As any semblance of diplomacy between most of the Western World and nations like North Korea continues to wither away, the need to increase speculation and outright regulation of cryptocurrencies has become ever more vital. At this point in time, it is widely speculated that nations like North Korea have been pooling funds to acquire weapons of mass destruction with the hopes of one day executing an attack on the United States, one of its territories, or perhaps one of its allies. Because these States know that they are in fact the subject of intense scrutiny and speculation from the West, they have begun to turn their financial focus towards cryptocurrencies.
The ever-growing interest in cryptocurrencies, a form of digital currency that allows for the transfer of funds, independent of a central bank, makes necessary the adoption of international regulations. The goal of these regulations, and subsequent sanctions if/when they are violated, will be to prevent the alternative form of currency’s covert nature from being exploited by nations engaged in the financing of terrorism and the trafficking in weapons of mass destruction on a global scale.
This note will discuss why nations like North Korea have selected cryptocurrencies as their medium of choice to fund their illegal activities, why it is such a prudent choice, and thus, why it is so vital the powerful nations of this world come together and flex their proverbial muscles on these nefarious actors. Part I will outline a brief international history of cryptocurrency. Included in this history will be an explanation of what exactly cryptocurrency is and how it is different from your everyday dollars and cents. There will also be a discussion of the United States and its involvement with cryptocurrency, including, but not limited to, a discussion of what our nation has done re: regulation. Finally, Part I will discuss North Korea and its use of cryptocurrency; there will be a specific focus on why nations like North Korea have gotten involved in today’s cryptocurrency market. Part II will discuss the harmful effects of cryptocurrency’s covert nature. Some of these veiled features of the currency include its ability to be bought, sold, and traded anonymously, the volatile nature of cryptocurrency prices, and the numerous hacking concerns that cryptocurrency databases and ledgers face every day. Part III will discuss the current monitoring of the cryptocurrency markets. This discussion will include not only what the United States is doing to regulate their domestic cryptocurrency markets, but also what Europe and parts of Asia are doing as well. Finally, Part IV will emphasize what the United States is doing to address the problems plaguing the cryptocurrency market. As the conclusion of this note, I will present what I believe to be a reasonable and calculate plan to try and reign-in the ever-growing cryptocurrency markets. This plan will first require the spreading of awareness; state actors must be persuaded and convinced to get involved with cryptocurrency for positive reasons. After several power state actors are behind the use of cryptocurrency and have some proverbial ‘skin in the game,’ it will influence them to get involved in step two, the enforcement of an international regulations that outlines how these nations will monitor cryptocurrency transactions within their borders. Accompanying the regulations re: monitoring, will be strict and severe sanctions that do enough to dissuade countries from using cryptocurrency for nefarious behavior, but not so crippling as to force their hand. This last piece will be the key to ensuring the long-term sustainability and viability of cryptocurrency as the first legitimate form of international payment.
I. A BRIEF INTERNATIONAL HISTORY OF CRYPTOCURRENCY
A cryptocurrency is a digital asset designed to work as a medium of exchange using cryptography to secure the transaction, to control the creation of additional units, and to verify the transfer of assets. In discussing cryptocurrencies, it is important to know certain key terms. The term, “cryptocurrency” is a subset of “virtual currency” where ownership of a unit of value or tender is validated using cryptography. Broadly speaking, ‘cryptography’ denotes “a method of storing and transmitting data in a particular form so that only those for whom it is intended can read and process it.” A cryptocurrency is difficult to counterfeit because of this security feature.
The history of cryptocurrencies can be traced back to a man named Wei Dai who published a description of what he called “b-money” back in 1998; “b-money” was intended to be an anonymous system of electronic cash distribution. Shortly after Dai’s revolutionary creation, University of Washington cryptographer and computer science genius Nick Szabo founded what he called “bit gold.” Like bitcoin and other cryptocurrencies that would follow it, bit gold was an electronic currency system which required users to complete a proof work functions with solutions being cryptographically put together and published. This proof of work function is what economics deem a deterrence to denial of services attacks and other services abuses such as spam. It was put into place to make sure that the users were getting involved for the right reasons and not trying to harm the system in place.
