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Open in new tab An Analysis on the Legal Developments of Cryptocurrency Acceptance and its Impact on the Hospitality Industry Las Vegas, NVC
Contents
Abstract …………………………………………………………..2
Introduction And Background. ………………………….3
Current Legal Environment ………………………………5
Hospitality Use Cases……………………………………. 10
Recommendations And Conclusions. ……………….14
Citations. ………………………………………………………17
ABSTRACT
The fascinating and intricate world of cryptocurrency holds extremely high promise for adoption into hospitality and tourism systems. The industry could benefit greatly from blockchain adoption but rampant legal concerns including struggles with how to classify bitcoin and other cryptocurrencies, security concerns, lack of regulatory measures, tax concerns, as well as propensity to use blockchain for illegal means due to its inherent anonymity all place the future of blockchain adoption for the wider hospitality industry in jeopardy.
INTRODUCTION AND BACKGROUND
Some would argue that blockchain is the greatest thing that most people have never heard of. Proponents would say blockchain elevates trust and relational capabilities in an expedited and holistic manner, democratizes participation in economic systems and re-distributes power and economic relations amongst actors by influencing the way data is collected, stored, exchanged and owned (Tham and Sigala, 2020). Detractors would argue that bitcoin combines elements of a Ponzi scheme with market manipulation and pump-and dump (Engle, 2016) and opens the flood gates up to potential criminals to make their illegal activities even more anonymous to the wider public. Whatever side of the fence one may be on, the potential around cryptocurrency and blockchain in general is undeniable.
Cryptocurrency employs cryptography to conduct secure transactions, with Bitcoin being the most well-known of cryptocurrencies. At its heart, Bitcoin uses a peer-to-peer payment system to conduct secure electronic transactions but it operates on what is called the blockchain. (Zeng et al, 2015). In order for transactions to be verified, a blockchain must be solved in order for the transactions to be added into the public ledger. Many argue that due to its distinctive technological nature and different configuration set- ups, blockchain has the potential to create and form new market settings and equilibriums that no only simply fix existing sustainability gaps and needs but also form new markets with new rules and institutional logics for achieving tourism sustainability (Tham and Sigala, 2020). Among the emerging technologies surveyed by PwC in 2017, hospitality and leisure are poised to receive the largest share of investment in blockchain technology (Kwok and Koh, 2019). Blockchain has become a significant source of disruptive innovation and when combined with all of the sub industries that make up the larger hospitality industry, these industries create a $7.6 trillion dollar market, roughly 10% of the world’s GDP (Kizildag et al., 2019).
This all shows the immense promise and potential for the hospitality industry should they begin to embrace blockchain technology more readily, but there are huge barriers to this happening on a wider basis. Some of the biggest issues that face blockchain mass adoption from a legal standpoint are its inherent decentralization, its propensity to allow illegal unregulated commercial activity, its precarious legal classification of what exactly cryptocurrencies like Bitcoin are considered, as well as the uncertain tax implications of certain cryptocurrencies like Bitcoin. All of these issues we will explore in detail later in the paper, but all have their own unique challenges that could prevent wider adoption of Bitcoin and other cryptocurrencies like it. Bitcoin is the mother of all cryptocurrencies and was the first of its kind, so arguably if Bitcoin cannot attain mass adoption and greater regulatory and legal approval, neither will other cryptocurrencies.
CURRENT LEGAL ENVIRONMENT
The hospitality industry in general has experienced a surge of peer-to-peer transactions in a number of other forms outside of the blockchain, such as Airbnb and Uber (Zeng et al., 2015). Peer-to-Peer transactions will continue to increase well into the future due to their inherent flexibility and convenience and blockchain is no different. With respect to Bitcoin specifically, Bitcoin provides speed and convenience to a plethora of hospitality services. Bitcoin currency conversion makes international travel more comfortable because travelers can simply convert their native currency to the currency of their foreign travel. From the perspective of the business entity, businesses can avoid paying high transaction fees from intermediaries such as banks and credit card companies and they can accept Bitcoin payment from anywhere in the world. Firms can reduce expenses by paying a lower transaction fee with the usage of Bitcoins. Businesses also eliminate the risk of credit card charge-backs or warranty issues, since a Bitcoin payment is final and complete when accepted, without recourse by the consumer (Zeng et al., 2015).
