are carried out using cryptography, and their accounting is decentralized rather than centralized by any bank or organization. It is accomplished using Block Chain technology. As of January 2022, it is estimated that there will be over 8,000 Cryptocurrencies.Bitcoin is the primary and most widely used cryptocurrency.
Electronic money should not be confused with cryptocurrency or virtual currency (e-money). E-money is an electronic form of fiat currency that is used to electronically transfer the value of real currency. E-money is the amount transferred from the currency exchanged in mobile banking to the amount in the payment service provider organization’s e-wallet.
Virtual currency and e-money are both examples of digital currency. In addition to paper currency, the central bank can issue digital currency, which is known as Central Bank Digital Currency (CBDC). CBDC is a dematerialized form of real currency (Real Currency or FIAT Currency) that is fully guaranteed by the issuing country’s government.
Network Marketing and Pyramid Scheme Businesses
Network marketing is a business model in which new customers are recruited as members. It is encouraged to acquire new customers and sell goods (or services) (Services). It is planned for customers under those customers to pay a commission based on the purchase of goods or services. Multi-Level Marketing is another name for such businesses (MLM).
If you get involved in the MLM business without proper understanding, this pyramid scheme can be used, which increases your chances of being cheated. A Pyramid Scheme distributes the amount received from a new customer’s membership fee to its customer members rather than the profit received from the sale of goods or services.
The pyramid scheme has a hierarchical setup, which means that the person with the most connections can earn the most. A scheme like this is frequently exposed after the number of new members is reduced, and new entrants who have recently signed up in large numbers may suffer as a result.
With the development of information technology and the increase in Internet access, the Network Marketing business has become more and more expanded and has the opportunity to increase its activities even in cross-border form.
It has also been found that most of these businesses cheat customers in another country by mobilizing business and members from one country. Even in Nepal, organizations such as Jocial, Crowd1, and Solemax Global have approached the media claiming to be marketing firms running pyramid schemes.
MLM businesses have also begun to benefit from the growth of cryptocurrency. It has been discovered that such businesses are encouraged to become new customers by offering high returns in a short period of time, entice new people to buy cryptocurrency through their member customers, and pay commissions for sales within their network.
Electronic money should not be confused with cryptocurrency or virtual currency (e-money). E-money is an electronic form of fiat currency that is used to electronically transfer the value of real currency. E-money is the amount transferred from the currency exchanged in mobile banking to the amount in the payment service provider organization’s e-wallet.
Virtual currency and e-money are both examples of digital currency. In addition to paper currency, the central bank can issue digital currency, which is known as Central Bank Digital Currency (CBDC). CBDC is a dematerialized form of real currency (Real Currency or FIAT Currency) that is fully guaranteed by the issuing country’s government
Network Marketing and Pyramid Scheme Businesses
Network marketing is a business model in which new customers are recruited as members. It is encouraged to acquire new customers and sell goods (or services) (Services). It is planned for customers under those customers to pay a commission based on the purchase of goods or services. Multi-Level Marketing is another name for such businesses (MLM).
If you get involved in the MLM business without proper understanding, this pyramid scheme can be used, which increases your chances of being cheated. A Pyramid Scheme distributes the amount received from a new customer’s membership fee to its customer members rather than the profit received from the sale of goods or services.
The pyramid scheme has a hierarchical setup, which means that the person with the most connections can earn the most. A scheme like this is frequently exposed after the number of new members is reduced, and new entrants who have recently signed up in large numbers may suffer as a result.
With the advancement of information technology and the expansion of Internet access, the Network Marketing industry has grown and now has the potential to expand its activities even across borders. It has also been discovered that the vast majority of these businesses defraud customers in other countries by mobilizing business and members from one country. Even in Nepal, organizations such as Jocial, Crowd1, and Solemax Global have approached the media claiming to be marketing firms running pyramid schemes.
MLM businesses have also begun to benefit from the growth of cryptocurrency. It has been discovered that such businesses are encouraged to become new customers by offering high returns in a short period of time, entice new people to buy cryptocurrency through their member customers, and pay commissions for sales within their network.
Risks and Legal Frameworks in Cryptocurrency Trading/Investment
Although some countries have permitted businesses to accept cryptocurrency as payment, no other country has recognized cryptocurrency as legal tender, so there is no legal obligation to accept it as currency or payment in other countries. Cryptocurrency in Nepal is not recognized as currency or foreign currency or foreign exchange as per the Foreign Exchange (Regulation) Act, 2019, so it is prohibited to pay, exchange or use it as a monetary instrument.
Other countries have not recognized cryptocurrency as a currency, but have recognized it as a digital asset and have legalized its mining, purchase/sale, and ownership through regulation. Due to a lack of legislation in Nepal, cryptocurrency has yet to be recognized as a digital asset.
If a problem or dispute arises with any user or transaction, the investor has no special regulatory or legal recourse. If you invest money through another individual, there is a chance that you may be scammed and not receive a refund, which would cause your investment to lose money and leave you with nothing.
Because cryptocurrency is bought and sold as a digital asset in various exchanges abroad in fiat currencies such as US dollars, purchasing such cryptocurrency from abroad will result in the misappropriation of foreign currency and appears to be a violation of the Foreign Investment Prohibition Act, 2021.
