Bitcoin: To Regulate or not to Regulate?

Bitcoin: To RegulateBy: Georgette Fernandez Laris

Einstein said technology has a tendency to exceed our humanity. In the midst of the cryptocurrency and blockchain technology revolution, regulation becomes increasingly important. Effective ethical regulatory frameworks help us recognize our moral blind-spots as we confront cryptocurrencies and their underlying technological protocols.

  1. Introduction & contextualization: what is Bitcoin?

The not so distant 2008 global financial crisis (GFC) rekindled questions about the nature of money. Crises provide threshold moments when we doubt institutions we have long taken for granted and trusted. The GFC spurred public interest in money: what is money, how it originated, where its value comes from, and what we think it should be. Explanations tend to point to either the Barter Theory of Money or the Debt Theory of Money. In turn, the philosophy underpinning each theory fuels our interpretations of current monetary and banking affairs, the type of monetary and financial market policies we espouse, and our opinions and use of alternative money types such Bitcoin and other cryptocurrencies.

Two Theories of Money

According to the Barter Theory, money arose to clear inefficiencies arising from the difficulty in finding pairs of people whose disposable possessions for exchange at any one time are capable of satisfying all exchange parties’ wants simultaneously. In this theory, money acts as a token intermediates exchange because by using it we establish and accept units of account, value and trade. Some of the theoretical stipulations imposed on this barter-resolving, exchange-token included a controlled supply, divisibility, accountability, portability, integrity (non-forgery) and reliance (trusted value). Thus, money is considered a commodity with intrinsic value, even when considering fiat (paper) currency whose value derives from society’s confidence in central banks backing its use.

The Debt Theory of Money instead interprets money as the representation of a dynamic process of social relationships (in many instances in terms of power or inequality). Just as debt is not an object but a relationship, money acquires its value from the endogenous dynamism across money users and their network of trust. This theory parallels German sociologist Georg Simmel’s philosophy on money – a social institution, meaningless if restricted to one individual, but can bring about changes in general conditions only by changing the relations between individuals (Simmel, 1907).

         Bitcoin conforms to both theories

Both theories hold trust (in the object according to the barter theory, or in the relationship according to the debt theory) to be of primary importance if the monetary instrument is to be usable. Indeed, the founder of Bitcoin, Satoshi Nakamoto, denounced the amount of trust required to make conventional currency work as one of its root problems, especially in light of the erosion of public trust in bankers and policy makers.

Nakamoto combined a technological protocol based on cryptography, a distributed scarce-asset (computational power and energy) model, and a peer-to-peer lending scheme to create an instant, decentralized, and pseudonymous system for electronic transactions of value transfer. This system claims to be apolitical, not relying on a central authority’s power and bypassing the need for trust. The idea of relinquishing the need for trust in a unit of value transfer might seem counterintuitive, but Nakamoto claimed to have surpassed trust issues through his design of the blockchain. A blockchain is a distributed (non-centrally coordinated) database containing the immutable timestamped record of any and every transaction processed in the Bitcoin network, of which every member has a copy.

The protocol’s assertion of fully-trust-proof relies on the decentralized-consensus reached through the proof-of-work mechanism all network members engage in to validate transactions. Owners (miners) of the network’s scarce resources (energy and computing power) use their hardware to solve cryptographic or mathematical proofs that validate any transaction and verify it via the blockchain’s history. Computer scientists recognize such mathematically based validation and verification checks as the way to prevent trust-eroding problems such as double-spending (an agent spending the same funds twice, denying the first transaction happened) and Sybil attacks (when agents claim to be multiple people in a network to gain resources they are not entitled to). Miners performing the transaction checks for the blockchain are paid with the network’s own, self-produced, self-regulated token – Bitcoin – as well as with transaction fees whenever other users (third-party Bitcoin wallet providers or digital currency exchanges) employ the blockchain.

Features of Bitcoin’s design correspond to the two theories of money. The strictly controlled supply of Bitcoins is programmed not to exceed 21 million. The proof-of-work mechanisms help make the network tamper-proof. These facts echo the controlled supply, accountability, and unforgeability requirements for money under the barter theory. Bitcoins have also been hoarded and used in speculation, thus exercising their asset bearing, value storing function. All these monetary uses correspond to a clear adherence to the barter theory of money.

