Cryptocurrency & Blockchain Technology Regulations
The asset class has yet to be declared by the regulators and this is where the currency vs security debate begins.
Cryptocurrency and blockchain technology are household terms that are talked about with veracious appetites by people who dabble in the world of investing and those who are considered professionals.
Foundationally cryptocurrency is a form of monetary exchange while producing an unchangeable ledger of transactions that is verifiable by all participants on the blockchain in a decentralized fashion and simultaneously an asset to be traded. The asset class has yet to be declared by the United States financial regulators and this is where the nascent debate commences, currency(commodity) or security.
Imagine a world where transactions were completed immediately and the typical 3-5 business day notice is non-existent. According to an article in CNBC the abrupt explosion in cryptocurrency theft peaked at a staggering 14 billion dollars in 2021, largely due to decentralized finance which is also responsible for 21% of all hacks in 2021 consequently from the numerous software vulnerabilities that these new protocols tend to have (Sigalos, 2022). Decentralized Finance (DeFi) is a rather new addition to the global monetary system, but the idea has been pondered deeply by some of the greatest economic minds preceding this innovative time.
Milton Friedman declared, “I think the internet is going to be one of the major forces for reducing the role of government. The one thing that’s missing but that will soon be developed is a reliable e-cash” (Kamal, 2017). Friedman also made it explicitly clear that the proliferation of transactions on the internet would be an advantageous vehicle for criminals to exploit. Globally governments and corporations are beginning to realize the necessity of implementing effective regulations that can balance the adoption, innovation, security, taxation, and governing bodies that cryptocurrency and blockchain technologies require.
The myriad of cryptocurrencies and blockchain technologies that flood the financial markets and exchanges have become household conversations throughout the world; yet neglect of international lawmaking among the world’s nations is alarming , cyber-attacks reaching for attention in daily news articles appear to carry minute weight, and the United States is planting the seeds for proper regulation and cohesion between private companies and governments where the responsibility lies in mandating effective regulations which ultimately should evolve into a combined effort.
Initially, while examining cyber space between world leaders is crucial and increasingly more prevalent at formal settings like the United Nations and G20 Summit, the neglect of international laws on cryptocurrencies and blockchain technologies are alarming and the notions of promulgating regulations are proving to be polar and rudimentary.
The attention that cyber-attacks have received in the headlines throughout the pandemic and the monetary damages that are typically associated compounds the urgency of the expanding cyber issues. The United Nations has been a leader throughout the pandemic when the world faced the corona virus, but there was minimal international collaboration to mitigate the alarming rise of cyber-crime (Katagiri, 2021).
As businesses moved from in-person to hybrid & remote work, the associated rise of ransomware cyber-attacks targeting individuals and businesses with the negotiation of data exchange for large sums of monetary value in the form of cryptocurrency which in turn prove to be extremely difficult to trace for law enforcement agencies. Supporting the stance that cryptocurrencies are in dire need of regulation so that transactions can be traced from person to person to provide individuals and businesses increased security.
Transaction methods utilizing bitcoin allow complete anonymous existence for hackers to avoid any authority figures (Kalaimannan, 2016). Of the 6,000 cryptocurrencies that are available options for cyber criminals and the ease of replicating the source code at this point in time creates a myriad of problems that need be solved and the opportunity for resolutions is at the international and national level for technology such as cryptocurrency and the illegal activities of cyber-attacks.
At the international G20 summit during March 2018 the attendees were explicitly clear to neglect the term cryptocurrency opting instead for the use of crypto-assets (Anush, 2021). There is an obvious avoidance of regulation at the international level which is likely to change soon due to the widespread adoption of cryptocurrencies worldwide. The nation that adopts regulatory actions first will likely see an increased usage of cryptocurrency within its borders consequentially resulting in the benefit of safety that regulations can provide.