While of this activity regarding cryptocurrency and other digital forms currencies and assets was going on, a developer or group of developers was waiting in the wings. The first cryptocurrency to capture the public imagination was Bitcoin, which was launched in 2009 by an individual or group known under the pseudonym Satoshi Nakamoto. As of Sunday, January 14th, 2018, there were over 16.8 million bitcoins in circulation with a total market value of over $230 billion. Bitcoin’s success has spawned several competing cryptocurrencies such as Litecoin, Namecoin and PPCoin.
A. What is a Cryptocurrency?
As opposed to everyday currency or legal tender (i.e. U.S. dollar, the EU’s Euro, etc.) are lawfully established by its respective governing body to serve as a medium for payment of taxes, commercial exchange, etc., and thus require to be accepted by counterparties for the discharge of debts or released of securities, cryptocurrencies require the consent of both parties to the transaction.
A defining feature of a cryptocurrency, and arguably its most endearing allure, is its organic nature; it is not issued by any central authority, rendering it theoretically immune to government interference or manipulation. Cryptocurrencies make it easier to transfer funds between two parties in a transaction; these transfers are facilitated using public and private keys for security purposes. These fund transfers are done with minimal processing fees, allowing users to avoid the steep fees charged by most banks and financial institutions for wire transfers.
Central to the genius of Bitcoin is the block chain it uses to store an online ledger of all the transactions that have ever been conducted using bitcoins, providing a data structure for this ledger that is exposed to a limited threat from hackers and can be copied across all computers running Bitcoin software. Many experts see this block chain as having important uses in technologies, such as online voting and crowdfunding, and major financial institutions such as JP Morgan Chase see potential in cryptocurrencies to lower transaction costs by making payment processing more efficient. While this may read as though a cryptocurrency is more secure in that it is not lumped into one central bank like most of our checking and savings accounts are at FDIC Accredited Banks (i.e. Bank of America, Chase, etc.) , the anonymous nature of cryptocurrency transactions makes them well-suited for a host of nefarious activities, such as money laundering and tax evasion.
Additionally, because cryptocurrencies are virtual and do not have a central repository, a digital cryptocurrency balance can be wiped out by a computer crash if a backup copy of the holdings does not exist. Since prices are based on supply and demand, the rate at which a cryptocurrency can be exchanged for another currency can fluctuate dramatically. Finally, Cryptocurrencies are not immune to the threat of hacking. In Bitcoin’s short history, the company has been subject to over 40 thefts, including a few that exceeded $1 million in value. Still, many observers look at cryptocurrencies as hope that a currency can exist that preserves value, facilitates exchange, is more transportable than hard metals, and is outside the influence of central banks and governments.
B. The United States and Cryptocurrency
Before 2013, neither the federal government nor the states had issued regulatory guidance over cryptocurrencies, its issuers, or the exchanges that facilitate its transfer. Since March 2013, the U.S. Department of the Treasury (through FinCEN and the IRS) and several States have taken or begun actions to regulate cryptocurrencies.
The first federal regulatory guidance dealing with cryptocurrencies was FinCEN’s March 2013 Guidance describing compliance obligations under the federal Bank Secrecy Act (“BSA”) for certain participants in cryptocurrency transactions. After that guidance, the Department of Homeland Security in May 2013 seized assets owned by a Bitcoin exchange based in Japan and one of its subsidiaries. Homeland Security’s seizure warrant was directed at Dwolla, an Iowa-based Internet payments company, ordering the seizure and forfeiture of an account held in the name of Mutum Sigillum, LLC. The federal agent’s affidavit that the Department filed in support of the seizure warrant described Mutum Sigillum as a U.S.-based subsidiary of the Mt. Gox Bitcoin exchange. The affidavit cited transactions in which a confidential informant had used U.S. dollars to purchase and exchange Bitcoin for U.S. dollars through Mutum Sigillum and Dwolla accounts. These transactions supported the Department’s claim that Mutum Sigillum was engaged in money transfers but had failed to register with FinCEN pursuant to the March 2013 Guidance and 31 U.S.C. § 5330.