Yet, at the same time, Bitcoin’s design makes explicit the importance of network members’ relationships and interactions during both the verification and authentication of transactions and in fueling Bitcoins’ production. Likewise, the value of Bitcoin is directly correlated with the expansion of its network of users and with the miners’ adherence to the protocol’s security and proof-of-work verifications. Cryptocurrencies like Bitcoin don’t have an anchoring intrinsic value, rather, they derive value solely from the expectation that others would also value and use them. Therefore, Bitcoin and similar digital currencies seem to also illustrate the relational aspects of money formation and usage associated with the debt theory of money. Moreover, as new forms of money, cryptocurrencies seem to embody, more than traditional fiat currency, modernity’s spirit of rationality, calculability and impersonality. These traits, Simmel argues, shifts the character of social interactions when monetary transactions replace barter exchange.

2. The two sides of the coin: advocates and opponents

Bitcoin inspired the creation of cryptocurrencies such as Litecoin, Ethereum, Dogecoin and more than 700 other digital currencies less well-known but with some market capitalization. These cryptocurrencies seem to appeal to those who propose the radical transformation and improvement of money for the betterment of society. Many alternative approaches to currencies seek the disintermediation of money, that is, to disengage either the state, private banks, or both from controlling the production of money and managing its use. Bitcoin eliminates the influence of the state (and central bank), thus garnering ample support among Hayek-minded proponents of the denationalization of currencies. Bitcoin also restricts the power the current fractional reserve system gives to commercial banks to tie the creation of money to the extension of credit and debt.

Striving for the best of all possible worlds, Bitcoin purports to take the regulation and control of money away from untrustworthy sources of human authority and put it in the hands of machines and computer algorithms. Unfortunately, despite the apolitical rhetoric of supporters, Bitcoin is not politics-free. Indeed, as the London School of Economics sociology professor Nigel Dodd alerts us, Bitcoin helps to demonstrate the relationship between technology and the social context of its use. Technology cannot enact social organizations on its own. As a form of money, Bitcoin does not evade social relations. Rather, social structure, leadership, hierarchy, friendship, and community, all forms of social relations, sustain Bitcoin. (Dodd, 2015).

2.1 Critics

While much less centralized, the Bitcoin blockchain protocol has a tendency towards centralized money (Bitcoin) production. The high computing and energy resources required for the validation of transactions and the production of Bitcoin supply tends to massively favor the miner pools (specific-capability groups of miners) with the greatest processing power, incentivizing cartels of monopolistic production strategies. Alternative cryptocurrencies such as Litecoin and Dogecoin claim to avoid the concentration-bias of money production found in Bitcoin. Yet, relational power structures are all too evident in other blockchain currency applications (e.g., Nextcoin) that use proof-of-stake consensus mechanisms. In this system, miners are assigned transactions awaiting verification based on the quantity of coins they hold (their “stake”), instead of having to randomly compete to verify transactions and thus earn digital coins as remuneration. These systems also link the amount of cryptocurrency owned by miners to their degree of investment in the stability and security of the network.

Recent governance issues in both Ethereum and Bitcoin blockchains reveal the importance of politics in the cryptocurrency environment. Protocols correspond to the set of rules enforced in cryptocurrencies’ ecosystems. However, governance structures determine the rule-making stipulations for them. Most cryptocurrencies lack a formalized governance framework leading to disagreements and splits in the community.

On August 1, 2017 Bitcoin Cash (BCC) was launched. BCC emerged from a hard fork (software code modification) to the original Bitcoin protocol. The split results from a politicized disagreement between pools of distributed miners over how best to adjust the protocol to increase transaction capacity and speed. Bitcoin’s original design placed a 1MB data limit per block on the block chain. As Bitcoin’s trading volumes rose with its popularity, such block chain space limits caused transactional delays. Whilst searching for solutions, the Bitcoin community failed to reach a consensus on how to increase the block size, leading to a split in the community and to the creation of Bitcoin Cash. First, a group of Bitcoin developers proposed an increase in the block size to 2MB. The group had other updates to free up space by removing signature data from Bitcoin transactions.  The Bitcoin community faction against the modifications that would move transactions off the block chain opposed the fork. This faction came up with another solution to increase transaction speeds which led to the split and the launching of the new, independent, Bitcoin Cash relying on an 8MB block size.

In a more successful enterprise, Ethereum recently incentivized its miners to modify (fork) the ledger to prevent a fraudulent hacker from spending millions of Ether tokens from their investment crowd-funding startup DAO. This action sheds light on the need for well-structured governance structures with consistent motivations. Yet, in most cases, cryptocurrency networks struggle to align the incentives of miners and stakeholders.

