ATMs
Bitcoin ATM
Jordan Kelley, founder of Robocoin, launched the first
bitcoin ATM in the United States on 20 February 2014. The kiosk installed in
Austin, Texas is similar to bank ATMs but has scanners to read
government-issued identification such as a driver's license or a passport to
confirm users' identities.
Initial coin
offerings
An initial coin offering (ICO) is a controversial means of
raising funds for a new cryptocurrency venture. An ICO may be used by startups
with the intention of avoiding regulation. However, securities regulators in
many jurisdictions, including in the U.S., and Canada have indicated that if a
coin or token is an "investment contract" (e.g., under the Howey
test, i.e., an investment of money with a reasonable expectation of profit
based significantly on the entrepreneurial or managerial efforts of others), it
is a security and is subject to securities regulation. In an ICO campaign, a
percentage of the cryptocurrency (usually in the form of "tokens") is
sold to early backers of the project in exchange for legal tender or other
cryptocurrencies, often bitcoin or ether.
According to PricewaterhouseCoopers, four of the 10 biggest
proposed initial coin offerings have used Switzerland as a base, where they are
frequently registered as non-profit foundations. The Swiss regulatory agency
FINMA stated that it would take a "balanced approach" to ICO projects
and would allow "legitimate innovators to navigate the regulatory
landscape and so launch their projects in a way consistent with national laws
protecting investors and the integrity of the financial system." In
response to numerous requests by industry representatives, a legislative ICO
working group began to issue legal guidelines in 2018, which are intended to
remove uncertainty from cryptocurrency offerings and to establish sustainable
business practices.
Legality
The legal status of cryptocurrencies varies substantially
from country to country and is still undefined or changing in many of them.
While some countries have explicitly allowed their use and trade, others have
banned or restricted it. According to the Library of Congress, an
"absolute ban" on trading or using cryptocurrencies applies in eight
countries: Algeria, Bolivia, Egypt, Iraq, Morocco, Nepal, Pakistan, and the
United Arab Emirates. An "implicit ban" applies in another 15
countries, which include Bahrain, Bangladesh, China, Colombia, the Dominican
Republic, Indonesia, Iran, Kuwait, Lesotho, Lithuania, Macau, Oman, Qatar,
Saudi Arabia and Taiwan. In the United
States and Canada, state and provincial securities regulators, coordinated
through the North American Securities Administrators Association, are
investigating "bitcoin scams" and ICOs in 40 jurisdictions.
Various government agencies, departments, and courts have
classified bitcoin differently. China Central Bank banned the handling of
bitcoins by financial institutions in China in early 2014.
In Russia, though cryptocurrencies are legal, it is illegal
to actually purchase goods with any currency other than the Russian ruble. Regulations and bans that apply to bitcoin
probably extend to similar cryptocurrency systems.
Cryptocurrencies are a potential tool to evade economic
sanctions for example against Russia, Iran, or Venezuela. Russia also secretly
supported Venezuela with the creation of the petro (El Petro), a national
cryptocurrency initiated by the Maduro government to obtain valuable oil
revenues by circumventing US sanctions.
In August 2018, the Bank of Thailand announced its plans to
create its own cryptocurrency, the Central Bank Digital Currency (CBDC). UNICEF accepts cryptocurrency donations.
Advertising Bans
Bitcoin and other cryptocurrency advertisements were temporarily
banned on Facebook, Google, Twitter, Bing, Snapchat, LinkedIn and MailChimp. Chinese internet platforms Baidu, Tencent, and
Weibo have also prohibited bitcoin advertisements. The Japanese platform Line
and the Russian platform Yandex have similar prohibitions.
U.S. Tax Status
On 25 March 2014, the United States Internal Revenue Service
(IRS) ruled that bitcoin will be treated as property for tax purposes. This
means bitcoin will be subject to capital gains tax. 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.
In July 2019, the IRS started sending letters to
cryptocurrency owners warning them to amend their returns and pay taxes.
The Legal Concern of
an Unregulated Global Economy
As the popularity of and demand for online currencies has
increased since the inception of bitcoin in 2009, so have concerns that such an
unregulated person to person global economy that cryptocurrencies offer may
become a threat to society. Concerns abound that altcoins may become tools for
anonymous web criminals.
Cryptocurrency networks display a lack of regulation that
has been criticized as enabling criminals who seek to evade taxes and launder
money.
Transactions that occur through the use and exchange of
these altcoins are independent from formal banking systems, and therefore can
make tax evasion simpler for individuals. Since charting taxable income is
based upon what a recipient reports to the revenue service, it becomes
extremely difficult to account for transactions made using existing
cryptocurrencies, a mode of exchange that is complex and difficult to track.
Systems of anonymity that most cryptocurrencies offer can
also serve as a simpler means to launder money. Rather than laundering money
through an intricate net of financial actors and offshore bank accounts,
laundering money through altcoins can be achieved through anonymous
transactions.
Loss, Theft, and Fraud
In February 2014 the world's largest bitcoin exchange, Mt.
Gox, declared bankruptcy. The company stated that it had lost nearly $473
million of their customers' bitcoins likely due to theft. This was equivalent
to approximately 750,000 bitcoins, or about 7% of all the bitcoins in
existence. The price of a bitcoin fell from a high of about $1,160 in December
to under $400 in February.