Moreover, the world’s nations are neglecting to engage in discourse about cryptocurrency and blockchain technologies and implementing them for daily use, but the implications are far reaching and the regulations that govern each nations financial architecture are being challenged by one another. Nori Katagiri does a tremendous job presenting the divergence between cyberspace norms and cyberspace law in her recent research paper published in the Journal of Cybersecurity. According to Katagiri (2021),
“Norm discourse in diplomatic venues, including multilateral debates at the United Nations, has become highly undemocratic dominated by a small mix of great powers and active middle powers that are also split over what norms should guide state and nonstate behaviors” (p.1).
The corona virus pandemic that continues to impact daily life throughout the world has created an outbreak of growth in cyber-crime which has resulted in the necessity of cyber space regulation discourse at international diplomatic venues. If nations were to adopt cyber space regulations, then non-state cyber-attacks that seek financial benefit would potentially be mitigated or at the minimum decelerated. Ransomware is a type of malware that was first introduced in 1989 with the AIDS Trojan which culminated to tremendous financial loss in Russia (Kalaimannan, 2016). The process of ransomware attacks is to gain access to a victim’s computer and then encrypt all the data that is deemed important enough to warrant a negotiation for monetary exchange resulting in the data being unencrypted for the victim.
Ransomware has evolved to be a lucrative cyber-attack option for cybercriminals worldwide. Since 2013 crypto ransomware a subdivision of ransomware rose by nearly 20% and more recently cyber criminals have focused their attacks on public organizations like law enforcement agencies and health organizations (Kalaimannan, 2016). When data gets stolen from individuals or organizations there are few options but to pay the ransom. What is even more infuriating for these acts of cyber-crime is that the technology of cryptocurrency provides cyber criminals and their transactions to remain anonymous and extremely difficult to differentiate between criminal and non-criminal transactions. International and state specific regulations should be implemented to allow law enforcement agencies to track financial transactions more accurately for the goal of mitigating money laundering and ransomware attacks to include crypto ransomware.
Finally, The United States is a prime example of cohesion between private companies and the government for promulgating laws and regulations for crypto assets and blockchain technologies, albeit the discourse is in its infancy and just beginning to gain traction. Recently there is a growing aura of discontent between American citizens and the governing entity that controls the economy and monetary system. According to Catalini (2018), “Governments are the trusted intermediaries in several key transactions within the economy. They also have a monopoly on currency; manage identity verification, taxation, defense, and cybersecurity; and ensure market safety and fair competition” (p.40). All these aspects of the current economic system have become contested after the recession of 2008.
That historical event likely influenced the 2009 emergence of the first cryptocurrency and blockchain, Bitcoin by the unknown person who goes by the online pseudo name Satoshi Nakamoto. Catalini touts that the best way to mitigate criminal activity is to mesh the DeFi assets and the centralized assets for daily consumer utilization (Catalini, 2018). Early December 2021 six CEOs of notable cryptocurrency exchanges provided a lengthy meeting with congress to dispel any confusions about the technology and engage in discourse for the promulgation of regulations that will hopefully mitigate money laundering, theft, and hacks that request ransom from its victims. These 6 CEOs provided an informative session with congress; legislation has yet to be made, but it was an important first step towards regulation. The issue that currently stands is who the governing body will be that holds responsibility for regulatory jurisdiction. This problem is being examined by looking at the current definition of cryptocurrencies such as Bitcoin, Ethereum, and USDT a notable stable-coin, and how these cryptocurrencies are classified as assets.
Not all cryptocurrency is created equal but the most famous one, Bitcoin, meets the definition of money: a measure of value, a means of circulation of goods or services, a means of accumulation, and a means of payment. It can also act as a security and as a good to barter or exchange which is why the jurisdiction of governing is in question in the United States. Currently there are multiple organizations who provide regulations for money and securities; at the federal level: the Internal Revenue Service, the FinCEN Department of Securities, the Securities and Exchange Commission, and the Commodity Futures Trading Commission which all encompass the regulations of cryptocurrency transactions (Anush, 2021). Although the United States has had issues with jurisdiction of regulatory actions another notable leader in this space is Japan.
Particularly, Japan’s Digital Asset Commission was established as a non-governmental agency in 2014 and recommends to businesses to file a special application and go the extra mile when analyzing financial issues, more specifically the know your customer (KYC) policy (Anush, 2021). The know your customer policy is also coupled with the anti-money laundering (AML) policy and are important to regulate the financial transactions happening throughout all the crypto exchanges and markets worldwide.