There are a variety of examples of the mainstream appeal of Bitcoin and blockchain in a variety of companies. Companies such as Cheapair.com and Expedia have accepted Bitcoins for local and international transactions (Zeng et al., 2015). Large distribution corporations and verticals have invested in developing proprietary blockchains and smart contracts to manage corporate procurement, B2B contracting and SC relations (Tham and Sigala, 2020). Governments of several small island economies are even heading the adoption of blockchain technology and their cryptocurrency volume constitutes the highest proportion of the billion-dollar daily trading volume of all cryptocurrencies (Kwok and Koh, 2019).
While this adoption may seem highly promising, there are still numerous legal issues as it pertains to Bitcoin and blockchain technology that are contentiously being debated and overall represent a steep uphill battle that must be fought in order to achieve greater mass adoption for these disruptive technologies. For starters, there is a deep mistrust of cryptocurrencies from a security standpoint and lack of governmental regulation. Several Bitcoin exchanges such as Mt. Gox, Tradehill and Bitcoinica have been compromised by hackers and fraudsters with significant loss to investors (Engle, 2016). There is a severe lack of awareness surrounding data security as it pertains to blockchain and while the intention of blockchains are to reduce corruption and collusion, there are many examples where they nonetheless have been a guise for well-concocted plans for money laundering as well as a variety of other crimes (Tham and Sigala, 2020).
When it comes to lack of governmental regulation, there are very few direct laws or statues that directly address blockchain as a whole. More statues have been created around Bitcoin due to its popularity, but this only represents a fraction of the larger cryptocurrency ecosystem. Most of this is due to the inability of many courts to even properly iron out how to classify Bitcoin and other cryptocurrencies. In SEC v. Shavers, a U.S. court affirmed Bitcoin to be a currency (Engle, 2016). If this continues to be affirmed by other courts, an argument exists that cryptocurrencies such as Bitcoin have the potential to be deemed counterfeit and rendered illegal due to them competing against the dollar as a general medium of exchange and thereby violating the federal money monopoly (Engle, 2016). The Stamp Payment Act makes it illegal for an individual to create and circulate legal currency that competes with U.S. Currency (Zeng et al.,). For now Bitcoin avoids Stamp Payment Act laws because it does not emulate U.S. coins and presents no threat to the American dollar, in addition to the fact that very few courts have even affirmed Bitcoin to be considered a currency.
Gerkis and Krikunova, supra note 16, at 6 classified Bitcoin as a security. If Bitcoin is found to be considered a security, this means it falls under SEC jurisdictional regulation and this means that Bitcoin represents a business investment in which the Bitcoin holder expects to gain a profit (Zeng et al., 2015). In addition to this, there have also been issues raised about whether a Bitcoin transaction is subject to sales tax, and income tax on profits. Currently the IRS states in Notice 2014-21, 2014-16 I.R.B. 938 that virtual currency is treated as property. General tax principles applicable to property transactions apply to transactions using virtual currency. Therefore, cryptocurrency should be taxed according to the gain or loss that taxpayers realize when they sell or exchange cryptocurrency. This further points to Bitcoin and other cryptocurrencies being seen more as security than actual currency. Whether a security or currency there even exists a middle ground where cryptocurrencies can be considered currencies, and yet may also be subject to SEC jurisdiction as a security, depending on the specific facts of the case (Engle, 2016).