In February 2014, the Mt. Gox Bitcoin exchange suspended operations and subsequently collapsed. Mt. Gox later filed for bankruptcy protection in Japan and commenced an ancillary proceeding in Texas under the U.S. Bankruptcy Code’s Chapter 15. A class action lawsuit was filed against Mt. Gox in the Northern District of Illinois. At roughly the same time, states began to determine whether and how to regulate cryptocurrencies when the Conference of State Bank Supervisors and the Uniform Law Commission created new projects aimed at studying the need for forms of cryptocurrency regulations.
Federal agencies moved cautiously with no plans to embark on a systematic regulatory scheme for cryptocurrencies. In late February 2014, the chair of the Board of Governors of the Federal Reserve System testified that the Board “lacked authority to supervise or regulate Bitcoin in any way.” Other federal agencies were not silent on or shy about how cryptocurrencies fit into various regulations in force. For example, in January 2014, FinCEN issued additional regulatory guidance on virtual currencies, clarifying that “mining” itself-that is the receipt of cryptocurrency as a reward for maintaining the block chain was not “money transmission” and, thus, clarified its own 2013 Guidance.
On March 25, 2014, the United States Internal Revenue Service (IRS) ruled that bitcoin will be treated as property for tax purposes as opposed to currency. This means bitcoin will be subject to capital gains tax. One benefit of this ruling is that it clarifies the legality of bitcoin. No longer do investors need to worry that investments in or profit made from bitcoins are illegal or how to report them to the IRS. In a paper published by researchers from Oxford and Warwick, it was shown that bitcoin has some characteristics more like the precious metals market than traditional currencies, hence in agreement with the IRS decision even if based on different reasons.
The calls for regulation increased when on June 23, 2014, the Clearing House Association and Independent Community Bankers Association published a study entitled “Virtual Currency: Risks and Regulation,” which was designed to “promote consideration of how existing regulatory regimes in the United States may be applied to virtual currency, virtual currency system participants and products, and virtual currency transactions.
Following these developments, the question arose of whether or when Congress or federal government agencies might regulate virtual currencies for other purposes. These questions included regulation for not only securities offerings and commodities transactions, but also consumer transactions. In November 2013, the Senate Committees on Homeland Security, Banking, and Urban Affairs, held hearings, on national security and terrorist-financing concerns and on the need for regulation of cryptocurrencies with some attention to consumer protection and anti-money-laundering concerns, respectively.
Regulations promulgated by the U.S. Department of the Treasury’s Office of Foreign Assets Control (OFAC) already prohibit transactions with certain countries and with designated entities, unless the U.S. person participating in the transaction has obtained one or more “licenses” to engage in the transaction. These OFAC regulations apply to transactions in goods or services as well as to payments made in connection with these transactions. The question is whether or not payments in cryptocurrencies, involving cattle, oil, or WMDs, are able to be monitored closely enough to be enforced under OFAC regulations; the consensus seems to be not necessarily.
C. North Korea and Cryptocurrency
Starting in 2016, security firms such as FireEye began observing state actors, like North Korea, begin to utilize their intrusion capabilities to conduct cybercrime, targeting banks and the global financial system. This marked a departure from previously observed activity of North Korean state actors employing cyber espionage for traditional nation state activities. Yet, given North Korea’s position as a pariah nation cut off from much of the global economy – as well as a nation that employs a government bureau to conduct illicit economic activity – this is not all that surprising. With North Korea’s tight control of its military and intelligence capabilities, it is likely that this activity was carried out to fund the state or personal coffers of Pyongyang’s elite, as international sanctions have constricted the Hermit Kingdom.
As these sanctions continue to tighten the Western World’s grip on North Korea’s proverbial wallet, FireEye notes the coming of a second wave; state actors seeking to steal bitcoin and other virtual currencies as a means of evading sanctions and obtaining hard currencies to fund the regime. In just the past six months, security firms, like FireEye, have observed North Korean state actors target at least three South Korean cryptocurrency exchanges with the suspected intent of stealing funds. The phishing observed in these cases is often targeted at personal email accounts of employees at digital currency exchanges; the attacks frequently use tax-themed lures and malware linked to North Korean state actors suspected to be responsible for intrusions into global banks in 2016. Finally, combining the ties that the Republic established in a watering hole compromise of a bitcoin news site in 2016 with at least one instance of usage of a covert cryptocurrency miner, it is no surprise why North Korean interest in cryptocurrencies is sky-rocketing. In 2017 alone, North Korea has launched at least three large-scale spearphishing expeditions on South Korean cryptocurrency targets.
