The Legality and Acceptance of Cryptocurrency

The legality and acceptance of cryptocurrency as a means of payment has been a contentious issue in recent years, despite its existence for more than two decades. The anonymity and tax elusiveness have been two of the greatest points of contention. Furthermore, the debate has been intensified by claims that cryptocurrencies such as bitcoin could be the greatest scam of the 21st century (Narayanan, Bonneau, Felten, Miller & Goldfeder, 2016). Aspects of cryptocurrency such as how it originated, how it is obtained, its virtuality, and its anonymity have made it difficult for people across the globe to believe and accept it for exchange (Narayanan et Al., 2016). These controversies have been coupled with limited information on the subject and the lack of regulation. 

Cryptocurrency is a virtual or digital currency that is highly secured with the use of cryptography, which makes it almost impossible to double-check or falsify transactions (Narayanan et al., 2016). Most cryptocurrencies utilize blockchain technology on decentralized networks (Narayanan et al., 2016). Blockchain entails a ledger that is distributed and enforced with the help of disparate computer networks. It can also be defined as a new form of digital asset established and spread across a vast network of several computers (Chuen, Guo, & Wang, 2017). It is this decentralized aspect that defines cryptocurrency and makes it unique. Cryptocurrency, generally, cannot be issued by a central authority and consequently thrive outside government interference and control instituted by central authorities (Narayanan et al., 2016). Cryptocurrency has been associated to internet and cryptography in the process of encoding legible information into nearly uncrackable code; this is particularly useful in tracking transfers and purchases (Narayanan et al., 2016). 

A significant number of cryptographies utilized currently in cryptocurrency was developed for the military (Chuen, Guo, & Wang, 2017). As cryptocurrency proliferated and grew popular due to its impeccable security, government interest grew. Governments wanted to incorporate controls similar to the regulations and restrictions imposed on weapons (Chuen, Guo, & Wang, 2017). However, their determination was curtailed after civilians were crowned rights to own and sell cryptocurrency basically on the grounds of freedom of speech. 

History of Cryptocurrency 

Cryptocurrency is derived from two words; crypto and currency. Crypto refers to run several algorithms and cryptographic ways of encryption designed to safeguard the entries (Brunton, 2019). Crypto includes public and private keys, hashing functions, and elliptical curve encryption. Cryptocurrency is dated back to the early 1980s after the invention of the 'blinding' algorithm by an American cryptographer, David Chaum (Brunton, 2019). The algorithm has been adopted in modern web-based encryption. There are claims that the theoretical foundations of cryptocurrency existed long before the blinding algorithm (Brunton, 2019). Early proponents of cryptocurrency had the goal of utilizing cutting-edge maths-based algorithms and computer science principles to find solutions for what they referred to as practical and political limitations of fiat currency. 

Chaum’s algorithm facilitated a secured and encoded exchange of information between groups. It formed a firm foundation for current and future electronic currency transactions. They were referred to as blinded money. During the late 1980s, David Chaum highlighted other cryptocurrency enthusiasts with a view of popularizing and commercializing blinded money. Chaum relocated to the Netherlands, where he founded Digicash (Brunton, 2019). Digicash was a for-profit company that produced blinding algorithm-based units of currency. At that time, Digicash control was centralized as opposed to Bitcoin and several modern cryptocurrencies. Digicash monopolized supply and controlled its production, similar to what central banks do to fiat currencies. Following series of government interference, Digicash incorporated cryptographic payments, which prompted users to use software to be able to withdraw notes from banks and input specific encrypted keys before sending notes to recipients (Brunton, 2019). The digital currency was, therefore, untraceable even by the banks issuing, the government, and or other third parties. 

In 1996, a paper entitled "How to make a mint: The cryptography of anonymous electronic cash, was published by the National Security Agency (Brunton, 2019). The paper described the cryptocurrency system, and later, it was published in the American Law Review (Vol 46) in 1997. In 1998, We Dai wrote and published "b-money" in the form of description, according to Dai, b-money is attributed to an anonymously distributed electronic cash system (Brunton, 2019). Later that year, Nick Szabo discussed bit gold similar to bitcoin and several technologies that have succeeded it. Bit gold required users to fulfill proof of work with solutions put together cryptographically and published (Brunton, 2019). 