Cryptocurrencies have even been found to be investment contracts under the Howey test based on definitions prescribed in SEC v. Howey where cryptocurrency is found to be an investment of money that has common enterprise which is expected to produce profits thanks to the effort of others (Engle, 2016). Many countries do not even consider Bitcoin and other cryptocurrencies to be real currency, but allow them to be used as a medium of exchange. The act of exchange of services or products without legal tender is known as bartering and some have even argued that Bitcoin and other cryptocurrencies presents itself more as a barter transaction than a currency, though nowhere is it spelled out as such (Zeng et al., 2015). Between labeling them as a currency, security, investment contract, or simply as a bartering system, blockchain and the cryptocurrencies that sit in its medium clearly have a lot of regulatory issues to work out not to mention the deep security implications and ripeness for illegal activity to take place, but the issues don’t stop there.
Cryptocurrencies, like public companies, have ways that they formally announce to the public that they are now public. These are called ICOs, or Initial Coin Offerings. ICOs are relatively new terms and due to them being fairly new there is not a lot of regulation around them. Since 2017 there has been a booming surge of ICOs that raised outrageous sums of money in significantly short time spans, particularly when compared to IPOs held by traditional companies. In 2017 alone, ICOs collectively raised an estimated $5.1 billion and Brave, a company developing a decentralized web browser, raised an astonishing $35 million in less than 30 seconds (Robinson, 2018). Bancor, a company developing a cryptocurrency exchange platform, raised in excess of $153 million in just three hours (Robinson, 2018). Another example of innovatively using ICOs was that an ICO was used as a fundraising mechanism to develop a resort on the Great Keppel Island in the Great Barrier Reef, off the coast of Queensland (Tham and Sigala, 2019).
Many of these ICOs were able to be held without formal letters of incorporation, without a Board of Directors, and without representing a formal company. In many ways, people invest in an idea with no formal regulatory agency to validate the authenticity of these different ICOs and where the money raised is actually going. It is what Robinson calls the New Digital Wild West. One could argue that the entire regulatory nightmare that blockchain faces in its hope for mass adoption is for sure the definition of the New Digital Wild West.
HOSPITALITY USE CASES
Hospitality industry professionals are motivated to explore the possibilities of utilizing Bitcoin as an acceptable form of payment in their global market as well as other cryptocurrencies. However, hospitality professionals have a legal obligation to safeguard guests and patrons identity and to not participate in illegal transactions, such as fraudulent acts and “money laundering” (Zeng et al., 2015). At present, academic literature studies on Bitcoin remains concentrated on its economic value, with early adopters keen to speculate by buying with the intention of recouping quick returns on their initial investments. There remains a lack of critique as to how cryptocurrencies, such as Bitcoins, work operationally across very diverse market conditions (Tham and Sigala, 2020). While this may be true specifically for Bitcoin, there are a variety of examples on how the building blocks which Bitcoin is built on, blockchain, can be utilized to benefit hospitality enterprises and is already being utilized by a variety of hospitality enterprises.
Early adopters of blockchains and cryptocurrencies within the tourism industry such as major airlines like Air New Zealand, Air France-KLM, Singapore and Lufthansa as well as big hotel chains like Marriott’s Bonvoy loyalty and booking system suggested that innovators required significant financial and resource investment before blockchains can be leveraged to the business mode (Tham and Sigala, 2020). This thought process slowly waned as a variety of different areas of the industry as well as outside the industry began to participate in blockchain innovation thanks to its wide of amount of flexibility and complexity.
Discussions and arguments about the applications of blockchain technology in financial services are particularly rampant in areas such as commercial and internet banking, innovative payment solutions, point-of-sale (POS) technology, asset trading and exchanges, financial security concerns, and financial advice and customization of personal/household finances (Kizildag et al., 2019). This has many parallels to hospitality enterprises as perhaps one of the readiest applications of blockchain technology to hospitality and tourism will emerge in the form of payments and transactions that are facilitated by cryptocurrencies , such as Bitcoin (Kizildag et al., 2019). Bitcoin ATMs have already been installed in Canada, Australia, Finland, Slovakia, Germany, UK, Switzerland, and the United States. The shopping website, eBay, accepts Bitcoin transactions in the UK and Cumbria University started to accept Bitcoin as a tuition fee payment (Zeng et al., 2015). Countries such as Russia and South Korea have already initiated blockchain platforms to facilitate cryptocurrency transactions in tourism (Tham and Sigala, 2020).