For supporters of alternative money who wish to curtail the excesses of commercial banks and their hegemony in money creation through debt, it is not completely clear whether Bitcoin and its altcoins will indeed provide disintermediation. Through the launch of Bitcoin in 2009, and its underlying blockchain legacy, Nakamoto provided financial market infrastructure participants the blueprint for a disruptive innovation set to revolutionize payment systems. Since then, big corporate banks such as Goldman Sachs, Barclays, JP Morgan Chase, and others have invested heavily in start-ups and blockchain protocol schemes that create regulatory-clout economizing and cost-reduction links between them. They mostly advocate any system that facilitates digital relationships without the need for an overarching trust-ensuing central regulatory third party. But the ethos of discussions on applications of blockchain and distributed ledger technologies over their products and services tend to view trust as an outcome product rather than as a procedural sentiment.

Recalling Simmel’s definition of money as a claim upon society, confidence in the truth of such claims cannot be fully based on the mathematical certainty of algorithms. Trust in governance frameworks made by humans must be as strong as trust in algorithms for the value of electronic transfers to be perceived as stable, legal, and protected from hacking that can make digital currency wallets evaporate.

2.2 Supporters

A large portion of potential cryptocurrency and blockchain financial services users will evaluate the ethical character of the instruments, especially considering online black-market reliance on Bitcoin as a medium of exchange for illicit products and services. However, as shown in one of our prior case studies on the Ethics on Bitcoin, cryptocurrencies like Bitcoin cannot in itself be immoral. Instead, moral appraisals of cryptocurrencies must evaluate the intentionality behind the development of these technologies, the moral character of their actual usage, and whether their protocol design incentivizes unethical behavior more than other currency and payment mechanisms.

Positive uses of the distributed ledger technologies underlying the Bitcoin blockchain have already emerged in different domains of mainstream financial services. For example, through blockchain-based intermediaries and Bitcoin transfers, several international money transfer start-up initiatives have managed to reduce the cost of sending remittances and have expanded the receipt of remittances across unbanked populations in countries such as Kenya and the Philippines. High social impact start-ups have also sprouted from Ethereum’s blockchain. 4GCapital, a 2012 FinTech start-up dedicated to providing instant access to credit for small business growth in Africa, relies on Ethereum’s blockchain to record and validate donors’ digital currency transfers, convert digital to fiat money, and disburse it to businesses.

Since late 2014, when it became apparent that Venezuela’s president Nicolas Maduro’s policies would only be worse than those of his socialist-dictator predecessor Hugo Chavez, some analysts have claimed that Bitcoin has helped some segments of Venezuela’s population expand their ability to purchase food and basic services. In the midst of Venezuela’s economic and political crisis characterized by unemployment, hyperinflation, capital controls, and foreign currency black markets, Bitcoin acts as a cost-effective and efficient means by which Venezuelans can either store part of their wealth, or receive foreign funds that help meet people’s needs including food, health, and basic utility bills. Essentially, Venezuelans buy, sell, or receive Bitcoins from family members abroad. They then rapidly convert them into U.S. dollars and then into local Venezuelan bolivares via local cryptocurrency exchanges. Access to cryptocurrencies of course remains scarce, with Bitcoins mostly helping already relatively better-off Venezuelans. Additionally, some cryptocurrency exchanges have been closed-off by the government. Nonetheless, this application of Bitcoin use echoes Nakamoto’s priorities of restoring the sovereignty of people over their money and re-empowering them with a means of payment devoid of political greed and manipulation.

Despite these positive ethical attributes, the credibility and trustworthiness of cryptocurrencies and their foundational technologies continue as work-in-progress. Potential off-ledger manipulations of pseudo-anonymous, encrypted, publicly recorded transactions invite questions about the ability to blindly trust blockchain structures as they stand today.

3. Perceived cryptocurrency risks

In less than a decade, hundreds of cryptocurrencies have emerged in the relative absence of effective regulation. The revolutionary nature of the blockchain protocol schemes underlying cryptocurrencies’ core design, the speed of adoption and adaptability of such technologies, and their potential to rapidly change the financial industry have mobilized expert communities, high-stake market participants and regulatory bodies into public consultations regarding potential benefits, risks, and challenges posed by cryptocurrencies.

