Regulation of Cryptocurrencies. Necessity and Approaches E-Book

Daniel Werner

• Herausgeber: Studylab
• Kategorie: Fachliteratur
• Sprache: Englisch
• Veröffentlichungsjahr: 2019

Seitenzahl: 112

Beschreibung

In today's digitalized world that has seen the inexorable rise of the internet and its related technological advances, it was only a question of time until our financial system would be improved upon by digital technology. The emergence of so-called cryptocurrency, with Bitcoin undoubtably being the most prominent one, has therefore subsequently led to new ways of payment and storage of money. Especially Bitcoin, however, has had its fair share of illicit and criminal activities. It is for this reason, that Daniel Werner in his work has embarked upon examining the more disadvantageous side of this technology. He is therefore investigating which dangers might be inherited by Bitcoin and other cryptocurrencies and how regulatory measures could effectively ease those concerns. He stresses how important the management of these questions by governmental administration is, not only with regard to cryptocurrencies but to financial institutions and companies alike. In this book: - Cryptocurrency; - Blockchain; - Consumer protection; - Global Regulatory Approaches

Leseprobe

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Table of Contents

List of Abbreviations

1 Introduction and Analysis of the Status Quo

2 Terminologies and Underlaying Information

2.1 Distinction of Classical Payment Methods

2.2 Terminological Distinction of Cryptocurrencies

2.3 Popular Cryptocurrencies and underlying Technologies

2.3.1 Bitcoin and the Blockchain Technology

2.3.2 Ethereum

2.3.3 Altcoins

2.4 Key Intermediaries in the Bitcoin Ecosystem

2.4.1 Mining Pools

2.4.2 Exchanges

2.4.3 Electronic Wallet Services

3 Necessity of Regulation

3.1 Danger of Criminal Activities

3.1.1 Hacking Attacks and Investment Scams

3.1.2 Price Manipulation in the Bitcoin Ecosystem

3.1.3 Money Laundering, Tax Evasion and Terrorism

3.2 Consumer Protection

3.3 Monetary Policy

3.4 Consideration of Counterarguments and Impediments

4 Regulatory approaches

4.1 Overview of Global Regulation Approaches

4.2 Central Bank issued Cryptocurrency

4.2.1 Design of CBDCs under Observance of Monetary Aspects

4.2.2 Controversial Consideration

4.3 Prohibition or Restriction of Cryptocurrencies

4.3.1 Targeting Key Intermediaries

4.3.2 Banning Cryptocurrencies

5 Conclusions

Addendum

List of References

List of Abbreviations

1 Introduction and Analysis of the Status Quo

The last few decades are marked by the digitalization, the rise of the Internet and the smartphone revolution. New technologies created a permanently connected world with transcending borders and the internet as the backbone of our economy. Eventually, the technological progress affected society‘s payment methods and even the way we store our money. The emergence of Bitcoin in 2009 occurred at a time, in which numerous investors had lost trust in the established financial system. The liberal idea behind Bitcoin drove the interest of the people and led to a unique success story. The immense surge in Bitcoin’s price was followed by the emergence of thousands of cryptocurrencies, most of which were based on the distributed ledger technology. In the subsequent years, this technology has targeted not just online payment systems, but is striving to revolutionize whole industries. This new market has experienced an ongoing increase in popularity and market capitalization since it is creating unique opportunities, but also putting law enforcement at the forefront of new challenges. Despite of Bitcoin’s great potential, its history is marked by illicit and criminal activities and businesses. This raises the questions, which dangers and threats are still inherited by Bitcoin and other cryptocurrencies and whether appropriate regulatory measures could ease those concerns. How the governmental administration of cryptocurrencies and their regulation develops in the future will not just have direct impact on the success of Bitcoin and the likelihood that cryptocurrencies develop into a mature financial industry, but could also affect companies of competing payment systems like PayPal, credit card-issuing companies as well as financial institutions. The current regulation is mostly perceived as opaque among scholars and varies widely between governments around the world, while the timeliness of the topic creates an explicitly high degree of scientific relevance.

