Cryptocurrencies, first introduced in 2009, have rapidly grown in value, volume, and use. The sentiment that they are no more than a passing fad and need not be dealt with by scholars or policymakers remains but is no longer legitimate. Hostile actors such as terrorist groups and sanctioned states use cryptocurrencies to finance activities ranging from deadly attacks to rogue nuclear programs. The use of cryptocurrencies by legitimate actors brings far less dramatic externalities but still presents serious issues, such as the vulnerability of citizens to cryptocurrency-related scams, lost tax revenue, and the stress cryptocurrencies place on countries' electrical grids. This chapter provides readers with an understanding of exactly how cryptocurrencies function, how hostile actors use them, and how governments respond so that they may better understand the challenges posed by cryptocurrencies and how they might be addressed.
TopIntroduction
Cryptocurrencies are a new and exciting phenomenon. Their decentralized nature and the anonymity they provide stand in stark contrast to traditional, government-controlled fiat currencies. Furthermore, their use, value, and effects are subject to a great deal of interest from the public, media outlets, and governments worldwide. But is this attention merited? Do cryptocurrencies matter to political outcomes of interest, and if so, how? This chapter presents case evidence of cryptocurrencies as a meaningfully disruptive global economic force.
As discussed more thoroughly in the following sections, cryptocurrencies rely on blockchain technology and one-way hashing functions to create a digital currency independent of privileged third parties. Using a system of related public and private cryptographic keys, users can transmit funds directly to one another pseudo-anonymously. Transactions are verified and recorded on the blockchain, a publicly available ledger of every transaction that has ever occurred for each type of cryptocurrency and each user’s account balance. However, these cryptographic keys allow for anonymity and security with transactions despite using a public ledger system, as transactions occur without identifying information.
Since their introduction, cryptocurrencies have rapidly increased in value, volume, and use. As of May 28, 2022, a single bitcoin is worth roughly $29,000, and bitcoin alone has a market cap of $550 billion, approximately the same size as Facebook’s parent company, Meta. Bitcoin is still the most valuable cryptocurrency, but there are now over 10,000 alternative cryptocurrencies, or “altcoins,” that consumers can purchase. No altcoin is close to bitcoin in terms of value, but there are now fifty altcoins with a market cap of over $1 billion, and the market cap of cryptocurrencies is now at $1.5 trillion (Statista Report: Cryptocurrencies, 2022). With this rapid increase in volume and value, the mainstream acceptance of cryptocurrencies is also increasing. Consumers can use cryptocurrencies to purchase goods or services at companies such as Tesla, Microsoft, PayPal, Newegg, Home Depot, Shopify, AT&T, Dish, Bloomberg, Expedia, and Wholefoods. Over the previous two years, the twenty-four-hour trade volume of cryptocurrencies has grown from $500 million to highs of over $500 billion (Statista Report: Cryptocurrencies, 2022). While the cryptocurrency market remains volatile, its growth since its inception has been exponential.
Cryptocurrencies’ popularity with law-abiding citizens is growing, but its earliest and most loyal adopters were those operating outside the bounds of domestic and international laws. For example, shortly after the creation of cryptocurrencies, an online marketplace named “The Silk Road” appeared on the dark web, offering illicit goods and services such as firearms, narcotics, assassinations, and erotica, but only in exchange for Bitcoin. In its two years of operation, the Silk Road processed an estimated one billion US dollars (USD) worth of transactions (Norry, 2017; Kethineni & Cao, 2020). Despite the Silk Road’s demise following its owner's arrest on pornography charges, illicit trade on the dark web with cryptocurrencies has only increased, with numerous copycat websites emerging. As a result, the cryptocurrency-based black market has grown exponentially, with tens of billions of USD in illegal cryptocurrency transactions occurring yearly (Foley et al., 2019; Grauer et al., 2022).