Bitcoin Regulations Research Papers Examples
The history of Bitcoin dates back to 2008, supposedly having been created by a person or group going by the name Satoshi Nakamoto. Bitcoin is a virtual currency or crypto-currency that are not issued by a central economic authority, but rather, created by computers on a network and mined by individuals or business users. Roughly, about 3600 bitcoins are added each day. (Shubber 1) The payment or transactions of bitcoins are based on a bitcoin network and in a peer to peer system that is independent from third party interception. Owners keep bitcoins in their computer hard-drives that double as wallets.
In recent times, bitcoins have generated intense debates. The proponents of bitcoins feel that the usage of bit coins corresponds to the ideal role of future currency that can be used without restrictions of time and place. All transactions are recorded by a public ledger so that transaction information is transparent, yet keeping the identity of users confidential. (Harvey 79) The absence of a central regulating authority makes it impossible to implement taxes on transactions involving bitcoins. Further argument states that the use of bitcoins could prevent corruption and punitive taxes. On the other hand, the opponents argue that bitcoin would not have universal appeal since its value fluctuates sharply, making it difficult for businesses to fix prices of goods or issue refunds. Critics also feel that Bitcoins can assist private and anonymous transactions that are resistant to oversight and control, leading to misuse of bitcoins for criminal purposes. (Leger) Also, the system becomes unfair to those users who joined later since it becomes more and more difficult to mine out bitcoins for new users. Lastly, the bitcoin market will be heavily affected if their trading centers collapse. This paper will explain the processes in the bitcoin system followed by the reasons for the pressing requirement for regulation for bitcoin to transform into a widely accepted currency, in the process eliminating black market traders and preserving the freedom that bitcoin has hitherto enjoyed.
Process and Acceptability
The bitcoin system is an elaborate one. The most important part of the system is the blockchain. In simple terms, the blockchain a growing chain of numbers that encapsulates the history of every bitcoin ever created. (Bradbury 68) The blockchain makes it impossible for a bitcoin user to spend the same bitcoin twice (basically sending the same coin to two different people having already spent it once). One can imagine the blockchain modeled in a manner similar to one block on top of another, resembling a digital tower. Every floor of the data holds information on a transaction that formerly took place. In the absence of a central authority, the creators of this system designed a consensus algorithm, in which case the block takes the form of a hash. This makes it extremely difficult to manipulate the system.
The hashing process is the next progression that comes in line. This is the most important part of the bitcoin process since an alteration of a single hash in any one block would cause a ripple change across other blocks since they are all placed next to one another. A person who devotes time and computing resources to produce successful hashes is called a miner and receives a predefined number of bitcoins to their address. The algorithm is smart enough to alter the difficulty of producing successful hashes by changes the number of leading zeroes in the hash. (Bradbury 71) Problems like bloat in the blockchain have been dealt by users through the formation of alternative chain systems such as sidechains or through the development of interoperable blockchains. (71)
Retail users, ideally, purchase these bitcoins from websites such as bitstamp or the like. Russ Juskalian conducted a simple experiment to test the efficacy of the bitcoin by trying to live for 48 hours in Arnhem, Netherlands on nothing but bitcoin. (69) His experiment indicated the following problems: 1) Constant volatility made it difficult to predict the real prices since the costs kept changing, resulting in a small unpaid or excess amount at the end of most transactions, 2) Most people were not comfortable or were not aware accepting bitcoins. (70), 3) Due to problems with the Wi-Fi or the network, payment problems arose, and 4) Most standard services such as the railways and museums would not accept bitcoins. (71) From these observations, Juskalian concluded that government sanction was indeed very important for the currency to gain wide recognition in public services such as the railways.
