In financial trading, cryptocurrencies like bitcoin use decentralization, traceability, and anonymity features to perform transactional activities. These digital currencies, using the emerging blockchain technologies, are forming the basis of the largest unregulated markets in the world. This creates various regulatory challenges, including the illicit purchase of drugs and weapons, money laundering, and funding terrorist activities. This chapter analyzes various legal and ethical implications, their effects, and various solutions to overcome the inherent issues that are currently faced by the policymakers and regulators. The authors present the result of an analysis of 30 recently published peer-reviewed scientific publications and suggest various mechanisms that can help in the detection and prevention of illegal activities that currently account for a substantial proportion of cryptocurrency trading. They suggest methods and applications that can also be used to identify the dark marketplaces in the future.
TopIntroduction
Trading in cryptocurrencies has become a global phenomenon in recent years. These are decentralized anonymous virtual currencies, that do not require central control by any central authority (Nakamoto, 2019). Cryptocurrencies can adapt to the challenges in the emerging digital economies and for funding purposes while engaging communities through crowdfunding and the peer-to-peer technology platforms (Tschorsch & Scheuermann, 2016). Therefore, cryptocurrencies, with the use of Blockchain technologies, have hit the news headlines due to their rapid growth in terms of both market volume and value, since around 2012 (Tschorsch & Scheuermann, 2016).
The first initiative for cryptocurrencies was the white paper, that was released under Satoshi Nakamoto pseudonym in 2008. It combined the ideas of Blockchain technology, decentralization, finite supply, and perfect anonymity to pave the way for the first virtual currency known as Bitcoin (Nakamoto, 2019). Blockchain has been utilized in most of the business models, including supply chain (Alvarado & Halgamuge, 2019), multimedia (Shrestha et al., 2020), finance, and healthcare. In 2010, merchants like WordPress, Microsoft, and Expedia started accepting Bitcoin as their mode of payment, which led to the recognition of Bitcoin as a proper currency.
As Bitcoin gained popularity, the idea of encrypted and decentralized currencies emerged, and the first alternative cryptocurrency appeared. This currency, called Altcoin, focused on improving the original Bitcoin design by offering several advantages like higher speed and anonymity. Therefore, this period became attractive to new start-ups, with currencies such as Namecoin and Litecoin.
Unsurprisingly, as a currency designed with a lack of control and anonymity in mind, Bitcoin proved to be a lucrative and attractive target for criminals. For example, in June 2014, a Bitcoin exchange called Mt. Gox went offline making the owners losing almost 750,000 Bitcoins. This case is still under investigation as it led to a total estimated loss of 400 million dollars. Due to such reasons, many countries have disallowed the use of cryptocurrencies like Bitcoin, as they fear of them being used for illegal purposes such as trades involved in the black market (Fraser & Bouridane 2017; Kshetri & Voas 2017; Toyoda et al. 2017; Van Der Horst et al. 2017; Meiklejohn et al. 2013; Chadha & Kumar 2017).
Misuse of Bitcoin is easily possible through the exploitation of pseudo-anonymity and use of Blockchain transactions. Moreover, the evidence for Bitcoins used in terrorist funding and money laundering has already been found (Kshetri & Voas 2017; Toyoda et al. 2017; Van Der Horst et al. 2017; Chadha & Kumar 2017; Liu, Chen, et al. 2017). Therefore, there is a need for cooperation between the government agencies, with other agencies like banks and other financial regulators, to develop legal frameworks and to track the cryptocurrency transactions in order to put them in the tax domain.
Most digital currencies are unregulated. Some countries consider them as legal, whereas others have banned them outright. For instance, use of cryptocurrency is banned in China, and even applying for Initial Coin Offerings (ICO) in China is considered as an illegal activity. Countries that have adopted it into their financial system are facing problems related to taxation and the growth of illegal activities (Kshetri & Voas 2017; Toyoda et al. 2017; Van Der Horst et al. 2017; Meiklejohn et al. 2013; Chadha & Kumar 2017). Due to this reason, proper legislation needs to be framed (Shehhi et al., 2014).
With this background, this chapter attempts to analyze the legal and ethical implications of digital currencies to fill the gaps through the use of various relevant techniques.
Figure 1. Overview of Legal & Ethical Implications of Use of Cryptocurrencies
So far, however, there has been little discussion about the use of cryptocurrencies. Most of the cryptocurrency articles focus only on Bitcoin, and no major study describes legal and ethical issues in the use of cryptocurrencies through the use of Blockchain trading. This chapter attempts to provide a glimpse of various issues in the use of cryptocurrencies and also to suggest methods and techniques to mitigate them.