D. Why North Korea Has Gotten Involved in Today’s International Cryptocurrency Markets
It doesn’t take much to understand why cryptocurrency has piqued the interest of the Republic of Korea. Kim Jong-Un’s interest in cryptocurrencies comes amid rising prices and popularity. The same factors that have driven its success – lack of state control and secretiveness – would make them useful fund raising and money laundering tools for a man threatening to use nuclear weapons against the U.S. With tightening sanctions and usage of cryptocurrencies broadening, security experts say North Korea’s embrace of digital cash will only increase.
Looking at the points in time when North Korea conducted its numerous cryptocurrency attacks falls right in line with the above-referenced theory. Promulgated by numerous security firms, such as FireEye, these attacks usually came right after sanctions were handed down by the West on North Korea. On April 26, 2017, the United States announced a strategy of increased economic sanctions against North Korea. It is widely believed that these sanctions and others levied on the Republic by the United Nations are the driving force behind North Korea’s interest in cryptocurrency. Just a few weeks after the April 26 announcement, North Korea launched its first of three spearphishing campaigns against South Korean cryptocurrency exchanges.
While bitcoin and cryptocurrency exchanges may seem like odd targets for nation state actors interested in funding state coffers, some of the other illicit endeavors North Korea pursues further demonstrate interest in conducting financial crime on the regime’s behalf. If actors compromise an exchange itself (as opposed to an individual account or wallet) they potentially can move cryptocurrencies out of online wallets, swapping them for other, more anonymous cryptocurrencies or send them directly to other wallets on different exchanges to withdraw them in fiat currencies such as South Korean won, US dollars, or Chinese renminbi. As the regulatory environment around cryptocurrencies is still emerging, some exchanges in different jurisdictions may have lax anti-money laundering controls easing this process and make the exchanges an attractive tactic for anyone seeking hard currency. In addition to their attacks on the multiple South Korean cryptocurrency exchanges, North Korean state actors have also breached English-language bitcoin news websites and collected ransom payments, via bitcoin, from the global victims of the malware they employed known as ‘WannaCry.’
II. THE HARMFUL EFFECTS OF CRYPTOCCURENCY’S COVERT NATURE
While cryptocurrencies are digital currencies that are managed through advanced encryption techniques, many governments have taken a cautious approach toward them, fearing their lack of central control and the effects they could have on financial security. Furthermore, as the popularity of cryptocurrencies have gone, central bank representative have not been shy in stating that the adoption of such forms of digital currencies, i.e. bitcoin, pose significant challenges to central banks’ ability to influence to price of credit the whole economy. There has also been concern from these same financial actors that as trade involving cryptocurrencies become more popular and widespread, there is bound to be a decline and loss of consumer confidence in fiat currencies.
Gareth Murphy, a senior central banking officer had echoed the sentiment of those financial actors referenced above noting, “widespread use [of cryptocurrency] would also make it more difficult for statistical agencies to gather data on economic activity, which are used by governments to steer the economy.” He went on to caution that these kinds of virtual currencies will pose a new challenge to central banks and their control over the important functions of monetary and exchange rate policy.
A. The Anonymity of Cryptocurrency
One of the distinguishing features of cryptocurrencies from traditional currencies is that the former is not backed by any government. Instead, the trading of cryptocurrencies involves cryptography for security making it extremely difficult to counterfeit. Cryptocurrencies popularity stem from the fact that there is little financial regulation, affording some degree of anonymity in transactions. Because the trading of cryptocurrencies involves little governmental regulation, it has come under scrutiny from federal regulators because of its role as a medium of exchange for illicit activities and the high degree of anonymity it gives users. While some proponents of cryptocurrencies welcome regulation, others feel that it inherently goes against the libertarian aim of a cryptocurrency.
As referenced above, one of the distinct advantages of cryptocurrencies is its use in anonymous transactions. When making a transaction with cryptocurrencies, users do not have to give identifying information other than their key chain identifier. Their cryptocurrencies identities are also pseudo-anonymous, meaning that the transactions are mostly anonymous, but that it could be possible to identify the spender. While the online identities are not specifically tied to a certain person, all transactions are completely transparent, because they are posted to the block ledger.