There are a variety of other ways that companies are utilizing blockchain technology to their advantage outside of payment transactions. TUI Travel Group is already using blockchain technology to manage the distribution of its inventories and other assets and handle internal processes such as loyalty and reward platforms to improve the end-to-end user experience (Kizildag et al., 2019). Blockchain has the high probability to influence the way companies structure their loyalty and reward program as blockchain allows companies to issue loyalty tokens as rewards in their loyalty programs. This particular loyalty token enables guests to freely exchange, trade and/or redeem loyalty tokens in an open forum with others to increase the monetary value of the rewards (Kizildag et al., 2019).
In wine tourism, specifically by openvino.org, blockchain is being used to provide transparency and information about the origin/authenticity of wine offerings (from grape cultivation to winemaking and distribution/sales until the final stage consumption at cellar door or restaurant) and even raise capital and crowdfund wine tourism projects by issuing and developing cryptocurrencies whose value is backed-up with real wine products (Tham and Sigala, 2020).
From a paperwork and administrative perspective, blockchain is allowing for a distributed sharing of information to check against loan records, credit histories and collate legal documentation such as digital signatures and electronic copies of personal identification in an expedited manner. This not only significantly reduces the time, cost and effort required from all parties involved but is also more sustainable as it eliminates unnecessary paperwork (Tham and Sigala, 2020).
Given the highly competitive and evolutionary trends confronting tourism providers, blockchains and cryptocurrencies present a viable proposition to reduce inefficiencies, re-distribute power amongst economic actors and create a more equal playing field between large and small operators that heavily dominate the tourism industry, challenge current power relations and structures within SCs by providing transparency and establishing authenticity of actors and transactions and question and disrupt traditional intermediary services by empowering actors to keep ownership of their identity and transactional data (Tham and Sigala, 2020). By providing more equal opportunities to small and bigger tourism players to participate and compete in the tourism economy with “equal terms,” blockchains and cryptocurrencies create more inclusivity related to the credence nature of tourism and its ethical and responsible values (Tham and Sigala, 2020).
RECOMMENDATIONS AND CONCLUSIONS
There is a host of opportunity out there when it comes to the overall potential use cases of blockchain and cryptocurrencies in the context of the hospitality industry. One of the key areas of focus for wider adoption of this emerging technology will rely on there being a “leader” and/or a critical mass of enthusiasts mutually supporting and trusting one another within a blockchain ecosystem. In a similar vein, and to support the industry- wide adoption of blockchain the existence of an industry representative (e.g. a destination management organization) and/or an exemplar best practice can significantly help in pushing blockchain adoption (Tham and Sigala, 2020). These two points point to the notion that people have to get in the game in order for its value to spread. Companies have to take risks and be willing to get involved in the cutting edge of technology in order for blockchain to even have a chance at survival. Early adopters and first movers are some of the most important key players when it comes to finding champions for this kind of innovative change, particularly from very large enterprises that command the attention of other smaller entities.
Many of the roadblocks to greater blockchain adoption is due to the legal battles that are still very much alive. Much of this starts with a lack of foundational knowledge around what blockchain and cryptocurrencies are and the variety of benefits that they can provide. The average person does not know what blockchain or a cryptocurrency is and would not be able to explain it and even those who are intimately familiar with the concepts may struggle to explain it to a layman. For laws to change, lawmakers have to understand what the technology is. They have to understand its value, what it provides, and the ways it can improve larger society while also understanding its risks. No business operates without risk, yet businesses are still allowed to operate. In the same vein, while blockchains were primarily designed to ensure that the system would self-regulate without necessary governmental intervention (Tham and Sigala, 2020), this sentiment is largely what is keeping blockchain from larger adoption. Those involved in blockchain and cryptocurrency have to be willing to find compromises between completely compromising their system to regulatory oversight and nightmares to finding a healthy balance between regulation and privacy. This may take a while to determine the appropriate balance, but it is critical to the mass adoption of blockchain.
