During technology’s fast-paced evolution within the past decade, one invention captured the entire world by simplifying and changing the banking system: cryptocurrency. Cryptocurrencies have surged within the last ten years as a digital medium of exchange and an alternative to contemporary considerations of what money is, while using cryptography to ensure the security of all transactions. Owners of cryptocurrency have access to their own private keys to transfer cryptocurrencies, without any governmental oversight, making this platform extremely attractive to the general public, including private individuals who use it for illicit purposes. The government has no power to regulate these means, since it is all passed through a distributed ledger. With this decentralized medium of exchange, it has become increasingly harder to regulate, leaving the question of how countries around the world will watch over the proliferation of this digital asset.
One of the largest issues that regulators face is the usage of cryptography in cryptocurrency exchanges. Cryptography allows codes to verify the transfer of assets, “gather...the information and data, and it all passes through blockchains, which represent the distributed ledger.” This distributed ledger is one of the key aspects of cryptocurrency. Prior to the creation of the block chain, there was the double spending problem, which did not consist of a middleman or central server to watch over transactions, causing users to double spend their currency. During the time of the double spending problem, no one knew how to spend digital currency without updates. This was solved in 2008 by Satoshi Nakamoto who created Bitcoin, the first and most popular cryptocurrency. Bitcoin uses a block chain, or a peer-to-peer network, to permanently secure all transactions through codes so everyone in the block chain can see the transaction. For example, when someone spends one Bitcoin now, there is a central server to update their currency. Nakamoto has not had any personal activity on Bitcoin since they disappeared many years ago, but there are reports that a huge amount of Bitcoins exist under their wallet. However, they have not shown activity since their disappearance. If those coins were to show activity, the price of Bitcoin would drop heavily for fear of them being sold, making the rest worthless.
Although the movement to the electronic banking system gained momentum, there are several hacking instances that have resulted in stolen millions from cryptocurrency owners. Some of the most infamous hacks in the Bitcoin blockchain include the Winklevoss Twins, the Gox exchange, and the Facebook controversy. Before the Facebook-Bitcoin controversy, the Winklevoss twins were known for battling with Facebook founder, Mark Zuckerberg, over who actually created Facebook.
Alternatives to Bitcoin, called “altcoins,” emerged after it had gained popularity. The two most popular include Ethereum and Litecoin, which are privacy-specific coins with the goal of being as hard to track as possible. Although cryptocurrency was initially very hard to trace, U.S. Securities and Exchange Commission (SEC), Commodity Futures Trading Commission (CFTC), and Congress in 2019 have developed ways of tracking the distributed ledger. True investigations into cryptocurrency-related crimes did not start until a few years ago, but these institutions were able to uncover hundreds of criminal entities on just the Bitcoin blockchain. In addition to laundering dirty money and monetizing ransomware, cryptocurrency crimes have extended to dangerous organizations, such as Al-Qaeda and ISIS. By falling into the hands of terrorist organizations, cryptocurrency has been utilized to procure funding and instill the continuation of these dangerous users.
However, not only governmental agencies have attempted to control and observe the mysterious transactions within cryptocurrency. Law enforcement has received the help of agencies, such as ComplyAdvantage and Elliptic, that use new technologies as well to monitor deviances in the blockchains. According to Rachel Wolfson in Forbes, “By examining blockchain activity closely, companies focused on combating cryptocurrency related crimes can pinpoint accounts that appear to belong to the same Bitcoin wallet and are controlled by the same entity.” By studying trends and patterns most agencies can use their own technology to warn governmental agencies about illicit uses of cryptocurrency. However, as technology grows for these oversight agencies, more criminal behavior picks up on the other end. This ongoing battle for the highest use of technology has become less useful to lawmakers, as the regulatory processes stray from their jurisdiction in the digital world.
Another issue for attempted regulation, involves the correlation between location and prices. Countries that are generally colder and where electricity is cheaper, have more cryptocurrency mining and usage. Because the electricity is cheap and mining with massive computer systems generates heat, colder countries have thrived off of cryptocurrency investments. For this reason, because these countries have more experience with digital assets, it is more important to ensure the safety of online cryptocurrency users. Governments in colder countries use directives, such as …., while most countries use, “government-issued notices about the pitfalls of investing in the cryptocurrency markets.”
Another important issue that has emerged is the energy usage required to mine cryptocurrencies.
Because of the advanced technology and previous issues with cryptocurrency, agencies are starting to focus on regulatory intervention in the cryptocurrency network. The legal system's regulations should target the cases of cryptocurrency and outlying transactions rather than regulating the procedural level of cryptocurrency, such as codes and the technology. This future for cryptocurrency depends on leading the mandates of the regulation towards the middlemen, which can be enforced by the existing financial market participants and traditional gatekeepers such as banks, payment service providers and exchanges, as well as large and centralized node operators and miners. This second check will ensure the safety of cryptocurrency.
The future for the global economy relies on the digital world and its multiple facets. Cryptocurrency has become the greatest threat to the established financial system the world has ever seen and the most important new technology since the internet itself.