As a result, purchasing such digital assets via mobile apps and the Internet using a bank account, electronic card, or payment service provider’s E-Wallet is also illegal.
Payment abroad, except as prescribed by the Foreign Exchange (Regulation) Act, 2019, using hundi through informal means if receiving payment from abroad or abroad is prohibited. Purchasing cryptocurrency from abroad and sending payment appears to be a violation of both this Act and the previously mentioned Foreign Investment Prohibition Act, 2021.
Cryptocurrency prices have fluctuated dramatically, particularly for speculative investors. When it is seen to be bought and sold, investing in it appears to be very risky. For example, the price of Bitcoin fell by 40% between November 2021 and January 2022. As a result, high losses in such investments are possible in a short period of time.
It has been observed that cryptocurrency investments can be used in terrorist activities, as well as to launder assets obtained from criminal activities and to evade taxes.
Because the Foreign Exchange (Regulation) Act of 2019 will entice Nepalese living abroad to take capital from Nepal to invest abroad or money from relatives and friends living in Nepal, assisting them in investing abroad is illegal and punishable.
Despite the fact that cryptocurrency is a young technology and the block chain technology associated with it is of a specific type, it has been determined that cryptocurrency is the future of money and that its value will undoubtedly increase over time.
Although block chain technology has the potential to cause dramatic changes in other dimensions, investors may reduce the value of cryptocurrency because it has no intrinsic value, many central banks are working to issue their own digital currencies, and the future course of technology development is uncertain.
The risks and legalities associated with network marketing
Customers who join the Network Marketing firm appear to be vulnerable to fraud because the company claims to be a marketing firm while actually operating on a pyramid scheme model. Recent members appear to be suffering the most.
The Direct Selling of Goods (Management and Regulation) Act of 2074 prohibits Network Marketing/Pyramid-based businesses and provides for penalties for those who violate the Act.
Participating in a Network Marketing business run from abroad using modern technology and sending remittances may result in money being sent illegally or through hundi, which is a violation of the Foreign Exchange (Regulation) Act of 2019.
Since it has been reported that cryptocurrency funds, such as Hyperfund, are also operated under the Network Marketing model, investing in them will result in foreign currency embezzlement, attracting the Foreign Investment Prohibition Act, 2021, as well as the Direct Sale of Goods (Management and Regulation) Act, 2074.
Cryptocurrency and Network Marketing Transactions Pose State and Economic Challenges
Money Laundering and Investing in Terrorist Operations Pose ML/TF Risks ML/TF Threats:
Money laundering and terrorist financing appear to be high risks associated with cryptocurrency transactions (ML/TF Risks). In June 2014, the FATF issued a report highlighting ML/TF risks such as anonymity, service segmentation, decentralized systems, and so on.
Fraud and Tax Evasion
It appears that the use of bitcoin can lead to illegal activities such as fraud and tax evasion. A private firm’s investigation suggests that 3.5 billion US dollars were transmitted through Criminally Associated Bitcoin Addresses in 2020 alone, according to the Financial Stability Institute’s (FSI) April 2021 study. It appears that the increase in illegal economic activity associated with the Network Marketing industry will have a negative impact on government revenue.
Financial Consumer Protection Challenges
It appears that bitcoin transactions will have an impact on consumer protection. Customers of financial services are more likely to be insecure in a country like Nepal, where financial literacy is low.
Capital Movement Regulation Challenges
It appears that the use of cryptocurrencies will have an impact on Capital Movement Regulation. In a country like Nepal, where capital is scarce and transferring domestic capital overseas is prohibited, preventing capital flight via cryptocurrency appears to be the most difficult challenge. Similarly, because of modern technologies, cross-border network marketing is prohibited.
Capital flight appears to be occurring through the movement of funds overseas via medium or hundi.
Impact on Financial Stability
The increasing use of cryptocurrency appears to have an effect on overall financial stability. In the IMF’s Global Financial Stability Report (GFSR) issued in October 2021, cryptocurrency was listed as “one of the three key threats to global financial stability.”
Impact on Monetary Policy
Because cryptocurrency is operated by the private sector and is not under the control of the central bank, its widespread use may have an impact on the effectiveness of monetary policy rather than calculating the money supply.
Negative impact on foreign exchange reserves
Cryptocurrency trading/investment and network marketing businesses may result in capital flight and remittances from Nepalese living abroad to Nepal.
Because investments can be made abroad, it appears that foreign exchange reserves may suffer.
Engaging in illegal economic activities at a young age appears to have a negative impact on personal life as well as the country’s economic and social structure because young people are drawn to activities such as investing in cryptocurrency and similar funds and participating in network marketing.
Conclusion
It has been stated that the use and trade of cryptocurrency has increased significantly over the previous decade, and Nepalese both in the country and abroad are interested in cryptocurrency trading or related ventures. Similarly, outside-run network marketing businesses based on pyramids are popular in Nepal.
Should you need any further information, please do not hesitate to contact us at +977-9849517735 or by email: info@corporatelawyernepal.com
Alpana Bhandari is a founding partner and CEO of Prime Legal Consultants and Research Center. She graduated from American University Washington College of Law. She specializes in corporate/arbitration and family law.
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