Kwok and Koh aptly explained some of the most critical ways that blockchain can benefit hospitality enterprises, and while their research was focused mostly on small island entities, the benefits can have strong parallels to larger economies and tourism industries in more developed countries:
“While the application of blockchain technology is multi-faceted, its implementation is set to benefit tourism in four broad areas. First, blockchain will enhance tourist experience as the platform support technology-mediated learning which is dyadic between tourism operators and tourists…. Second, cross-border remittances via blockchain network in SIEs is quick and hassle-free. Additionally, pricing in cryptocurrency unit is universal and real-time, thus, easing foreign currency conversion… Third, using blockchain technology provides a means of diversification– to safeguard the currency and strengthen the banking system. The financial institutions of SIEs are highly reliant on correspondent banks. Besides minimizing the prohibitive cost of compliance to sustain their operations in SIEs, blockchain technology will also establish a more robust mechanism to monitor compliance… Lastly, from the host destination perspective, doing away with the commission fees via the blockchain can contribute to lower overall operating cost.”
Blockchain has a variety of benefits but comes with a variety of legal struggles that must be worked through in order to achieve wider adoption. As technology advances, so too must the business practices of operators. Blockchain enables hospitality companies to stay on the cutting edge while also cutting out intermediaries and providing customers with an end-user experience that attempts to actively protect their identity but also provide them a more customized and even flexible experience. Blockchain is applicable to a wide variety of functional areas and can benefit nearly any portion of a hospitality business, but that business has to be willing to ride the wave of changes that this new disruptive technology will face as well as face the limited acceptability until further adoption has been achieved.
CITATIONS
- Zeng, , Thomas, J. H. , Kitterlin-Lynch, M. , Chang, S. H. , & Williams, J. ( 2015). Bitcoin: Legal issues and usage in the hospitality industry. Journal of Hospitality & Tourism Cases, 4 (3), 68– 73.
- Tham, and Sigala, M. (2020), “Road block(chain): bit(coin)s for tourism sustainable development goals?”, Journal of Hospitality and Tourism Technology, Vol. 11 No. 2, pp. 203-222. https://doi-org.ezproxy.fiu.edu/10.1108/JHTT-05-2019-0069
- Kizildag, , Dogru, T., Zhang, T.(., Mody, M.A., Altin, M., Ozturk, A.B. and Ozdemir, O. (2019), “Blockchain: a paradigm shift in business practices”, International Journal of Contemporary Hospitality Management, Vol. 32 No. 3, pp. 953-975. https://doi-org.ezproxy.fiu.edu/10.1108/IJCHM-12-2018-09586
- Andrei J. Kwok & Sharon G. M. Koh (2019) Is blockchain technology a watershed for tourism development?, Current Issues in Tourism, 22:20, 2447-2452, DOI:10.1080/13683500.2018.1513460
- RANDOLPH ROBINSON II * (Summer, 2018). ARTICLE: THE NEW DIGITAL WILD WEST: REGULATING THE EXPLOSION OF INITIAL COIN OFFERINGS. Tennessee Law Review, 85, 897. https://advance-lexis- com.ezproxy.fiu.edu/api/document?collection=analytical- materials&id=urn:contentItem:5W1N-VKK0-00CW-1253-00000-00&context=1516831.
- Eric Engle (2016). ARTICLE: IS BITCOIN RAT POISON? CRYPTOCURRENCY, CRIME, AND COUNTERFEITING (CCC). Journal of High Technology Law, 16, https://advance-lexis-com.ezproxy.fiu.edu/api/document?collection=analytical- materials&id=urn:contentItem:5JW7-PKM0-0198-F0H3-00000-00&context=1516831.