The objective of this literature review is, to comprehensively depict, based on current and relevant literature, initially the phenomenon of emerging cryptocurrencies, their underlying technologies and the consequences of their popularity for classical payment systems, in order to consider the necessity of governmental, regulatory measures afterwards and introduce the most reasonable and feasible options as well as their mode of operation for law enforcement. To create a context, a terminological categorization will be carried out below in chapter two, followed by the communication of basic knowledge about the underlying technology and an introduction of main businesses within the Bitcoin ecosystem. Subsequently, the acquired knowledge will be utilized, to analyze recent literature in chapter three, to enable a critical consideration regarding the necessity of stricter regulatory frameworks for cryptocurrencies, as well as barriers and constraints these new technologies impose for law enforcement. Chapter four will address recent publications regarding feasible approaches for the regulation of cryptocurrencies, under the consideration of previously discussed impediments. Finally, chapter five will provide a review of the work by summarizing the findings and allowing a suggestion for future developments as well as recommendations for actions regarding the conduction of governmental policies for the administration of cryptocurrencies.

This work is based on the latest, most cited and most relevant scientific research. The timeliness of the topic however leads to a limited amount of accessible scientific literature and therefore requires the observation of alternative sources to ensure an objective examination. Beside numerous contributions in eminent scientific journals for the discussion of the core topics, internet documents like the news portal Coindesk were utilized for the acquisition of information, whose integrity was thoroughly screened. The selection of references was adjusted to the objective of this thesis, to provide the best possible heuristic value.

2 Terminologies and Underlaying Information

To understand the issues and difficulties of regulating these newly emerging technologies and markets, it is crucial to possess a basic understanding of the underlying technologies, competing payment services and key players in the Bitcoin ecosystem. This chapter provides a broad information framework about terminologies and technologies in the context of cryptocurrencies. The first subchapter provides an introduction into classical payment methods and a distinction of digital payment systems. Furthermore, an analysis about the categorization of Bitcoin and other digital currencies in terms of money and currencies will be carried out. Finally, this chapter presents the most popular and important cryptocurrencies as well as key players and intermediates in the Bitcoin ecosystem.

2.1 Distinction of Classical Payment Methods

First, a terminological classification of established payment methods will be carried out to enable an economical categorization, but also a technological demarcation of cryptocurrencies afterwards. Common payment methods can be distinguished by non-digital and digital approaches. The non-digital payment methods are comprised of cash, debit payments, cash on delivery, and advance payments and transferals.

In the seventh century, the first coins were introduced in the kingdom of Lydia, followed by the first paper money in China in the eighth century.[1] Since these early times, societies established diverse kinds of cash as an exchange medium to facilitate trade and accelerate the economic progress.[2] The next step in the development of payment systems was paper money. People accepted paper money as a medium of exchange because of the implied promise that it was convertible into coins or a determined amount of precious metal.[3] Eventually currency has evolved into fiat money, which is defined as paper currencies issued by governments which legally must be accepted for the payment of debts. Although coin and paper money does not fulfil an essential or vital purpose for survival, societies have agreed upon its value because it is scarce and provides value to its user, which is that it functions as a medium of exchange, unit of account and store of value.[4] The first discussions evolved in recent years about the necessity of physical money. However, until today the payment with cash provides a high degree of anonymity, convenience as well as low costs for payments to every user.[5]

In the late 1950s the transition from a cash-based economy to electronic payment systems began.[6] With the emerging banking industry in the 20th century the variety among payment methods increased and individuals got access to secure payment transactions through financial intermediaries. As a result, banking account-based payment options like direct debiting,[7] cash on delivery,[8] or common transferals[9] emerged.

In the late twentieth century the digital revolution began and opened up the market for digital payment systems. In 2000, the SEPA[10] project was born, which included the objective to transform the European forms of payment systems to a more efficient and safe technology-based system.[11] A recent study has shown, that stakeholders of the SEPA project have saved about 21,9 billion Euros yearly due to higher processing efficiency and price convergence.[12]

Modern payment methods include payments via credit cards, PayPal or online transferals. In the context of this literature review, the digital payment methods are particularly relevant. Cryptocurrencies are a new option in the category of digital payment systems and are therefore a direct competitor to credit cards, PayPal transactions and other forms of online transferals. Therefore, we will take a closer look at the underlying operating modes, prospects and limitations of these systems.