Identified cryptocurrency risks fall into a ranked continuum based on the perceived immediacy of each concern. In order of imminence, the risk-range starts from threats to financial integrity (anti-money laundering/financing of terrorism (AML/CFT)) and moves to issues of consumer protection, tax evasion, and the regulation of capital movements to stave off instability. Concerns regarding systemic financial volatility, or the potential implications a widespread use of cryptocurrencies would have on monetary policy, are still perceived as distant. Nonetheless, they require further analysis and monitoring.

Examples of institutions implementing regulatory initiatives, primarily since late 2014, include: the New York State Department of Financial Services (NYDFS), the Japanese Financial Services Agency, the US Treasury FinCEN (Financial Crimes Enforcement Network), the European Central Bank (ECB), the European Commission, the UK Financial Conduct Authority (FCA), the European Banking Authority (EBA), the British Banking Association (BBA), the UN Financial Action Task Force (FATF), and the Committee on Payments and Market Infrastructures (CPMI).

4. Regulatory responses

  • Financial Integrity (AML/CLT)

Given the ample use of Bitcoins as a main form of payment in black-markets and in the online drug site Silkroad (now eradicated), this is the one area that has received the most regulatory attention. Cryptocurrencies’ anonymity and cross-border reach motivate their use in illicit marketplaces, money laundering (ML), and terrorist financing.

Following the 2014 multi-million dollar theft due to the hacking and collapse of the Japanese-based cryptocurrency exchange Mt.Gox, then the largest in the world, Japan took regulatory measures to prevent the demise of any other cryptocurrency-related service provider on its premises. To prevent money laundering and cybersecurity issues in Japan, digital currency exchanges now need to register and report to the Japanese Financial Services Agency as their governmental regulator. More recently, Japan has recognized digital currencies as asset-like-values. In spring 2017, the Japanese government passed legislation endowing Bitcoin and virtual currencies with legal tender status. They now can be used legitimately to make payments as well as digital transfers.

Similarly, Spain’s Finance, Taxation and Public Administration Ministry concluded in 2015 that Bitcoin should be treated as a legitimate electronic payment system and started requiring Bitcoin-based online gambling companies to apply for and obtain a license to continue to operate in Spain.

  • Consumer protection

Market-based or technology-related disruptions of cryptocurrency protocol systems can result in substantial losses for users, especially given the scarcity of insurance for digital currency accounts. Because of the lack of regulatory safeguards and the complexity of the technology, cryptocurrency holders and users are vulnerable to scams, fraud, misrepresentations, value asset loss through hacking, and fraudulent investment schemes (which operate as online Ponzi schemes). Other consumer vulnerabilities relate to the irreversibility of transactions, especially of flawed or fraudulent ones.

In response, the U.S Securities Exchange Commission (SEC) and the U.S. Commodity Futures Trading Commission (CFTC) have started to combat virtual currency Ponzi-type investment structures. In 2015, the New York State Department of Financial Services (NYSDFS) issued one of the most comprehensive sets of regulations governing virtual currency operators within its jurisdiction. The hallmark NYSDFS rules require businesses involved in transmitting, storing, buying, selling, exchanging, issuing, or administering cryptocurrencies and other virtual currencies in New York to be licensed by NYSDFS. Likewise, the NYSDFS subjects its licensees to minimum capital requirements, regulatory periodic examinations, financial disclosures, and approval of management changes and mergers and acquisitions.

Private sector participants have also taken action. Loss of consumer confidence caused by misuse of cryptocurrencies’ foundational technologies and their improper surveillance drove FinTech market participants to create a non-profit standards organization for the cryptocurrency ecosystem, the CryptoCurrency Certification Consortium (C4). C4 provides startups and other market participants with self-regulating codes of practice such as the CryptoCurrency Security Standard (CCSS) and the C4 Code of Ethics.

  • Taxation

By design, the identity of cryptocurrency users and network members is encrypted. Thus, these currencies provide pseudo-anonymous users with an ideal vehicle for tax evasion. Additionally, in several countries there is no consensus regarding the proper tax treatment of cryptocurrency holdings. Some countries argue in favor of treating them as a form of (non-monetary) property while others record cryptocurrencies as a form of currency. Where cryptocurrencies are considered non-monetary property, their use in purchasing goods or services, or for investment purposes, entails the recognition of gains or losses. These are subject to local rules pertaining to whether the property is defined as a capital asset, its holding length period, or classification standards of transactions as speculation. Where cryptocurrencies are considered currency (e.g., Japan) foreign exchange gains or losses are required. In Japan, virtual currency transactions are taxable and cryptocurrencies received from abroad are not tax deductible but are treated instead as non-taxable purchases. Finally, Japan records income earned from virtual currencies as operating revenue for corporations and subjects individuals’ cryptocurrency income to a tax on aggregate income.