In 2009, bitcoin was created by a pseudonymous individual or group called Satoshi Nakatoshi and it became the first decentralized cryptocurrency, also referred to as the first cryptocurrency (Narayanan et al., 2016). Bitcoin uses SHA-256 for proof of work scheme. Bitcoin has flourished over time and remains the most valuable cryptocurrency in the markets by value (Schaupp & Festa, 2018). 

In April 2011, Namecoin with decentralized DNS was created to make internet censorship difficult (Narayanan et al., 2016). A few months later, Litecoin comes to birth. Litecoin became the first cryptocurrency to incorporate script as its hash function as opposed to earlier releases with SHA-256. Peercoin became popular after it adopted a hybrid design of proof of stake and proof of work. Several cryptocurrencies and variants of discussed cryptocurrencies have been developed, and over 1000 of them exist today (Narayanan et al., 2016). On August 2014, the United Kingdom reported its treasury had been tasked to study cryptocurrency, their role, and impacts in the UK economy. Also, the report had to include proposals on how the industry can be regulated. 

Features of Cryptocurrency 

One of the most outstanding aspects of cryptocurrency unparalleled to other currencies is their virtuality. Cryptocurrencies are based on computer software, and unlike money, gold, or other forms of trade, they cannot be touched or seen (Chuen, Guo, & Wang, 2017). Cryptocurrencies exist in the form of values determined by sophisticated computer algorithms and mathematical calculations. Human beings cannot quantify the currency on their own; most of the traders utilizes the already mined currency to facilitate their business transactions. This feature has made it difficult for people to not only believe in the existence of this currency but also on finding original cryptocurrency to buy without having proof of sight and touch. 

How it is Measured 

Units of cryptocurrency are developed via a mining process (Hileman & Rauchs, 2017). The process entails high computing power to solve complex mathematical problems and, in the process, generates coins. Cryptographic wallets have been designed to facilitate storage and spending of currencies obtained either through mining or from brokers. 

Decentralized Technology 

The technology in which cryptocurrency is based is a decentralized system (Hileman & Rauchs, 2017). The system allows traders to process payments and keep money without the requirement of depositing money via banks or using their names. Blockchain, a distributed public ledger, keep records of every transaction carried out and indicate balances held by account holders (Hileman & Rauchs, 2017). When cryptocurrency is developed and produced before issuance to traders or is issued by one issuer, the system is considered centralized (Narayanan et al., 2016). Decentralization paves the way for the collective production of the entire Cryptocurrency system. Production takes place at a rate determined at the time of system creation and is made publicly known. This, however, not the case for centralized economic and banking systems, for instance, Federal Reserve System, government control of currency supply through printed units of fiat money, corporate bonds, or government instructions for additional digital banking ledgers (Narayanan et al., 2016). Since the creation of a technical system by a group of individuals referred to as Satoshi Nakamoto, decentralized cryptocurrency work on this system (Narayanan et al., 2016). The system does not allow governments or companies to produce new units. Also, the system does not provide backing for firms, corporate entities, and banks holding asset value measured in cryptocurrency. 

Transaction Fees 

The fees attached to every transaction is dependent upon a supply of network capacity at the period against the demand by currency holders for quick sales (Alqaryouti, Siyam, Alkashri & Shaalan, 2019). In most circumstances, the currency holder chooses a specific fee for a transaction process, whereas network entities determine transactions based on the highest price offered to the lowest. Cryptocurrency transactions can lessen the burden of a complex process for currency holders by offering priority alternatives and, thus, an operation of a particular fee to be processed at the time requested. For different cryptocurrencies, transaction fees vary based on bandwidth requirements, the complexity of the computational process, and storage requirements. Few cryptocurrencies lack transaction costs but depend on proof-of-work from client-side for anti-spam mechanism and prioritization of transactions. 

