Brian Ortega
Professor Balun
RCA
20 November 2018
Should Cryptocurrency be regulated? (Pros and cons)
Bitcoin is a revolutionary type of currency that is not tied to any state, government, bank, or financial system. It is a decentralized digital currency that can be used to make anonymous peer-to-peer digital transactions. Liberated from the typical features of a capitalist market, bitcoin is based on algorithms. The underlying principle of bitcoin and other cryptocurrency is the blockchain, each transaction is processed and recorded in bits, adding another link to a giant global chain. In my paper I will talk about the pros and cons of Bitcoin. Bitcoin may be the future worldwide currency because of the advantages it brings but there’s also a negative parts to it. I believe Bitcoin is a positive worldwide currency but the government finds it wrong because they can’t gain control over it.
Unlike regular currencies like the Dollar, Yen, or Pound; bitcoin is not tied to a nation or to any bank. It is unregulated, bitcoin transactions are totally free and private. Bitcoin can be used as virtual cash, to buy things online, or it can be traded similarly to stocks on what are known as bitcoin exchanges. Bitcoin can potentially change the way people value goods and services. The value of a bitcoin or any other cryptocurrency lies mainly on user behavior. Bitcoin has transformed the ways people can conduct their financial transactions.
The creator of bitcoin continues to be anonymous but uses the alias Satoshi Nakamoto. Nakamoto created bitcoin in part to resolve the challenge of creating a digital currency that was totally free from the traditional banking system. As New York Times magazine editor Benjamin Wallace points out in “The Rise and Fall of Bitcoin”, the creation of bitcoin coincided with diminished trust in the government and Wall Street. Bitcoin succeeded where other technologies had failed. Until bitcoin was created, all other digital currency models remained tied to the known currency markets, systems of exchange, and methods of conducting transactions.
Bitcoin was different because of the block chain system. “Blockchain” written by Economics professor Michael Nofer argues that “Blockchain technology and distributed ledgers are attracting massive attention and trigger multiple projects in different industries”(183).The block chain works similarly to the way torrents work, in that multiple users around the world participate in the virtual chain. Rather than relying on a centralized system, there is a potentially infinite number of ordinary users with desktops, laptops, or more sophisticated machines like servers. Each link in the chain conducts algorithms, creating more bitcoin as currency as a result. When any bitcoin transaction is completed, it becomes an untraceable member of the block chain.
Bitcoin became popular because of several reasons. One reason is that bitcoin and other cryptocurrencies can be used to make anonymous peer-to-peer transactions. Also, there are no foreign transaction fees, no exchange rates, and no credit card transaction fees when using bitcoin. Bitcoin can be beneficial for vendors and consumers. “Regulation of Cryptocurrencies and Blockchain Technologies” by Professor Rosario Girasa, identifies different ways bitcoin can be used negatively and how I can be regulated. Professor Girasa points out that “One of the most notable and obvious uses for bitcoin was to conduct transactions on the “dark web,” where consumers can seek and find all types of contraband” (249). She also explains how bitcoin may be used for money laundering.
Another reason that bitcoin and other cryptocurrencies have become popular is that they are detached from the international monetary exchange system. In Cryptocurrencies and Business Ethics, German philosopher Claus Dierksmeier identifies different reasons for the use of bitcoin, “Cryptocurrencies are insulated from the fluctuations that take place in financial systems, and are especially attractive to buyers in countries that have volatile or weak currencies, like China”. (2) For this reason, governments are already trying to crack down on cryptocurrency exchanges. Relatively few people have bitcoin now, but if more people invest their money in bitcoin, the less the governments can regulate their own financial systems, including systems of taxation. Governments are likely to monitor bitcoin in the future, and disguise any attempt to shut down bitcoin as a means of protecting the public but it might actually be just because they don’t want to lose control over people. Cryptocurrencies cannot be fully regulated or monitored in any meaningful way in the long run. Bitcoin and other cryptocurrencies use open source technology, and the block chain system makes it so that it is difficult to stop since there is no centralized system as there would be with a bank or any formal organization.