Different value-added and sales-tax grading scales are applied to owned cryptocurrencies depending on whether they were obtained through mining or via buy and sell operations in digital currency exchanges. The U.S. records, as part of each owners’ gross income, the fair market value of the cryptocurrency at the time it is mined. Australia taxes miners only at the time of sale or transfer of Bitcoins previously mined. In the U.K., the value of virtual currencies at the time of purchase of goods or services is used for VAT purposes, income from cryptocurrency mining is outside the scope of U.K.’s VAT. Conversion of virtual currencies into British or foreign currencies is also not subject to VAT on the value of the currency. Conversely, in Australia, Bitcoin exchanges and markets have to charge taxes on the full value of Bitcoins supplied to residents and not merely on commissions.

  • Exchange Control & Capital Flow Management

Cryptocurrencies and their blockchains lack full identity transparency, making them fitting instruments for circumventing exchange and capital controls. Instances of cryptocurrencies and virtual currencies serving as an avenue for the evasion of capital controls have been reported in China, Venezuela, Cyprus, and Greece. Instead of purchasing foreign currency subject to government-imposed limitations, market participants purchase cryptocurrencies and virtual currencies online and use them to conduct internet-based foreign exchange transactions or to make otherwise prohibited capital transfers. Cryptocurrency conversion into fiat money is achieved via peer-to-peer exchange floors or marketplaces matching the sellers and buyers. In the case of Venezuela, the dictatorial government has cracked down on some local Bitcoin exchange ventures and continues to pursue their demise.

  • Financial Stability

Despite the rising market capitalization of several cryptocurrencies, the small volume of transactions conducted in their decentralized blockchains makes it unlikely that the non-negligible financial risks they pose to individual users would lead to systemic contagion. Nonetheless, the International Monetary Fund (IMF) warns the growing large-scale use of virtual currencies and the greater interconnectedness of blockchain technologies could, in due course, give rise to systemic financial risks. The broader adoption of algorithms and distributed ledger digital solutions also increase vulnerabilities to cyberattacks.

Monitoring rising systemic risks poses formidable challenges due to the anonymity of exposures, decentralized participants, and lack of an agreed-upon governing regulatory framework. Some cryptocurrency schemes may become so big or interconnected that a failure could be catastrophic, making systemic risks more difficult to resolve, especially in the absence of a lender of last resort. Regulatory responses to financial stability concerns are still in their early stages.

As of now, most countries limit financial institution exposure to virtual currencies by simply prohibiting financial institutions from engaging in virtual currency businesses (IMF, 2016). The U.S. Conference of State Bank Supervisors developed a model framework for states’ virtual currency regulatory regimes. Regulators must first ensure the stability of the larger financial marketplace when allowing any virtual currency activities. The Conference also recommends introducing financial strength requirements for virtual currency companies.

At the international level, given the cross-border nature of cryptocurrency and virtual currency networks, there is no consensus yet regarding who should oversee virtual currency markets and financial market institutions using blockchain technologies for payment, settlement, and clearing activities (IMF, 2016). Virtual currencies could create an alternative payment system subject to lower standards in terms of regulatory requirements, fueling race-to-the bottom behavior in the absence of an international regulatory body consensus.

  • Monetary Policy

Currently, virtual currencies do not yet pose significant constraints on monetary policy but they could raise concerns if they become more widely used. If the number of payments using cryptocurrencies substantially increase, the demand for traditional central-bank-issued cash and reserves will decline, diminishing central banks’ ability to monitor payment systems. In the extreme, central banks may lose control over both currency supply and credit. It would also limit their ability to provide lender-of-last-resort support and to coordinate responses to temporary economic shocks and business cycle fluctuations.

5. Japan leads by example

The development of effective regulatory responses to the continued evolution of cryptocurrencies is at an early stage. Work remains to be done to put in place effective frameworks that regulate virtual currencies in a manner that guards against their risks whilst providing morally acceptable incentives for financial practice that do not stifle innovation.