Bitcoin Mining and Ethical Concerns
As mentioned, bitcoins are mined by miner using immense computing power. Khadim Shubber writes that a handful of mining companies such as MegaBigPower exists that mine and sell bitcoins. (1) The recent price erosion in bitcoin value (from $1000 to about $200) puts undue stress on miners since it is these entities who invest heavily in computing power. However, miners have other problems such as methods to cool the facilities that run such massive combined computing power that commercial cooling systems are required to maintain ambient temperatures. Further, with a limited number of bitcoins available everyday and with computing power on the rise, the mining business is an extremely competitive one. The heavy investment made in this operation insures that people have to work round the clock and hard to mine bitcoins faster than the others. Such a scenario also ensures that traditional miners who were a ‘one person entity’ have now been elbowed out by organizations with the mammoth computing power and, often, deep pockets due to investor interest. (Khadim 1)
Similarly, the problems in bitcoins system, at present, are not confined only to the operational aspects, but are also present in the dangers from bitcoin robbers. For example, the collapse of Mt. Gox last year yielded a loss of 850,000 bitcoins valued at almost half a billion dollars, only due to a security breach. (Burnett) Likewise, Canada saw its own version of bitcoin theft when a hacker took control of the router and stole the bitcoins belonging to a number of miners. (Khadim 1) In a similar manner, Europe’s bitcoin exchange Bitstamp lost 19000 bitcoins ($5 million) in a hacking attack. (Khadim 1)
Likewise, bitcoin operations such as Coinbase Inc, touted to be a bitcoin exchange that was funded by some of the biggest names in the business, including the NYSE turned out not to have proper licenses to operate in the state of New York. While the company claimed to be under proper regulatory oversight, New York regulatory authorities did not seem to agree with this claim. A similar problem was also seen by regulators in the case of ‘The Coinbase Exchange’ that was alleged not to have proper permissions to operate in the state. In this case, the California Department of Business Oversight went ahead and issued an alert informing consumers that the exchange was neither licensed nor regulated by the state. (Burnett 16)
These incidents (of supposedly unethical nature) clearly shake people’s confidence in this currency and make a clear case for a central bank intervention.
A Case for Regulation
Most experts claim that the reason for the birth of the bitcoin was to break the shackles of the authoritarian ideology and to reduce the power of central governments, thereby increasing individual liberties. (Shubber 1) However, such an economic structure also attracts unwanted elements who prefer to hide behind the anonymity that the system offers. Due to the anonymous nature of the bitcoin system many criminals have exploited the system for their own benefits. The biggest fear is that the system could fall prey to money laundering by terrorist organizations who would be easily able to move large sums of money without being detected for launching attacks on nations. There are several incidents that build a strong case for regulation of the bitcoin system.
Black Markets – Federal law enforcements agencies have observed, time and again, that bitcoins are the preferred currency for Internet black markets such as Silk Road and Black Market Reloaded. (Leger) Since bitcoin transactions are not connected to valid identities in the real world, the currency freely facilitates the trading of illegal goods online without revealing the identity of the traders involved. Such marketplaces have been accessible using a browser called Tor since they were largely inaccessible from the regular browsers such as Internet Explorer or Chrome. (Khadim 1) Although these markets had an exact structural resemblance to sites such as Ebay or Amazon, about 80% of the goods sold there were either illicit drugs or similar illegal paraphernalia.
This makes the currency, especially dangerous to use and makes a strong case for some level of regulation. In the case of online blackmarkets such as Silk Road and others, federal agencies have shut them down and have arrested their alleged operators. However, as soon as one such site shut down several others sprung up to conduct illegal trades online, thus making it necessary to employ some regulation as far as bitcoins were concerned.
Child Pornography – The Senate Homeland Security Committee and the International Centre for Missing and Exploited Children in a discussion with Patrick Murck (general counsel for the Bitcoin Foundation) raised concerns about the use of Bitcoins in child pornography rackets. (Leger) Their concern arose from a particular company called ‘Freedom Hosting’ that was responsible for hosting child pornography and related material on ‘deep web servers’ (servers that are potentially hidden from most normal internet users and accessed only through special browsers such as Tor). These operators always accepted payments from their clients in Bitcoins due to the anonymity that the currency provided vis-à-vis other currencies. The committee, particularly the officials of the International Centre for Missing and Exploited Children firmly believes that taking away the anonymity in this equation would strongly reduce the criminal activities that take place using bitcoins.