Since the advent of bitcoin, a bunch of other cryptocurrencies have appeared on the market. All are based on similar concepts using the block chain. Cryptocurrencies other than bitcoin include litecoin, ethereum, zcash, ripple, and dash. Each of these different currencies present advantages or disadvantages, including different prices or value for the currency, and different features including how and where they are used, and especially how their blockchain algorithm is designed. Philosopher Dierksmeier explains the advantages and disadvantages of these cryptocurrencies; “Each cryptocurrency has unique features, particularly when it comes to security and encryption—the cornerstones of cryptocurrency.”(12) Taken together, the security risks around Bitcoin are the currency’s single greatest drawback, and are worthy of special consideration for anyone considering converting U.S. dollars into Bitcoin.
The fact that Bitcoin units are virtually impossible to duplicate does not mean that Bitcoin users are immune to theft or fraud. The Bitcoin system has some imperfections and weak points that can be exploited by sophisticated hackers looking to steal Bitcoin for their own use. The Mt. Gox incident, as well as a host of smaller, less publicized incidents, underscore that Bitcoin exchanges are particularly vulnerable to theft by hacking. Two of Bitcoin’s perceived strengths – its political independence and strong anonymity protections – actually make it more attractive to thieves and fraudsters. Those who use Bitcoin for illicit purposes face additional risks. Dark web marketplaces – online, international black markets whose users buy and sell illicit substances, stolen goods, and prohibited services – are frequent heist targets. Bitcoin users who participate in the dark web are likely already breaking the law, and thus have limited recourse in the event of a hack or theft. After all, they can’t very well contact local authorities and say that the funds they received for selling illegal drugs were stolen. It usually takes more technical skill to steal Bitcoin than physical cash. Common modes of Bitcoin theft include: stealing private keys, exploiting wallet vulnerabilities, operating fraudulent exchanges and investment funds, attacking Legitimate Exchanges Directly, and attacking Dark Web marketplaces.
Some disadvantages of using Bitcoin are: exposure to scams and fraud, black market activity, and no chargebacks or refunds. As the world’s most popular cryptocurrency, Bitcoin has seen more than its fair share of medium-specific scams, fraud, and attacks. These range from small-time Ponzi schemes, such as Bitcoin Savings & Trust, to massive hack attacks, such as the breaches that felled Sheep Marketplace and Mt. Gox. Despite high-visibility prosecutions of the most egregious offenders, Bitcoin remains attractive to criminals and gray market participants. Obviously, dark web marketplaces like Silk Road and Sheep expose rank-and-file users to fraud and the threat of criminal prosecution. One of Bitcoin’s biggest drawbacks is a lack of standardized policy for chargebacks or refunds, as all credit card companies and traditional online payment processors have. Users affected by transaction fraud – for instance, they purchase goods that the seller never delivers – can’t request a refund through Bitcoin. In fact, Bitcoin’s decentralized structure makes it impossible for any single party to arbitrate disputes between users. While miners take responsibility for recording transactions, they’re not qualified to assess their legitimacy.