When making a purchase with cryptocurrencies, a person is only identified by their specific key address, not by their name or other identifying information such as in traditional transactions made using mediums such as credit cards. This makes cryptocurrencies popular with those seeking to make purchases on the deep web. The deep web is popular among those seeking to purchase illicit substances on the Internet. Cryptocurrencies are the primary medium of exchange for those making these transactions because users do not have to worry about the transaction being tracked back to their name.
This anonymity is also favorable for people in crisis countries. It would be advantageous to use cryptocurrencies for those who worry about having their property unfairly confiscated, or fear high taxes and regulations. The lack of governmental control of cryptocurrencies protects against that fear as people would not have to worry about having their cryptocurrencies unduly taken. The anonymity is also favorable for those who are potentially looking to avoid taxes or other regulations. By operating outside the traditional banking system, it also leads to the possibility of avoiding records being made of someone’s purchase history. This is advantageous for those who don’t want their purchase history recorded.
B. Cryptocurrency’s Volatile Nature
While cryptocurrencies have many positive attributes that attract users, there are also some weaknesses. These include its volatility, wait time, and lack of strong exchanges. These weaknesses inhibit many people from using cryptocurrencies, and inhibit cryptocurrencies use as a global currency. Some of these weaknesses are what lead different agencies to issue guidelines on, and attempt to regulate cryptocurrencies.
One of cryptocurrencies inherent weaknesses is its volatility. This stems from cryptocurrencies decentralized nature, and lack of a central regulatory agency. Cryptocurrencies are often affected by speculation; the dollar conversion price has been very volatile over its history, often affected by governmental policy decisions regarding cryptocurrencies and by the crashes of major cryptocurrency exchanges.
Cryptocurrencies have a volatility rate three to four times higher than a typical stock, and its exchange rate with the dollar is about ten times more volatile than that of the Dollar with the Euro and Yen. While other currencies, such as the Argentine Real and Mexican Peso, have had large fluctuations in value over time, they typically tend to stabilize after a period of time. Thus, as a store of value, cryptocurrencies are not a very stable choice for those looking to safely store their money.
C. Concerns over Fraud
On August 6, 2013, Magistrate Judge Amos Mazzant of the Eastern District of Texas federal court ruled that because cryptocurrency (expressly bitcoin) can be used as money (it can be used to purchase goods and services, pay for individual living expenses, and exchanged for conventional currencies), it is a currency or form of money. This ruling allowed for the SEC to have jurisdiction over cases of securities fraud involving cryptocurrency.
One of the more infamous cases of fraud in the cryptocurrency space came to a head just last August. On August 24, 2016, a federal judge in Florida certified a class action lawsuit against defunct cryptocurrency exchange Cryptsy and Cryptsy’s owner. He is accused of misappropriating millions of dollars of user deposits, destroying evidence, and is believed to have fled to China.
III. THE CURRENT MONITORING OF THE CRYPTOCURRENCY MARKETS
The legal status of cryptocurrencies varies substantially from country to country; many countries have yet to even create a formal definition of the digital currency and all that it entails. While some countries have explicitly allowed its use and trade, some others have restricted or banned it entirely. Likewise, various government agencies, departments, and courts have classified cryptocurrencies differently. For one, China’s Central Bank banned the handling of cryptocurrencies (i.e. bitcoin) by financial institutions in China during the fast adoption period in early 2014. In Russia, on the other hand, while cryptocurrencies are legal, it is illegal to purchase goods with any currency other than the nationally regulated/centralized Russian ruble.
A. The United States and Domestic Regulation of the Cryptocurrency Markets
Money is typically regulated by a centralized federal agency. The U.S. Dollar is regulated by the Federal Reserve, which controls the supply of money and the rate of inflation. The United States Federal Reserve also creates confidence in the banking system for the public because of its regulatory constraint, and serves as a lender of last resort for banks. Confidence in the banking system is also created through the Federal Deposit Insurance Corporation (FDIC). The FDIC insures depositors in a commercial bank or mutual savings fund up to $250,000. If a financial institution were to fail, the FDIC will pay off depositors up to the value of $250,000.