The payment via Credit card is the most popular and widespread digital payment method. Credit cards are issued by banks and credit card institutions and are accepted as an official payment method almost everywhere in the world. The largest Credit card organizations are VISA, Mastercard, Diners Club and American Express. These companies profit from the use of credit cards through several kinds of fees, such as annual customer fees, service fees for the multinational use of their products or fees for the withdrawal of cash at an ATM. However, the charged amount for these services varies strongly by factors like the respectively cooperating institute, the kind of credit card or the geographical location of the client. The centralization within business platforms like the credit card system allows the credit card companies and banks to operate highly efficiently due to economy of scale. While VISA can handle peaks of up to 47000 transactions per second, they never use more than a third of this capacity even in peak episodes.[13] Additionally, the strict regulations, audits and overviews facilitate the management of systemic risk and provide trust in the system. On the other hand, those regulations limit progress, which is why development between participants occurs rather slow compared to other industries. Furthermore, a common credit card transaction can take several business days to be executed, with results in inconvenience for the clients who need to wait for the delayed booking on their account. Credit card issuing institutes face risks that are typical for centralized systems. All parties are linked to the central ledger, so the participants face systematic- and counterparty risks.

PayPal is a company founded in 1998 by Peter Thiel and Max Levchin in California. The company is specialized on online payments and provides one of the worldwide most frequently used online payment methods. In 2018, PayPal has more than two hundred million customer accounts and is therefore an online payment service with a highly expanded infrastructure. The company’s goal is to simplify and democratize financial services.[14] While credit card transactions usually take some time to be executed, a transaction from one PayPal account to another can occur instantly. The cost for a transaction is basically zero, but PayPal charges users for the reception of incoming payments. The money receiver can keep the money on his PayPal account and use it for future transactions, or transfer it to his bank account, using a standard SEPA transaction. Such a SEPA transaction however requires the user to pay a service fee and provide some patience, since the service usually takes several business days to be executed.

Addendum 1 visualizes PayPal’s overall transaction volume per quarter since the beginning of 2010.[15] In 2017, PayPal executed about seven billion transactions with a significant increase of transactions in the last quarter. According to this data, PayPal executes not only 222 transactions per second on average but can also expect increasing transaction volumes in the upcoming years. Although PayPal is not registered as a bank, it is categorized as a money transmitter in the USA and is therefore subject to financial regulations which focus on the protection of consumers.[16]

The term online transferal refers to either electronic banking or mobile banking. While a payment via electronic banking uses a to the Internet connected computer, mobile banking payment transactions are based on the telecommunication networks. Unlike a common transferal, the online transferal is independent of the geographical location. The client can authorize the transaction when and wherever he or she wants. Safety and Security for this method is guaranteed through the PIN- and TAN- method. This technique enables users to verify their identity and therefore validate their transaction, to prevent misuse of the online transferal system. However, remittances, especially from one country to another, are usually expensive because financial institutions charge high transaction fees on the originally transferred amount.

Cryptocurrencies are a new player in the digital payment market that works without a financial intermediary or a trusted third party like credit card institutions or PayPal. Unlike common digital payment systems, cryptocurrencies work through the decentralized distributed ledger technology. In the following subchapters we will observe the terminological origins of the term cryptocurrency as well as the technological backgrounds, to provide an explicit and comprehensive understanding of this emerging technology and to create a frame which enables us to perform a comparison to established digital payment services.

2.2 Terminological Distinction of Cryptocurrencies

Although they differ in their meaning, the term cryptocurrency is often used synonymously with the terms digital currency or virtual currency. The term digital currency refers to every kind of electronic money, like money stored on PayPal- or bank accounts.[17] The term digital currencies might therefore be misleading when perceived as an innovation that emerged through Bitcoin. Effectively, digital money has been around for quite some time; in fact 96% of the circulating money in the United Kingdom was digital in 2016.[18] The definition of a virtual currency according to the European Central Bank, includes any currency that is a digital representation of value which can be used in some cases as an alternative to money, but is not issued by a central bank, credit institution or e-money institution.[19]