English paper

Bitcoin: An exploratory view into the crypto world

Florida International University

English Department - ENC 1102

Bitcoin: An exploratory view into the crypto world

Jesus Cotto Zayas – 5601270

Hector Lorenzo - 6034838

Prof. Nima Baghdadi

Since the rise of the Bitcoin in 2009, there has been a massive transformation in the cross-border money transfer. With the gradual evolution of technology and the internet, many things now seem to be going digital. Money has not been left behind by these technological evolutions. The enormous transition from the traditional Fiat money to the cryptocurrency has raised numerous debates with many taking different standpoints on the benefits of the digital money over the traditional money. Since its launch in 2009, the Bitcoin has received many critical reviews with numerous analysis of how it works. Unlike traditional currencies, this digital currency is not backed up by a regulatory authority. The launch of Bitcoin gave way for ways of sending or receiving payment with no or very low transaction costs. A major issue that raised alarm about Bitcoin was a vulnerability realized in Bitcoin’s protocol back in 2010. This vulnerability made it possible for one to bypass the constraints of the Bitcoin protocol to include a transaction without the proper screening process. Consequently, hackers would attack this vulnerability, duplicating Bitcoin. Most transactions in the crypto world are non refundable, meaning the bitcoin that was duplicated is now part of the system with no way to track them. (Mullan, 2014).

There are different viewpoints on whether there should be a need for regulations on the Bitcoins and the virtual currency in general. Although many have accepted the use of Bitcoins, there is still a huge concern about the illicit use inherent in virtual currency. This made us look deeper into the Silk road black market and how its closure affected bitcoin value. Based on statistical data found online in an article by Wired magazine 2013 Bitcoin price dropped from 125$ to 90$ but quickly recovered back to 115$ within a few hours. We believe this proves that the majority of the usage in crypto is made by real user with good intentions as opposed to what may of the articles we found claim. This lead us into our next dilemma, regulation.

Scholars have argued that government should have control over the money supply only when it is deemed necessary for the security of financial institutions or in the event of regulation of the global exchange rates. Financial policies may, however, be jeopardized by the decentralized nature and unregulated character of Bitcoin. Bitcoin transactions are mostly independent of any intermediary meaning that taxation and other efforts by governments to monitor or control the use of currency are less fruitful. If there were to be a firm regulation in the use of Bitcoins, governments might no longer be able to control the economy using the traditional monetary policies, given the distributed character of Bitcoins. This is because there would be no means for establishing the overall interest rate and bitcoin is finite. (Doguet, 2013).

One of our articles titled “ Nerdy money: Bitcoin, The private digital currency and the case against its regulation” by Kaplanov explores things from a different perspective to most. Kaplanov sees bitcoin as a community currency, a method of buying and selling goods between friends and believes there is a strong case as to why it should not be regulated. This article was written back in 2012 when bitcoin prices were closer to 8 cents as opposed to its current valuation of $5,400 and 92 Billion in market cap. Let’s just say that if Mr. Kaplanov would have bought $100 worth of bitcoins could probably retire today in his own private Yacht with about 6.7 million dollars. We have found multiple articles written before 2016 that keep describing bitcoin as a trend or a phase that will soon be forgotten, and it is because of this line of thought that bitcoin has made it this far without receiving unwanted attention. The latter example describes why we need regulation and, in our option, shows this is growing at an accelerated rate. Just this year the coin is up more than 5,000% with an opening price of $800 in January 2017. While the original idea of bitcoin was a free coin without ties to government or any sort of regulations, growth in the past years has created a need to implement structure in order to keep it sustainable. Regulations will be made whether the community wants them or not and based on our research so far we believe it is a far better strategy to embrace the change and help shape regulations than to keep avoiding them and just have them imposed. While the fundamental view on bitcoin given by this article was clearly flawed, it is very interesting to see how digital currency has evolved from a hobby to a major contender in today’s market. (Kaplanov, 2012).

According to the article Virtually possible: How to strengthen Bitcoin regulation within the current regulatory framework, by Kirby, there is an opportunity for regulators to ensure efficient use of Bitcoins while observing the rules that protect the financial system of the US. In addition to revolutionizing the global finance, the dual nature of the Bitcoin explains its high financial value relative to the traditional currency. The dual nature of the Bitcoin can be explained by the fact that it exists both like the US dollar as well as like a digital payment system. According to the author of this article, there are three possible ways that regulators, working in within the current financial regulatory framework, can utilize to create a more transparent and a safer Bitcoin marketplace. The first option is to promote the private-public cooperation which lets be honest wont work because no one will willingly claim to have x amount of bitcoins to later be taxed on. According to the author this would promote transparency in the virtual marketplace. The second option is to ensure a strict protection of the US financial system. This can be achieved by the cooperation between lawmakers and regulators to impose tough regulations for those who do not comply with the Bitcoin exchanges. The third option is to enhance certainty and trust in the marketplace by encouraging active filings of the Suspicious Activity Reforms (SARs). (Kirby, 2014). After reading this article we found it to be a little disconnected from reality, maybe back in 2014 when prices were cheap and people only had a couple of thousand dollars cooperation or Sar’s were a possibility. However today with prices quickly approaching the 8,000$ level and people holding millions in crypto to hedge it from inflation and taxes his proposed ways wont work, because they all rely on the good nature of the people and break the biggest asset of crypto which is anonymity. Surely there has to be better ways to enforce regulation so we kept looking and stumbled upon our next article.