In addition, in 2016 Japanese parliament passed a law that specified the legal regulation of the cryptocurrency arena and in 2017 Japan approved the amendments to the Banking Act which resulted in the declaration of Bitcoin as a means of payment. (Anush, 2021). This is a bold move considering cryptocurrency has a security attribute as noted previously which is why America has trouble providing a definition to it. Whether it is the United States, Japan, or another global leader who paves the way for global discourse and regulatory actions for cryptocurrency and blockchain technology, the inevitable laws will be implemented. The volatility of daily price swings, mitigation of crypto attacks like ransomware, and the KYC and AML policies should be enforced more strictly to promote security between cryptocurrency related transactions.
“With great power comes great responsibility,” as Uncle Ben said in Spiderman; likewise, is true of governments who are ultimately the ones charged with implementing regulations for the 6,000 plus or minus cryptocurrencies that are currently in circulation; their actions could either promote the growth of the free market while protecting the overall society as a whole or it could shy away and allow the rampant cyber-attacks to continue as they have throughout the entirety of the corona virus pandemic. In the end the government should step up to the plate as Spiderman ultimately did to face his nemesis.
Cryptocurrency and blockchain technology regulation is a global conversation happening everywhere from the democratic venue of the United Nations, G20 Summit, and United States Congress to public organizations: hospitals, municipals, town officials, and police departments, to the dinner table in households worldwide. The shift from citizens having no option for their financial choices to being able to be completely decentralized with their net worth is only a possibility thanks to the implementation of these expanding technologies.
Cryptocurrency and blockchain technology have fundamentally provided an explosion of innovation to systems that have sparsely been amended in the last few hundred years to include: the integrity of data, intermediation, verification of financial transactions, reduction in cost of transactions, and the ability to instantaneously exchange monetary value with anyone in the world anonymously. The notion of cryptocurrency has been predicted by more than one notable figure predating its conception and is advertised on social media relentlessly.
This technology is here to stay but there must be regulations and laws promulgated and enforced to promote the security and safety of individuals and organizations alike. The ravaging cyber-attack of crypto ransomware throughout the pandemic was a transparent catalyst for governing bodies at a minimum spark a necessary conversation with CEOs of major cryptocurrency exchanges.
The conversation will be ongoing with those authority figures but with grit and decisive action the regulations that are drastically needed to promote security and safety with the entirety of the cryptocurrency and blockchain ecosystem can be finally promulgated.
References
Anush, B., Inna, G., Petrovich, D., & Tetyana, B. (2021). Comparative and informative characteristic of the legal regulation of the blockchain and cryptocurrency: State and prospects. İlköğretim Online, 20(3), 15-41 1550. https://doi.org/10.17051/ilkonline.2021.03.172
Catalini, C. (2018). Blockchain technology and cryptocurrencies: Implications for the digital economy, cybersecurity, and government. Georgetown Journal of International Affairs, 19(1), 36-42. https://doi.org/10.1353/gia.2018.0005
Chainalysis. (2021, December 14). What is AML and KYC for crypto? Chainalysis. https://blog.chainalysis.com
Kalaimannan, E., John, S. K., DuBose, T., & Pinto, A. (2016). Influences on ransomware’s evolution and predictions for the future challenges. Journal of Cyber Security Technology, 1(1), 23-31. https://doi.org/10.1080/23742917.2016.1252191
Kamal, G. (2017, September 30). Economist Milton Friedman predicted Bitcoins in the 90's!! [Video]. YouTube. https://www.youtube.com/watch?v=onn34J74dnU
Katagiri, N. (2021). Why international law and norms do little in preventing non-state cyber-attacks. Journal of Cybersecurity, 7(1-9). https://doi.org/10.1093/cybsec/tyab009
Sigalos, M. (2022). Crypto scammers took a record $14 billion in 2021. CNBC. https://www.cnbc.com/2022/01/06/crypto-scammers-took-a-record-14-billion-in-2021-chainalysis.html