Some advantages of using Bitcoin are; greater liquidity than other currencies, wide acceptance as a payment method, easy international transactions, anonymity, privacy, and its independence. As the most popular cryptocurrency by a significant margin, Bitcoin has far greater liquidity than its peers. This allows users to retain most of its inherent value when converting to fiat currencies, such as the U.S. dollar and euro. By contrast, most other cryptocurrencies either can’t be exchanged directly for fiat currencies or lose substantial value during such exchanges. Hundreds of merchants accept Bitcoin payments; it’s possible to buy virtually any physical item using Bitcoin units. Bitcoin transactions that cross international borders are no different from Bitcoin transactions that stay in-country. There aren’t any international transaction fees as is often the case with credit card payments, ATM cash withdrawals, and international money transfers. Holding U.S. dollars or other fiat currencies in an online bank account, or executing online credit card and PayPal transactions, doesn’t protect your privacy any more than physically handing cash or a credit card across the shop counter. Though your online accounts are hopefully protected from all but the most sophisticated hack attacks, they’re clearly associated with you – meaning private merchants and public authorities can track how you spend and receive your electronic funds. By contrast, Bitcoin’s built-in privacy protections allow users to completely separate their Bitcoin accounts from their public personas, if they so choose. While it’s possible to track Bitcoin flows between users, it’s very difficult to figure out who those users really are. Since Bitcoin isn’t created or controlled by any state entity, such as a central bank, it’s not beholden to political influence. Since it exists outside any political system, it’s also much harder for governments to freeze or seize Bitcoin units, whether in the course of legitimate criminal investigations or as retribution for political acts.
Bitcoins are “mined” by people who participate in the process using special hardware and software, and also a working knowledge of how the system works. Ordinary people can participate in the mining process. However, most people who use bitcoin do not actually participate in the mining. Most people buy and sell bitcoins just as they would other currencies, using special exchanges known as bitcoin exchanges or cryptocurrency exchanges. The most famous cryptocurrency exchange is Coinbase, but others have extended since cryptocurrencies have become more popular. A bitcoin wallet is where an individual’s bitcoin stash is stored. Like any virtual or cloud-based wallets, there are different software systems that serve as wallets, many of which can be used to store several different types of cryptocurrencies. It is important to choose a reliable bitcoin wallet and exchange service because unlike a traditional bank, a bitcoin wallet is not insured or backed by any government.
Bitcoin has experienced a tremendous and almost frightening level of growth since it was first released in 2009, when it had almost no value (Wallace 2). By 2011, bitcoin achieved parity with the United States dollar. As of December 2017, the bitcoin was worth almost $14,000 but it fell tremendously and is currently worth around $7,000. While bitcoin remains the dominant cryptocurrency, the other cryptocurrencies have gained traction.
Blending software, sociology, and economics, cryptocurrency has radically transformed the ways people think about markets, money, and finances. Cryptocurrency is unlike any other currency that has ever existed, but it also differs considerably from other alternatives to money. Because cryptocurrency is digital, decentralized, and unregulated, buying and selling is fairly risky. Yet in some ways, cryptocurrency is no riskier than any other investment. Cryptocurrency promises to liberate people from the shackles of traditional banking. Cryptocurrency allows people to conduct financial transactions totally independently of government and banking oversight. This obviously presents problems in terms of raising money for taxes, or paying banks their fees. Eventually cryptocurrencies will draw enough attention from the United States government, the World Bank, and other major institutions. If and when a bitcoin crackdown does occur on a global level, the value of cryptocurrencies may fluctuate more than ever before. In the meantime, cryptocurrencies remain a viable alternative to hard currencies. Cryptocurrencies make it easy for people from all over the world to do business with one another easily and effortlessly, anonymously and securely.
Works Cited
Dierksmeier, C., & Seele, P. (2018). Cryptocurrencies and Business Ethics. Journal of Business Ethics, 152(1), 1-14.
Girasa, R. (2018). Regulation of Cryptocurrencies and Blockchain Technologies : National and International Perspectives. Cham: Palgrave Macmillan US.
Jeffrey Chu, Saralees Nadarajah, & Stephen Chan. (2015). Statistical Analysis of the Exchange Rate of Bitcoin. PLoS ONE, 10(7), E0133678.
Li, X., & Wang, C. (2017). The technology and economic determinants of cryptocurrency exchange rates: The case of Bitcoin. Decision Support Systems, 95, 49-60.
Nofer, M., Gomber, P., Hinz, O., & Schiereck, D. (2017). Blockchain. Business & Information Systems Engineering, 59(3), 183-187.
Wallace, B. (2011). The rise and fall of bitcoin. Wired.