On the other hand, cryptocurrencies are unregulated, falling outside the traditional confines of the banking system. This lack of regulation can lead to lack of confidence in cryptocurrencies as a viable currency. An increase in regulation could increase the confidence in cryptocurrencies, decrease volatility, and strengthen the major cryptocurrency exchanges.
Those in favor of increased regulation argue that it would be a positive thing for cryptocurrency users because it would increase the recognition of the currency. This would lead to more businesses accepting cryptocurrencies as means of payment for goods and services. Businesses would also feel more comfortable accepting cryptocurrencies as payment, knowing that it has central backing from a major regulatory agency. Regulations regarding how to handle cryptocurrencies also help individuals and businesses know that they are acting properly in the eyes of the government. However, this could potentially harm black market users because it would make it more difficult to complete their transactions.
Those opposed to regulation argue that it goes against the inherently libertarian aim of cryptocurrencies. Cryptocurrencies were founded on the grounds of being a peer-to-peer medium of exchange, governed by the collaborative mining system; they argue if cryptocurrencies were to be regulated, avid users feel that it would decrease the freedom of its use; this is a key reason cryptocurrencies were created. Regulation by the United States would also require the government to associate with something that has been widely associated with illicit transactions.
B. An Examination of Europe and Asia’s Regulation of the Cryptocurrency Markets
Currently, there are two international organizations that are studying the risks associated with the use of cryptocurrencies. The first is the European Banking Authority and the second is the Financial Action Task Force (FATF), an independent inter-governmental body. The FATF describes its own role as “developing and promoting policies to protect the global financial system against money laundering, terrorist financing, and the financing of proliferation of weapons of mass destruction.” Both studies explain, from a pan-European perspective, the perceived risks that cryptocurrencies may enable money laundering, terrorism financing and (in the case of the FATF study) trafficking in weapons of mass destruction.
Leading the way for the Asia nations in regard to regulating cryptocurrency markets, Singapore, Japan, and China have all come out with force regarding the digital assets. On Wednesday, September 6th, 2017, Japanese media reported that the country was prepared to introduce regulatory oversights on cryptocurrency in the coming months. One of the main problem facing the regulation of cryptocurrencies involves Initial Coin Offerings (ICOs) which are used primarily as a means of fundraising ; similar to an Initial Public Offering (IPO) in the traditional stock market, ICOs signal the launch of a new coin to be traded. These coins will boost their features and what makes them better than the last; their small price will attract investors and the coin/market cap will grow; this is a cycle seen with hundreds of coins at this point.
ICOs are exactly what piqued the interest of authorities in China where they are now illegal altogether. These authorities called ICOs, “unauthorized illegal fundraisings activity,” and reports indicate Bitcoin is the focus of these statements. While most cryptocurrency investors have been told that any hopes of China fully-accepting the digital currency, allowing for a huge explosion in token prices, is a pipe dream, Zennon Kapron begs to differ. The founder of Kapronasia, a cryptocurrency consulting firm, told CNBC in September 2017 that, “[t]he only way you can really stop bitcoin in China completely is if you shut down the internet…”
IV. WHAT IS THE UNITED STATES DOING TO ADDRESS THE PROBLEMS PLAGUING THE CRYPTOCURRENCY MARKETS?
At the time of publication, the U.S. Securities and Exchange Commission (SEC) provides a list of guidelines that they had made available on its website for citizens to consider before “participating in token sales.” It is no surprises that there is emphasis placed on fraudulent investment schemes and frequent warnings from the SEC to potential buyers about how and why they should or should not invest.
Previously, the SEC published an investigative report in July of 2017 which cautioned companies interested in or already using block chain technology to raise capital must take “appropriate steps to comply with U.S. federal security laws.” This report was the latest in a slew of statements made by SEC Chairman, Jay Clayton, has made in the past few months as cryptocurrencies have gained notoriety. Clayton has not minced words when discussing cryptocurrencies and their impact on financial markets noting, “Where we see fraud… we are going to pursue them because these types of things have a destabilizing effect on the market.”