Money Laundering and Terrorist Activities – The anonymity that bitcoin provides to user does not restrict its usage to the sale of illicit goods in black markets. An enterprising criminal could use this currency for money laundering purposes, especially on a global scale to purchase arms, bombs or any other weapons that might be used for destruction. Brooke Satti, a financial crime expert at IBM, states that most ISIS supported blogs have set up discussions on how the Bitcoin can be used to support the Caliphate. (Satti) Further, as per Reddit’s Bitcoin forums, ISIS has already begun accepting donations through dark wallets that further hide the money trail from governments that are against the ISIS agenda. (Satti) Although, acquiring the bitcoins is the easy part since selling it can be tougher for the terrorist group since it requires a higher level of verification. It is at this point that members of the group would have to sneak into nearby Turkey, Dubai or Israel at a significant risk to convert the bitcoins to a useable currency. (Satti) But one can see the very real danger that an unregulated bitcoin can pose to the world at large.
The three points mentioned above are enough to build a strong case for regulation and reduce the oversight that bitcoin.
Nature of Regulation
The paper has clearly indicated for various reasons that bitcoins need regulation, but it would also be prudent to discuss the nature of the regulations that governments must consider. In this case, the paper would discuss regulations in general terms and not with respect to any one country or government. The governmental regulation must be carried out in a manner that retains the freedom that bitcoin has enjoyed, yet the coins should maintain a certain level of liquidity as well as prevent its usage for illegal activities.
Liquidity – The experiment by Russ Juskalian shows us the difficulty in making payments using bitcoins for specific purposes since the price of currency keeps on changing. (69) Harvey Campbell believes that the problem of price volatility can be solved by maintaining a certain level of liquidity. (79) One can surmise that liquidity and related controls can be brought only when a responsible central banker steps in to regulate the currency. Therefore, regulation must ensure low to zero price volatility and ample liquidity in the system.
Registration of Bitcoin Exchanges – In 2013, the Treasury Department's Financial Crime Enforcement Network said Bitcoin exchanges that allow users to convert their virtual currency to dollars must register with the government and abide by anti-money laundering regulations. European regulators issued similar requirements in July. (Leger) This move would help in preventing anonymous users transacting over the net and would help blow the cover off of black market trading as well as terrorist and related money laundering activities. Currently, sellers have to undergo a comprehensive identity check before they would be able to sell the bitcoins they hold. (Satti) In this way, the problem of child pornography and such other illegal services would also be diminished since no user would want to avail such services after having provided their identities.
In conclusion, one can understand that cryptographic currency such as bitcoins, although touted as the currency of the future have to undergo comprehensive regulations if they are to gain credibility in the marketplace. In the present scenario, both governments as well as many people view the currency with some level of suspicion, but regulation should change all that. Although, proponents of anti-authoritarian and free market ideas would argue against it, one must consider that an unregulated currency carries major risks such as usage for purposes of illegal activities, including terrorism. It would be ideal to have a certain level of regulation so that genuine users would stand to benefit, while criminals and terrorists planning to use bitcoins for illegal and terrorist activities should be discouraged.
Bradbury, Danny. “In Blocks we Trust.” Engineering and Technology Magazine. Mar 2015. Web. 12 Mar 2015.
Burnett, John. “The New Currency Dilemma.” U.S News Digital Weekly. 7.6 (2015): 16 – 16. Print.
Harvey, Campbell. “Can you really beat the market?” Money.com. Mar 2015. Web 12 Mar 2015.
Juskalian, Russ. “A Weekend in Bitcoin City – Arnhem, The Netherlands.” MIT Technology Review 118.2 (2015): 69 – 71. Print
Leger, Donna. “Bitcoin seeks 'safe and sane regulatory course.'” USA Today. 18 Nov 2013. Web. 12 Mar 2015.
Satti, Brooke. “ISIS. Are they Using Bitcoins to Fund Criminal Activities?” Security Intelligence. 29 Oct 2014. Web. 12 Mar 2015.
Shubber, Khadim. “The Regulators.” New Scientist. 225.3006 (2015): 1 – 1. Print.