Legal Entity Identifiers In Cryptocurrency

Updated on: Jun 6th, 2023

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5 min read

Cryptocurrency is a digital or virtual currency that is nearly impossible to counterfeit or double spend as it is secured by cryptography. A salient feature of the currency is that they are not issued by any Government or central authority, and hence they are immune to Government interference.

Cryptocurrency typically uses decentralised control that is when the currency is minted or issued by a single issuer it is considered centralised. However, when each cryptocurrency works through distributed ledger technology, typically a blockchain, it serves as a public financial transaction database.

Given its introduction, it is evident that cryptocurrencies are anonymous as the addresses of the users of cryptocurrency cannot be traced to their real-world identities. The currency is less anonymous than cash but more anonymous than the online payment.

The anonymity of the currency has paved the way for money laundering, terrorism finance and other shady transactions. It is also used for tax evasion. Collecting taxable income is one such activity. Tax authorities have no way of detecting or sanctioning such tax transactions, making cryptocurrency a safe place to avoid taxes.

Latest updates Clarification on proposed Section 115BBH in Budget 2022

1. Losses incurred from one virtual digital currency cannot be set-off against income from another digital currency.
2. Infrastructure cost incurred on mining crypto assets will not be treated as cost of acquisition.

Union Budget 2022 Outcome:

1. Income from transfer of virtual digital assets such as crypto, NFTs will be taxed at 30%.
2. No deduction, except the cost of acquisition, will be allowed while reporting income from transfer of digital assets.
3. Loss from digital assets cannot be set-off against any other income.
4. Gifting of digital assets will attract tax in the hands of receiver.Losses incurred from one virtual digital currency cannot be set-off against income from another digital currency.

How Will Legal Entity Identifiers (‘LEI’) Help In Cryptocurrency?

Legal Entity Identifiers (‘LEI’) help in transforming the anonymity surrounding cryptocurrency to pseudo-anonymity.
Identity in financial transactions is three layers:

  • Organisation
  • People
  • Things

Which means that to understand the source of the transaction, it is important to understand who is behind it and an organisation could be individual-centric, system-centric or organisation-centric. For a secure online transaction, all three must be identified. However, blockchain isn’t the right place to display such information as it is a public domain, decentralised and available in an extensive network.

LEI can pierce the organisational identity layer and bring about some transparency in the world of blockchain. LEI being a 20 digit code unique to organisations can offer some solace to business entities as banks can set up processes to check in LEI Database.

Integrating LEI Within Blockchain Ecosystem

LEI is a global indicator and provides the highest source of assurance between participants.
There are two ways in which LEI can be incorporated in a blockchain-

  • Issuing LEI in a blockchain-enabled platform is the first option. This will create a perfect infrastructure environment for an LEI to function effectively. The blockchain ledger monitors each change pertaining to the specific LEI and then stores it in a decentralized environment.
  • The second option is using an LEI system to monitor financial instruments like digital assets. In other words, leveraging LEI to track digital assets like security tokens. This adds an extra layer of regulatory compliance as integrating a legal identification system for any entity that further manages digital assets. This entails a higher degree of trust and security among the participants or users of the financial entity as well as the instrument.

Cryptocurrency can gain wider recognition if the information about people and organisations doing transactions on the network is verified. Legal Entity Identifiers can provide some solution to solve that challenge. This doesn’t mean that organisations will lose their data freedom. Instead, identity to data will give more transparency to the cryptocurrency system and all transactions in it. Whether the network is centralised or not, identities can still preserve the network’s freedom and transparency because it will make life for the cybercriminals harder.

Disclaimer: The materials provided herein are solely for information purposes. No attorney-client relationship is created when you access or use the site or the materials. The information presented on this site does not constitute legal or professional advice and should not be relied upon for such purposes or used as a substitute for legal advice from an attorney licensed in your state.

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Quick Summary

Cryptocurrency is a decentralized virtual currency secured by cryptography; its anonymity facilitates money laundering and tax evasion. Legal Entity Identifiers (LEI) can help introduce transparency in cryptocurrency transactions by verifying the identities of entities involved. LEI can be integrated into the blockchain ecosystem for regulatory compliance and security.

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