Accepting the inextricable codetermination of technology and regulation, Japan adapts to FinTech’s creative, yet potentially disruptive, monetary and payment system changes. Leading by example, the Japanese government has set forth a set of comprehensive bills that establish a positive regulatory structure for the cryptocurrency landscape within its borders. Such measures spur financial technology innovation within the Japanese private sector and allow its banks to cope with the growth of digital currencies and to capitalize on them in the competitive and fast-moving Fintech world market. Japan’s positive regulatory structure consists of regulations applicable to all service providers operating inside the cryptocurrency ecosystem rather than just regulating the asset (Bitcoin) itself. The rationale is that, by regulating the whole range of companies in the cryptocurrency space, the regulatory structure can build consumer trust at every level of the cryptocurrency market-chain.

6. To regulate or not to regulate?Bitcoin: To Regulate

Former Barclays CEO Antony Jenkins has repeatedly predicted an oncoming tidal wave of FinTech creative destruction, potentially disrupting the banking industry through reductions in banking installations and employment by as much as 20-50% within the next decade. For Jenkins, cryptocurrencies like Bitcoin are just the beginning of the transformation in banking, powered through tools such as the blockchain. He argues that banks need to keep up with new FinTech if they are to survive. Jenkins sees regulation as a means to help banks expand their information technology capabilities and help bring cryptocurrency use into the mainstream.

The main argument in favor of cryptocurrency regulatory frameworks is they set the stage for the legitimization of cryptocurrencies such as Bitcoin. Through structured regulation, orthodox authorities acknowledge cryptocurrencies’ function in society, thus validating their value. Opponents of regulation like the Bitcoin Foundation and the U.S. Electronic Frontier Foundation (EFF) argue that regulation inevitably restrains innovation to the detriment of the public and industry. They point to the forgone efficiency and cost reductions in financial services, the relinquished financial access and inclusion benefits for unbanked vulnerable populations, and a prolonged reliance upon untrustworthy authorities.

Nonetheless, regulation can gauge the resilience of cryptocurrency counterparties, markets, and infrastructure to build confidence for more mainstream adoption of cryptocurrencies and to allow innovation. The IMF recognizes as technology alters financial market structures and attributes, financial regulation adapts to maintain secure and effective markets (IMF, 2017). A lack of trust in financial intermediaries and processes hampers the functioning of financial markets. Yet, technological change cannot eliminate the need for trust, as some Bitcoin pundits argue.

Japan provides a precedent for other countries on how to confront this fact. Indeed, Japan’s positive regulatory approach, encompassing all market participants, signals the critical role effective regulation plays in nurturing trust in the cryptocurrency ecosystem. Japan nurtures this trust by ensuring market participants’ financial positions are sound, accurately represented, and meet prudential standards. It also confirms that governance risk management practices in the virtual currency space meet regulatory requirements.

6. Cryptocurrency-specific regulatory principles

In traditional financial market operations, regulation serves to: (1) provide incentives for institutions to be accountable for systemic risk, (2) protect consumers where information is hard or costly to obtain, (3) support competition and prevent oligopolistic behavior, and (4) enable flexibility and regulatory arbitrage to ensure systemic risks are contained and the goals of regulation are sustained (IMF, 2017).

Analogously, the purpose of cryptocurrency regulation is to preserve financial stability and consumer protection whilst promoting innovation and developing consumer trust in new currency types and new payment systems technologies.

Through the group C4, startups and engaged FinTech developers and participants have established a Code of Ethics. C4 provides certifications so that professionals can assert their knowledge of cryptocurrencies in the same way as other financial market analysts. The C4 Code of Ethics provides a blueprint to ensure certified practitioners do not breach agreed-upon industry standards and that their certificate is not revoked. Its three main canons are: (1) apply decentralization to client problems when appropriate, 2) protect clients and the local and global neighborhood in which practitioners thrive, and 3) commit to complete honesty across all interactions and time.

7. How would the future regulatory landscape for cryptocurrencies look?

  • The decentralization and migration of services from intermediaries to networks, triggered by cryptocurrency design protocols and blockchain applications, will require regulators to rely less on entity-based regulation (as it is in traditional financial regulation) and shift their focus toward activity-based regulation.