Types of Cryptocurrency 

Bitcoin 

Thousands of cryptocurrencies currently exist, providing different functions and possessing varying specifications. One of the most popular and valuable cryptocurrencies is bitcoin. It was the first blockchain-based on cryptocurrency. Most of what exists today are clones of bitcoin with few built from scratch (Hileman & Rauchs, 2017). Bitcoin was initially established in 2009 by an anonymous individual or group of individuals referred to as Satoshi Nakamoto. Bitcoin rapidly gained popularity and flourished to more than 68% in the total value of cryptocurrency available within ten years. By November 2019, more than 18 million bitcoins were circulating in the market with an estimated value totalling approximately $ 146 billion (Fan, Ventre, Basios, Kong, Kanthan, Li & Wu, 2020). Bitcoin facilitates transactions of any values virtually without fees attached. One advantage of using Bitcoin is due to lack of government interference and elimination of bank charges. People anonymously process transactions free of charge. However, bitcoin has been compared to a private tool that has paved the way for illegal trade, for instance, drugs (Fan et al., 2020). 

Etherium 

Etherium was developed in 2015 and is the second most famous and valuable cryptocurrency after Bitcoin. It uses ether as the currency token. By May 2018, Etherium was valued at approximately $56 billion (Fan et al., 2020). The journey has not been friendly for ether after it was hacked in 2016. It split into two currencies, and at one point, its value rose to a peak of $ 1300 before crashing and diminishing in value to less than ten cents (Hileman & Rauchs, 2017). Several cryptocurrencies have utilized the Ethereum blockchain code as a launchpad. 

Ripple 

It was first founded in 2016 as a different distributed ledger system (Hileman & Rauchs, 2017). Unlike Bitcoin and Etherium, Ripple allows tracking of a variety of transactions, not just cryptocurrency. With a market value of approximately $24 billion, Ripple founders have worked with financial institutions and banks including Santander. 

Litecoin 

Litecoin is similar to Bitcoin in various aspects apart from its rapid incorporation of innovations, for instance, faster processes and payments. These innovations have proliferated the number of transactions, and as of 2018, bitcoin was estimated to a market value of $ 6 billion (Fan et al., 2020). 

Advantages of Cryptocurrency 

Faster Transactions 

Cryptocurrency has been celebrated for hastening the exchange of funds directly between different parties (Liu & Tsyvinski, 2018). This has been realized through the elimination of trusted third parties such as banks and credit companies who are usually tasked with overseeing the process. What secures the transactions processed are the public and private keys, including various forms of incentives, such as proof of stake and proof of work. 

Minimal or No Transaction Fees 

Holders of wallet or account addresses are served with public keys while the owners use private keys to sign transactions. Minimal processing fee for fund transfers is encountered at the same time bypassing huge fees imposed by banks and other financial institutions (Liu & Tsyvinski, 2018). 

There are other benefits of using cryptocurrencies such as support of privacy, secure communication, preservation of assets from the effects of inflation and lack of government interference (Liu & Tsyvinski, 2018). One or combination of the above benefits has made cryptocurrency rise to fame in a limited duration. 

Disadvantages 

Illegal Transactions 

The anonymity aspect of cryptocurrency transactions has become a private tool for facilitating illegal activities, for instance, drug trafficking, tax evasion, and money laundering activities (Liu & Tsyvinski, 2018). People with unknown identities can transact billions within a few seconds without third party oversight. Although some cryptocurrencies are more private than others, most of them make the transactions almost impossible to track. Bitcoin, due to its partial transparency, is relatively the last choice forecasting illegal businesses virtually. Forensic analysis of bitcoin blockchain makes it easier to determine the legality of the transaction, and as a consequence, several authorities have arrested and prosecuted Criminals. Dash, Zcash, and Monero are designed to be more private, making transactions difficult to track. 

Sudden Fluctuations of Market Prices 

Demand and supply form the basis for cryptocurrency market prices. Consequently, the exchange rates for cryptocurrency depicts wide fluctuations within a small duration. This has been intensified by the design of cryptocurrency to generate a high degree of scarcity (Liu & Tsyvinski, 2018). Bitcoin, for instance, experienced a rapid surge escalating the market price to about $ 19000 each in Dec 2017 (Nolasco Braaten & Vaughn, 2019). The price didn't last, and in succeeding months, it collapsed to about $7000. According to some economists, including the CEO of China Central Bank, cryptocurrencies are a short-lived fad or speculative bubble similar to Ponzi schemes. 

