Written by Maxens Destiné and Eric Chehata
Source: Adapted from [1]
Some became slightly richer, some “went big” and became millionaires, some became faintly poorer and others became homeless. There are many success and failure stories surrounding cryptocurrencies and their use by different people, but we often forget that cryptocurrencies can do more than change our monetary status. Indeed, for the general public cryptocurrencies may be another technological buzz-word, whose meaning is associated with either wealth, poverty or lottery, but for those who have a keen understanding of the potential of cryptocurrencies, this relatively new technology is often seen as a danger to social order.
Source: Adapted from [2]
How They Work
Before explaining “why authorities are worried about cryptocurrencies”, it is important to define what makes a cryptocurrency and how to use it. Cryptocurrencies are assets which are financial and digital and whose ownership and transfer of ownership is handled by a decentralized technology that is cryptographic [3]. Cryptocurrencies rely on validation from volunteers, often called “miners”. These “miners” validate transactions and receive a monetary compensation, typically in the same cryptocurrency they are mining for, for every validated transaction. Furthermore, to use cryptocurrencies, one only needs a crypto wallet. Crypto wallets are software which help you trade cryptocurrencies. They are trivial to use, and allow their users to trade crypto currencies with anyone. The bottom line is that they are not issued or handled by a government and cannot be controlled by them in any way except by shutting down the entire world wide web.
Source: Adapted from [4]
Bribery
This independence from governments opens the door to many illegal practices that would normally be prevented by a government-controlled currency. One of those practices is bribery. Normally, to give someone money, one must make a transfer with a bank account, or withdraw the money and give it to the recipient in person. The first method can be identified and regulated by authorities as they can monitor bank transfers. The second method, although harder to control, can also be regulated because large cash withdrawal and deposits are often closely monitored by law enforcement agencies [5]. Thus, if there is a transaction, withdrawal or deposit that authorities deem illegal, they can freeze the accounts of all parties involved, know their identity, verify their past transactions, etc.
For cryptocurrencies on the other hand, it is not possible to know exactly who is involved in a particular transaction since there may be no name, identification number, email, etc. attached to a crypto wallet. Additionally, even if the identity of a crypto wallet owner is obtained, law enforcement agencies cannot freeze the account of the person as they have no authority over crypto networks which means that all parties involved in the fraudulent activity would still be able to access their wallet.
Source: Adapted from [6]
Tax Evasion and Money Laundering
It is also possible to evade taxes and launder money in a similar way: by exploiting the anonymity of cryptocurrencies. The concept of tax evasion is quite simple. A party hides some of its revenue from the government so that it does not have to pay taxes on them. This is easy to do with cryptocurrencies. All that is needed is to agree with another party to use cryptocurrencies as a means of exchange. That way, profits cannot be traced by the government and thus cannot be taxed. It is also possible to use cryptocurrencies to launder money, fund terrorist organization, buy illegal goods such as drugs, weapons, etc. Like in the case of tax evasion, these activities primarily make use of the anonymity guaranteed by cryptocurrencies, although the exact methods differ from one another.
The Issue of Legal Definition
Another source of worries about cryptocurrency is the different definitions that countries gave them. Charlene Cieslik, chief anti-money laundering officer of Coinsquare, Canada’s most secure digital asset exchange for exchanging certain cryptocurrencies said “You [have] to be cognizant of where are the rules being broken around the world if everybody has a different definition.”[7]. Indeed, using cryptocurrencies a certain way in Canada may be a crime, but doing so in another country may not be. This is quite different from fiat currencies whose laws are somewhat homogeneous among all countries. Because of this, punishing crypto offenders can be challenging when the crime was perpetrated in a different country.
A Perpetual Danger
On a fundamental level, cryptocurrency has obvious disadvantages that pose threats to governments. Cryptocurrency transactions are of a high level of security, meaning that in the case of illegal activities governments will not be able to track down particular users using their wallets addresses. These illegal activities include but are not limited to offering bribes in the form exchanging payments, tax evasion, and money laundering. As such, cryptocurrency paves the way for a world of crime. Not only that, but cryptocurrency in and of itself poses a threat to the entire banking sector as well as government issued currencies since it presents an alternative to them.
References
[1] 2022 [Online]. Available: https://cdn.pixabay.com/photo/2017/01/25/12/31/bitcoin-2007769_960_720.jpg. [Accessed: 24- Mar- 2022].
[2] 2022 [Online]. Available: https://cdn.pixabay.com/photo/2017/10/14/22/20/farm-2852024_960_720.jpg. [Accessed: 24- Mar- 2022].
[3] Giudici, G., Milne, A. & Vinogradov, D. Cryptocurrencies: market analysis and perspectives. J. Ind. Bus. Econ.47, 1–18 (2020). https://doi.org/10.1007/s40812-019-00138-6.
[4] 2022 [Online]. Available: https://cdn.pixabay.com/photo/2017/10/28/11/36/ruble-2896789_960_720.jpg. [Accessed: 24- Mar- 2022].
[5] Fintrac-canafe.canada.ca. 2022. Financial transactions reported to FINTRAC. [online] Available at: <https://fintrac-canafe.canada.ca/individuals-individus/rpt-eng> [Accessed 23 March 2022].
[6] 2022 [Online]. Available: https://cdn.pixabay.com/photo/2014/09/26/17/59/money-laundering-462674_960_720.jpg. [Accessed: 24- Mar- 2022].
[7] C.C Charlene Cieslik, ‘Anti-Money Laundering in Cryptocurrency’, Koerner Hall, 2018.
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