Two members of the Silk Road Task Force—a multi-agency federal
task force that carried out the U.S. investigation of Silk Road—seized bitcoins
for their own use in the course of the investigation. DEA agent Carl Mark Force IV, who attempted to
extort Silk Road founder Ross Ulbricht ("Dread Pirate Roberts"), pleaded
guilty to money laundering, obstruction of justice, and extortion under color
of official right, and was sentenced to 6.5 years in federal prison. U.S. Secret Service agent Shaun Bridges
pleaded guilty to crimes relating to his diversion of $800,000 worth of
bitcoins to his personal account during the investigation, and also separately
pleaded guilty to money laundering in connection with another cryptocurrency
theft; he was sentenced to nearly eight years in federal prison.
Homero Josh Garza, who founded the cryptocurrency startups
GAW Miners and ZenMiner in 2014, acknowledged in a plea agreement that the
companies were part of a pyramid scheme, and pleaded guilty to wire fraud in
2015. The U.S. Securities and Exchange Commission separately brought a civil
enforcement action against Garza, who was eventually ordered to pay a judgment
of $9.1 million plus $700,000 in interest. The SEC's complaint stated that
Garza, through his companies, had fraudulently sold "investment contracts
representing shares in the profits they claimed would be generated" from mining.
On 21 November 2017, the Tether cryptocurrency announced
they were hacked, losing $31 million in USDT from their primary wallet. The company has 'tagged' the stolen currency,
hoping to 'lock' them in the hacker's wallet (making them unspendable). Tether
indicates that it is building a new core for its primary wallet in response to
the attack in order to prevent the stolen coins from being used.
In May 2018, Bitcoin Gold (and two other cryptocurrencies) was
hit by a successful 51% hashing attack by an unknown actor, in which exchanges
lost estimated $18m. In June 2018,
Korean exchange Coinrail was hacked, losing US$37 million worth of altcoin.
Fear surrounding the hack was blamed for a $42 billion cryptocurrency market
selloff. On 9 July 2018 the exchange
Bancor had $23.5 million in cryptocurrency stolen.
The French regulator Autorité des marchés financiers (AMF)
lists 15 websites of companies that solicit investment in cryptocurrency
without being authorized to do so in France.
Darknet Markets
Properties of cryptocurrencies gave them popularity in
applications such as a safe haven in banking crises and means of payment, which
also led to the cryptocurrency use in controversial settings in the form of
online black markets, such as Silk Road. The original Silk Road was shut down in
October 2013 and there have been two more versions in use since then. In the
year following the initial shutdown of Silk Road, the number of prominent dark
markets increased from four to twelve, while the amount of drug listings increased
from 18,000 to 32,000.
Darknet markets present challenges in regard to legality.
Bitcoins and other forms of cryptocurrency used in dark markets are not clearly
or legally classified in almost all parts of the world. In the U.S., bitcoins
are labelled as "virtual assets". This type of ambiguous
classification puts pressure on law enforcement agencies around the world to
adapt to the shifting drug trade of dark markets.
Reception
Cryptocurrencies have been compared to Ponzi schemes,
pyramid schemes and economic bubbles, such as housing market bubbles. Howard Marks of Oaktree Capital Management
stated in 2017 that digital currencies were "nothing but an unfounded fad
(or perhaps even a pyramid scheme), based on a willingness to ascribe value to
something that has little or none beyond what people will pay for it", and
compared them to the tulip mania (1637), South Sea Bubble (1720), and dot-com
bubble (1999). The New Yorker has
explained the debate based on interviews with blockchain founders in an article
about the “argument over whether Bitcoin, Ethereum, and the blockchain are
transforming the world”.
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. Regulators in several countries have warned
against cryptocurrency and some have taken concrete regulatory measures to
dissuade users. Additionally, many banks
do not offer services for cryptocurrencies and can refuse to offer services to
virtual-currency companies. Gareth
Murphy, a senior central banking officer has stated "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 cautioned that virtual currencies pose a new challenge to
central banks' control over the important functions of monetary and exchange
rate policy. While traditional financial
products have strong consumer protections in place, there is no intermediary
with the power to limit consumer losses if bitcoins are lost or stolen.[86] One
of the features cryptocurrency lacks in comparison to credit cards, for
example, is consumer protection against fraud, such as chargebacks.
An enormous amount of energy goes into proof-of-work
cryptocurrency mining, although cryptocurrency proponents claim it is important
to compare it to the consumption of the traditional financial system.
There are also purely technical elements to consider. For
example, technological advancement in cryptocurrencies such as bitcoin results
in high up-front costs to miners in the form of specialized hardware and
software. Cryptocurrency transactions
are normally irreversible after a number of blocks confirm the transaction.
Additionally, cryptocurrency private keys can be permanently lost from local
storage due to malware, data loss or the destruction of the physical media.
This prevents the cryptocurrency from being spent, resulting in its effective
removal from the markets.
The cryptocurrency community refers to pre-mining, hidden
launches, ICO or extreme rewards for the altcoin founders as a deceptive
practice.[90] It can also be used as an inherent part of a cryptocurrency's
design. Pre-mining means currency is
generated by the currency's founders prior to being released to the public.
Paul Krugman, Nobel Memorial Prize in Economic Sciences
winner does not like bitcoin, has repeated numerous times that it is a bubble
that will not last[93] and links it to Tulip mania. American business magnate Warren Buffett
thinks that cryptocurrency will come to a bad ending. In October 2017, BlackRock CEO Laurence D.
Fink called bitcoin an 'index of money laundering'. "Bitcoin just shows you how much demand
for money laundering there is in the world," he said.
Academic Studies
In September 2015, the establishment of the peer-reviewed
academic journal Ledger was announced. It covers studies of cryptocurrencies
and related technologies, and is published by the University of Pittsburgh.
The journal encourages authors to digitally sign a file hash
of submitted papers, which will then be timestamped into the bitcoin
blockchain. Authors are also asked to include a personal bitcoin address in the
first page of their papers.
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