Difficulty of Mining 

There are rising concerns that no material goods are attached to cryptocurrency. Nolasco Braaten & Vaughn (2019), however, argue that the cost of mining bitcoin, which generally consumes a vast amount of energy and requires high computation power, is directly related to the market price. The system is designed to gain block rewards through mining and, in the end, gain significant profit. This has not always been the case due to the sensitivity of market prices. 

Safety 

In a system designed to be entirely secure, some features of cryptocurrency such as wallets and exchanges are prone to hacking. A 10-year bitcoin history indicates numerous online exchanges hacked and stolen leading to loss of coins worth millions of dollars (Nolasco Braaten & Vaughn, 2019). 

Regulation of Cryptocurrency 

Cryptocurrency has been the subject of online fraudsters and loss of millions of dollars to hackers, and platform for other illegal activities. Rising concerns over its regulations have sprouted overtime despite earlier proponents' attempts to avoid government jurisdictions. Many opponents have described cryptocurrencies as possibly the greatest scam in history during the 21 at century owing to its anonymity and raising questions whether they exist. Even with such doubtful concerns, thousands of transactions are carried out every day using cryptocurrency, calling for economic interests and the need for control just like other forms of currencies (Chohan, 2018). Although cryptocurrency has gained partial control by government institutions, every country has different guidelines on cryptocurrency usage. 

In a report on the regulation of cryptocurrency, the rules laid down by 130 countries depict similar trends to those earlier reported in a 2014 report by Law Library Congress on 40 members of the European Union. In the past four years, cryptocurrency has escalated, Prompting more aggressive national, regional, and international authorities on regulation policies (Chohan, 2018). Library of Congress reported that eight countries had banned cryptocurrency trading: Algeria, Iraq, Pakistan, Nepal, Morroco, the United Arab Emirates, Egypt, and Bolivia. Fifteen states have implicitly banned cryptocurrency, including China, Iran, and Saudi Arabia. Regulation authorities in the United States and Canada, with the help of North American securities administration Associations, are investigating "bitcoin scam" and ICOS in various jurisdictions (Chohan, 2018). China Central Bank banned handling and ownership of bitcoins by financial institutions. 

Canada permits the use of cryptocurrency, including bitcoin. Based on statements by a Canadian financial Consumer Agency, one can use digital currencies to buy goods and services over the internet or in stores that accept cryptocurrency (Chohan, 2018). One can also trade on the digital currency on open exchanges or cryptocurrency exchanges. Cryptocurrency is, however, not considered as a Canadian legal tender, and the only Canadian dollar is an official currency. Canada's tax laws and policies, similar to legal tender, apply to digital currency and transactions processed on cryptocurrencies (Østbye, 2018). They are therefore subjected to the Income Tax Act. Cryptocurrency has been treated as a commodity and not a currency issued by the government by the Canada Revenue Agency (CRA). 

In June 2014, a bill C-31 was asserted by Canadian Governor General. The Act pave the way for the implementation of particular provisions, and other measures were inclusive of amendments to Canada proceeds of crime, i.e., money laundering and terrorist financial Act that was tabled on parliament on the same day. The Act became the world's first national law on digital currency and financial transactions. In Russia, cryptocurrency is legal. However, it is illegal to buy goods with currency other Russian Rubble (Østbye, 2018). Regulations and bans that have been imposed on bitcoins extend to other cryptocurrency systems. 

Ban on Advertisements 

Facebook, Bing, Google, Snapchat, Twitter, and LinkedIn temporarily banned advertisements on cryptocurrencies (Østbye, 2018). Chinese platforms, including Tencent, Baidu, and Weibo, made a similar move of prohibiting bitcoin adverts (Østbye, 2018). 

US Tax Status 

The Internal Revenue Service (IRS), of the United States, ruled in March 2014 that bitcoin will be subject to taxes just like any other property (Schaupp & Festa, 2018, May). This implied bitcoin will be entitled to capital gains tax. In July 2019, the IRS reported sending letters to cryptocurrency account owners, warning them on returns amendments, and payment of fees (Nolasco Braaten & Vaughn, 2019). 