Bitcoin financial regulation: Securities, derivatives, prediction markets, and gambling by Brito, Shadab, and Castillo, claims that financial regulation instruments such as securities and derivatives may no longer work effectively in regulating the virtual currency. This is partly because the emerging Bitcoin-denominated instruments do not rely largely on the traditional intermediaries. Also, the blockchain ledger technology used by the Bitcoin eliminates the need for intermediaries as it makes it possible to have decentralized markets and exchanges. It is also possible that Bitcoin derivatives are not subject to the current regulations by the Commodity Exchange Act under which derivatives involve physical delivery as opposed to the Bitcoin cash settlement. Laws that control online gambling fail to contemplate a method of payment such as the Bitcoin. To these effects, the authors of the article suggest that regulators should exempt financial transactions denominated in Bitcoin from their regulations. Strategies such as adaptation and resilience by the existing institutions could be used especially when the cost of regulation surpasses the benefits. (Brito, Shadab, and Castillo, 2014). We believe this is a much more down to earth approach that keeps the middle man out and taxes out of the crypto world. Just like the author says, prosecuting or trying to enforce the current financial regulations will be too costly. Instead they need to focus on Fiat exchanged, this is where you go from analog money into digital crypto money like bitcoin. This is the “Weak” link in our chain and the only way to impose taxes or regulations effectively in our opinion. Which made us think, What will bitcoin be like after regulation?

This is when we found Primavera, and the article, Bitcoin: A regulatory nightmare to a libertarian dream. This article asserts that the success of the Bitcoin as an alternative currency to the established national currencies will depend on the regulatory framework in which the Bitcoin ecosystem operates and not the technical and economic viability of the Cryptocurrency. A regulated framework can be achieved through a state regulation or a process of self-regulation with the help of private bodies such as the Bitcoin Foundation or using a market-based mechanism for regulation. For the state regulation, legislations are needed to regulate the decentralized currency in order to preclude it from use for supporting criminal activities. (Primavela, 2014). Meaning that bitcoin will only become widespread and actually usable in our daily lives after regulation has been implemented and just like we suggested they mention a market based mechanism or focus on the analog to digital money converted also known as exchanges. This last article kept us wondering what the bitcoin foundation was and how it could help regulate the coin itself.

Self-regulation of the Bitcoin ecosystem may be an effective way of ensuring that innovation in the Bitcoin ecosystem is not stifled. Given that there exists an entrenched institutional framework within which the Bitcoin ecosystem, it is possible for the regulation of Bitcoins to come from this framework. The institutional framework might comprise of mining pools, financial institutions, online merchants, and exchanges. For example, the Bitcoin Foundation, although having a limited impact on the overall regulation of Bitcoins, its influence may be valuable as it is responsible for the implementation of important changes to the Bitcoin protocol. Acting as a private regulator, Bitcoin Foundation holds dialogues with legislators and regulators for the implementation of effective changes in the Bitcoin protocol. (Van Beers, Storm, Santoni De Sio, & Kapoor, 2016). This specific approach seems to be thought out by someone who understands bitcoin and its specific components. We believe that the bitcoin foundation, which is new to me, Can help solve this regulation issues from the inside and provide the needed stability to get bitcoin to the next level.

So what about the legal side of things, Well in In the article, Rethinking virtual currency regulation in the Bitcoin age, Tu and Meredith suggest three possible ways that policymakers could to legislate virtual currency. One of these strategies is to promote cross-communication with various agency stakeholders. They should also embrace the spectrum issues surrounding the virtual currency with a global viewpoint. There is also a need to embrace the unique characteristics of Bitcoins to develop a comprehensive regulatory model. (Tu and Meredith, 2015). Meaning none of the current laws or systems apply to decentralized currency and basically we need to start from the beginning. At the end of our journey we stumble upon many great ideas and other not so great ideas by different authors but all based on what bitcoin used to be and not the Financial giant that it is now.

Conclusion

We have clearly seen how digital currency has transformed the global money transfer. providing a means for fast and cheap transfer of money across borders. They are, however, associated with high volatility, meaning that they can swiftly fluctuate in value which we believe is caused by the lack of regulation and the relatively young market age. The massive acceptance of Bitcoin not only by online merchants but also by offline merchants has increased the need for a global regulation model. Bitcoin can be used in a variety of illegal actions such money laundering and fraud but its true potential lies in its foundation, a currency without borders that doesn’t depend on one specific economy but rather the most basic principle supply and demand. It is important for regulators to incorporate legislators in developing a regulatory model so that it can reduce the use of Bitcoin in criminal activities and set rules to protect the financial investors. Once this is all set and done, bitcoin will find its true price be it 100,000$ or 1$ but it will become more stable and actually useful in day to day life.

References

Bitcoin financial regulation: Securities, Derivatives, Predictions, markets and gambling