  • Privacy and transparency are constituent elements for building trust in a financial service. However, emerging technologies that distribute information across networks, such as distributed ledger technologies, challenge the right balance between the two. Shared data, in an open network lacking a controller, makes it more complicated to simultaneously protect cryptocurrency user data and enable access to the financial information required by transparency stipulations. Regulators will need to develop an approach to facilitate both privacy and transparency requirements.


  • Oversight and regulation of algorithms underlying FinTech innovations will be needed to build consumers’ confidence in the systems that rely on these algorithms, such as cryptocurrencies and payment infrastructure. Regulators will need to ensure that algorithms are designed and operate in a way that does not expose consumers or the financial system to undue risk.


  • As of today, there is little consistency in cryptocurrency regulatory approaches across countries. This undermines regulation at the national level, incentivizes regulatory arbitrage, and creates loopholes between regulatory jurisdictions. Greater international cooperation and harmonization of standards will be essential to stave off systemic risks, especially as blockchain and distributed ledger technologies continue to expand and cryptocurrencies gain more mainstream acceptance.


  • Proliferation of Central Banks Digital Currencies (CBDC)

Several outlines for CBDC designs have been proposed since 2014, with Fedcoin, a U.S. Federal Reserve-managed cryptocurrency ledger, showcasing one of the first CBDC sketches. According to journalist Wendy McElroy, in June 2016, central bankers from 90-some countries met with IMF, World Bank, and Bank for International Settlements senior officials to discuss potential issuance of CBDCs.

Advocates argue that CBDC would allow central banks to maintain their essential functions despite technological disruption. These functions include include: maintaining their oversight role to ensure effective payments infrastructure, coordinating the issuance of currency, protecting their monetary policy transmission mechanisms, diluting private cryptocurrencies’ centralization of power, and enacting their lender of last resort function as needed. CBDCs would also entail savings to governments by gradually eliminating the maintenance and replacement costs of bank notes and coins.

Critics point out that schemes such as Fedcoin would centralize the control of the economy to an unprecedented extent and surrender people’s monetary autonomy to political control. CBDCs could enhance the ability of both central banks and the government to track wealth and could ultimately become an engine of social control.

7. Conclusions

Money as a media of exchange, or conversely, as a relational process, has shifted a couple of times historically. Its newest iteration takes the form of ledger-based electronic systems that have started a revolution in financial markets. The current natural selection of banking and financial market participants pushes them to surf new waves of FinTech architecture. Yet, the adage that regulation stifles innovation seems to lose ground in the cryptocurrency ecosystem. Without regulation, users are vulnerable to financial integrity theft, suspicion, and speculative bubbles. An unregulated ecosystem also gives users a limited scope of cryptocurrencies as payment means.

At the same time, if regulatory bodies (including central banks) adopt cryptocurrencies’ underlying technologies via the issuance of CBDCs, it would defeat the original purpose of cryptocurrencies like Bitcoin. Have we really come full-circle in the cryptocurrency saga?

Time will tell whether Fedcoin and other CBDCs gain traction. Nonetheless, now and then, the regulation of cryptocurrencies can add value to financial market participants as they embrace change. Rapid change tends to confound our ability to reason morally. However, well-designed ethical regulatory frameworks can provide guideposts for cryptocurrency users and FinTech developers. These guideposts can help evaluate both the moral quality of principles motivating the development and improvement of cryptocurrency designs, as well as the morality of transactions and the decisions of cryptocurrency users and regulators.


Editor: Eric Witmer



Monetary and Capital Markets, Legal, and Strategy and Policy Review Staff. (2017) Fintech and Financial Services: Initial Considerations/ International Monetary Fund (IMF) Discussion Note.

Monetary and Capital Markets, Legal, and Strategy and Policy Review Staff. (2016) Virtual Currencies and Beyond: Initial Considerations/ International Monetary Fund (IMF) Discussion Note.

Dodd, N. (1994) The Sociology of Money. Cambridge: Polity.

Dodd, N. (2005b) ‘Laundering ‘‘Money’’: On the Need for Conceptual Clarity within the Sociology of Money’, Archives Europeennes de sociologie 46: 387–411.

Dodd, N. (2012) Simmel’s Perfect Money: Fiction, Socialism and Utopia in ‘The Philosophy of Money’. Journal of Theory, Culture & Society 29(7/8): 146–176

Dodd, N. (2015) Bitcoin, Utopianism and the Future of Money. Kings Review Magazine. London.

Simmel, G. (2004) The Philosophy of Money. London: Routledge.

Other references (articles in press):