Two Silk Road Task Force members who were tasked with Silk Road investigation seized bitcoins for personal use in the process. One agent pleaded guilty of money laundering, including obstruction of justice and color of official right (Nolasco Braaten & Vaughn, 2019). Another one was found guilty of diverting bitcoin worth $800,000 to his account and was also linked to another cryptocurrency theft. The former was sentenced to 6.5 years, and then later for 8yrs both in Federal prison. The founder of cryptocurrency start-ups, Zen miner, and GAW miner in 2014, Josh Garza, acknowledged having plotted a pyramid scheme in 2015 to wire money. Through the court, Garza was ordered to fulfil payments worth $9.1 million and $700000 in interest (Bortnikov, 2019, April). 

Based on current regulatory trends, it is impossible to think cryptocurrency will be incorporated as a legal currency at any time in the future. It could, however, be treated as a valuable asset that can be used for trade exchange, including the exchange of corporate bonds, securities, etc. Many countries will wish to exercise control and impose tax rates on owners with interest in exposing criminal activities (Chohan, 2018). 

Conclusion 

Cryptocurrency has been subjected to criticism all over the world. The vision of early proponents to design an independent and flexible system free from government interventions and central control has been curtailed by determined criminals. They have exploited the important features of cryptocurrency to suit their illegal activities. Cryptocurrencies, through various controversies, have displayed an enormous loss that can be accrued through hacking, money laundering, and tax evasion. It has also been forecasted to cause potential economic crises sometimes in the future. Regulations of cryptocurrency are deemed necessary for nations to safeguard their economies from unforeseen functions of cryptocurrencies. Despite some countries enacting the absolute ban, new technologies allow for international transactions and bypassing restrictions. Nonetheless, technology has proved workable and versatile for several years. Many have praised it for a faster, cheap, and confidential way of carrying out transactions. Optimists have seen the potential of preserving assets from the effects of inflation without third party involvements. For now, cryptocurrency remains a pseudonymous property with significant benefits and potential losses. 

References 

Alqaryouti, O., Siyam, N., Alkashri, Z., & Shaalan, K. (2019, December). Cryptocurrency Usage Impact on Perceived Benefits and Users' Behaviour. In European, Mediterranean, and Middle Eastern Conference on Information Systems (pp. 123-136). Springer, Cham. 

Bortnikov, S. P. (2019, April). The state sovereignty in questions of issue of cryptocurrency. In International Scientific Conference "Digital Transformation of the Economy: Challenges, Trends, New Opportunities" (pp. 564-573). Springer, Cham. 

Brunton, F. (2019). Digital cash: the unknown history of the anarchists, utopians, and technologists who created cryptocurrency. Princeton University Press. 

Chohan, U. W. (2018). The problems of cryptocurrency thefts and exchange shutdowns. Available at SSRN 3131702. 

Chuen, D. L. K., Guo, L., & Wang, Y. (2017). Cryptocurrency: A new investment opportunity? The Journal of Alternative Investments, 20(3), 16-40. 

Fang, F., Ventre, C., Basios, M., Kong, H., Kanthan, L., Li, L., ... & Wu, F. (2020). Cryptocurrency Trading: A Comprehensive Survey. arXiv preprint arXiv:2003.11352. 

Hileman, G., & Rauchs, M. (2017). Global cryptocurrency benchmarking study. Cambridge Centre for Alternative Finance, 33, 33-113. 

Liu, Y., & Tsyvinski, A. (2018). Risks and returns of cryptocurrency (No. w24877). National Bureau of Economic Research. 

Möser, M., & Narayanan, A. (2019). Effective Cryptocurrency Regulation Through Blacklisting. Preprint. 

Narayanan, A., Bonneau, J., Felten, E., Miller, A., & Goldfeder, S. (2016). Bitcoin and cryptocurrency technologies: a comprehensive introduction. Princeton University Press. 

Nolasco Braaten, C., & Vaughn, M. S. (2019). Convenience Theory of Cryptocurrency Crime: A Content Analysis of US Federal Court Decisions. Deviant Behavior, 1-21. 

Østbye, P. (2018). Will Regulation Change Cryptocurrency Protocols? Available at SSRN 3159479. 

Schaupp, L. C., & Festa, M. (2018, May). Cryptocurrency adoption and the road to regulation. In Proceedings of the 19th Annual International Conference on Digital Government Research: Governance in the Data Age (pp. 1-9).