By Sunny Um WIRED Korea

The cryptocurrency industry insists Bitcoin and its ilk are not assets, as claimed by regulatory agencies, but currencies like the U.S. dollar, the euro or any other type of legal tender. The reason, it says, is that they have the same functions that the official currencies do – serving as a medium of exchange, a store of value and a unit of account.

But international banking and financial regulatory agencies are moving to define them as taxable assets whose values change depending on market conditions. They believe no agencies other than central banks are authorized to issue a legal tender.

Many governments, encouraged by this move, have started or are preparing to levy taxes earnings from virtual currencies. Among them is the Korean government, which has started to pay a keen attention to cryptocurrency transactions since 2017 when there was a buying frenzy. It created task forces to regulate them and started to work on legislation.

On neutral ground are some economic experts, who believe cryptocurrencies have features of both currencies and assets. In other words, they are in what is called a gray area.

On one hand, the Bitcoin is a currency, as it fits the definition of a currency: Few would dispute that it serves a medium of exchange, a store of value, albeit in a limited way. On the other, its value changes, like a car, a share of stock or any other asset, as the market conditions change.

When a fight was raging on over the cryptocurrency’s nature on the global state, the Korean government took steps last year to legally define the cryptocurrency as a “virtual asset.” The Ministry of Strategy and Finance submitted a revision bill to the National Assembly, with a view to taxing all profits from virtual currency transactions.

The bill, which passed the National Policy Committee, is awaiting a vote in a plenary session. Representative Kim Byung-wook of the ruling Democratic Party, was quoted as saying that the bill would be passed when the National Assembly held a plenary session at the beginning of this month.

But the National Tax Service, eager to expand the tax base and increase tax revenues, could not wait until the bill passed the National Assembly and was signed into law by the president. It took what appeared to be an ill-advised action when it imposed withholding taxes, totaling 80.3 billion won ($70 million), on cryptocurrency transactions foreigners had conducted via Bithumb during the past four years, the largest cryptocurrency serviced provider in Korea.

The tax collector apparently believed the existing tax laws provided a legal foundation to take such action. When it decided to levy the taxes, it referred the earnings as “miscellaneous income” and put the taxes on them in the category of income tax.

As a tax expert described it aptly, the National Tax Service dropped a “tax bombshell” on the Bithumb exchange. Though it duly paid the taxes, it says it will bring the case to the court.

Kim Woo-cheol, a professor of taxation at the University of Seoul, says it is theoretically possible but practically impossible for Bithumb to collect the amounts of money equivalent to the taxes it paid for from the foreigners who had made profits from the cryptocurrency transactions.

It may have been premature for the National Tax Service to impose taxes on cryptocurrency transactions via Bithumb. Yet, it is undeniable that the Korean government is under pressure from international political, banking and financial organizations to take steps on tighten regulations on cryptocurrency transactions.

They say it is necessary to regulate them tightly for the purpose of not only taxation but prevention of money laundering and other crimes. The tax bill pending at the National Assembly aims at curbing money laundering as well.

Indeed, the bill would require cryptocurrency exchanges to provide the regulator with the identity of a client conducting a large transaction and report suspicious transactions to a watchdog, the Korea Financial Intelligence Unit, as licensed financial institutions are required to do.

“Once the bill passes, it will require the domestic blockchain industry to improve its credibility by making cryptocurrency transactions transparent,” says Representative Kim.

That is what an inter-governmental organization monitoring money laundering, the Financial Action Task Force, is calling for. It demands member states take legislative action to prevent crimes involving cryptocurrency transactions.

As Korea is in the process of legislation, the debate on the nature of cryptocurrency shows no sign of ending in the international community anytime soon.

The Swiss-based Bank for International Settlements claims the Bitcoin and other virtual currencies are crypto-assets and that cryptocurrency is a misnomer. The International Monetary Fund holds the same view.

The debate is rekindled by the move to create a cryptocurrency for use on Facebook and what appears to be China’s countermove against Facebook. China would be pressured to create its own digital money if Libra should be launched as planned. Then who would continue to claim it is nothing but a virtual asset.

Mo Young-kyu, a professor of economics at Sookmyung Women’s University, it is still difficult to define virtual money either a currency or an asset in the legal framework. He says, “It is still in a gray area.”

Steve Nam, managing editor of the Journal of Blockchain Law and Policy at Stanford University, holds a similar view.

“How cryptocurrency is reflected in laws involves a balancing act,” says Nam. “Legislatures continue to grapple with navigating cryptocurrency’s decentralizing nature and benefits, and how to best enable them in legal frameworks while tempering malicious, criminal use and bad actors.

“While there’s a collective desire for further clarity for most participants in the space, there’s also an understanding that enshrining crypto in law in a rushed, overly simplistic manner would actually pose a setback.”