Even though regulation not only goes against one of the main tenets of cryptocurrencies: privacy, but also can be quite expensive for companies who invest in it, there are also several benefits they provide. If the U.S. wants to continue to spearhead the global movement against North Korea and their veiled threats of nuclear warfare, it is vital that they focus on the root of the evil; if the U.S. can rally global support to regulate and sanction illegal use of cryptocurrencies, they may ‘cut the head off of the snake’ that is North Korea’s finances.
A. Step One: Spread Awareness: Persuade and Convince State Actors to Get Involved in Cryptocurrency for Positive Reasons
In order for the U.S. to garner support from fellow world powers, they must emphasize the benefits of regulating cryptocurrencies. In a November 2016 article for The Guardian, author Nicky Woolf notes that the U.S. government was already, “[looking] to bring cryptocurrency out of the shadows.” This headline went hand-in-hand with the IRS issuance of a summons for data on over a million users of one of cryptocurrency’s most popular U.S.-based token exchange, Coinbase. The suit, which claimed that the users from 2013-2015, “have not been or may not be complying with U.S. internal revenue laws,” was the first pushback by the U.S. government in legal battle that has now spanned half a decade. While Coinbase remains fully-functional and extraordinarily successful to this day, the company, led by founders Brian Armstrong and Fred Ersham have made notable efforts to comply with federal regulations. In January 17, 2017, Coinbase obtained a BitLicense from the New York State Department of Financial Services (NYSDFS) which authorized their operation of business in the state ; this was followed up by approval from the DFS in March to trade Ehtereum and Litecoin in the state as well.
The U.S. would be prudent to use Coinbase as a model example to try and get each powerful nation they are aligned with to established some form of centralized exchange that their citizens can rely on. At the present time, there are simply too many places to buy and sell cryptocurrency for there to be a successfully monitoring of the situation. While there is no doubt shrinking and somewhat monopolizing the exchange market will benefit a few a whole lot while harming other, it would go long way in straightening out how these coins operate. Rather than being used as a strict money-making platform, these coins should be easily sorted into what they are suited for (i.e. payment, speed, performance, places accepted, etc.).
B. Step Two: Monitor Regulations in the Cryptocurrency Markets in Countries of Interest and Enforce Sanctions for Violations
There is no doubt that at the present, cryptocurrencies are being exploited by terrorist organizations and nefarious state actors for their own gain. Because transactions involving cryptocurrencies take place anonymous, the virtual currency is the perfect medium for these actors for hiding large financial transactions from government agencies and law enforcement ; specifically users of these coins can transact from, say, the Gaza Strip, but appear to be transacting in Virginia. Cryptocurrencies use as a money laundering device has truly proven to be a nightmare for not only financial regulators, but also counterterrorism units and intelligence community officials.
While cryptocurrencies are relatively untraceable when used by individuals who know the technology, the U.S. Justice Department is on the hunt ; in December 2017, the Department announced an indictment against a Long Island, NY resident, who allegedly used Bitcoin, along with other smaller cryptocurrencies, to launder over $85,000 to an ISIS cell; at the current time, this is the second largest indictment of this nature.
There is no doubt that these most recent developments are just the tip of the iceberg or beginning of an impending avalanche when it comes to cryptocurrency-based indictments and the U.S. government. Led by the DOJ and SEC, our government has made it clear they are going to do everything in their power to prevent these funds from being misappropriated any further. It would a long way for other power nations to join in these efforts and prevent these sorts of large-scale terrorist organizations and state actors from funding their activities.
As any semblance of diplomacy between most of the Western World and nations like North Korea continues to wither away, the need to increase speculation and outright regulation of cryptocurrencies has become ever more vital. As nations like North Korea continue to pooling funds to acquire weapons of mass destruction with the hopes of one day executing an attack on the United States, one of its territories, or perhaps one of its allies, the need for world leaders and their nations to be informed on these matters grows ever-more important. Because these States know that they are in fact the subject of intense scrutiny and speculation from the West, they have begun to prudently turn their financial focus towards cryptocurrencies.
The ever-growing interest in cryptocurrencies makes necessary the adoption of international regulations. Ultimately these regulations provide the civilized world with the best chance to implement some semblance of governance over the alternative form of currency’s covert nature. Hopefully this will in turn prevent its exploitation by nations engaged in the financing of terrorism and the trafficking in weapons of mass destruction on a global scale.