Cryptocurrency: A Challenge to Legal System

Abstract

Virtual Currency (VC) is an electronic currency that is neither government-funded nor backed by central bank. VC offers potential benefits over traditional currencies, including lower transaction fees and faster transfer of funds for services provided. In 2013, Financial Crimes Enforcement Network (FinCEN), defined virtual currency as “a medium of exchange that operates like a currency in some environments, but does not have all the attributes of real currency. In particular, virtual currency does not have legal tender status in any jurisdiction”. Some virtual currencies are used as a currency in online games or a digital world, however, there is no equivalent value in fiat currency for them, so named non-convertible. In the other side, a virtual currency that can be bought with and sold back for legal tender is called a convertible currency. One of the most popular type of convertible VCs is cryptocurrencies. They use security mechanisms such as cryptography for creating units of the currency and controlling the transactions. Cryptocurrency works based on Blockchain technology. Its main property is to provide anonymity for the transactions. Bitcoin, as an instance, is a cryptocurrency that has gained much attention in the market since 2009 when it was initially introduced. Since the focus of this paper is on cryptocurrency, which is a convertible virtual currency, we will use the term cryptocurrency and virtual currency or VC interchangeably with the cryptocurrency meaning. Unlike earlier digital currencies, like e-gold, that had centralized architecture, the newer virtual currency networks are completely decentralized, with all parts of transactions performed by the users of the system. So usually cryptocurrencies use peer-to-peer technologies and no traditional financial institutions involved in transactions. This unique property provides different levels of anonymity for the users. The emergence of virtual currencies presents challenges to federal agencies responsible for financial regulation, law enforcement, consumer and investor protection. These challenges stem partly from certain characteristics of virtual currencies, such as the higher degree of anonymity they provide and the ease with which they can be sent across borders. VC also has raised concerns that they might be used to finance terrorism and to engage in other criminal activities such as money laundering and tax evasion. In this paper, we present our research on the legal issues of the cryptocurrency by analyzing the current regulations and discuss about possible solutions for the future of cryptocurrency.