CRYPTOCURRENCY AND MODERN IMPLICATIONS

INTRODUCTION

The essence of a welfarisitic state is the one in which there is a fine balance between the
regulation and de-regulation. The notion of the prevention of exploitation of the majority
section of the society by the elite minority of the society can be realised only when the state
acts as a supreme authority and establishes itself as the monitoring body in the environment
where everything is market regulated. Most of the modern economists emphasise on the role
of the central banking system on the society ranging from maintaining capital flow within the
economy, stabilising general price index etc. Conventional system of banking and the money
is being threatened and challenged by the rise and introduction of the crypto currency
payment mediums.

Bitcoin, is the most popular segment in the crypto currencies all over the world and it came
into prevalence when a company ‘Overstock.com’ started accepting Bitcoin as a form of
payment. This invocative payment medium aims to establish a deregulated market where the
value of money was decided upon by the issuers of the currency, the market as a whole and
not by a centralised authority that makes every issuer and acceptor accountable to the
authority. Accountability brings about violation of privacy, unnecessary exertion of control
which as many claims are flaws in the present payment mediums. Thus the bitcoin is reviving
the era without the central banking system and is claimed as the most successful payment
system created by humans. On scrutinising the whole system, it was found that the bitcoins
gained popularity in the illegal segment due to the absence of third party monitoring the
transactions and also the revelation of ponzi schemes and fraudulent activities more obscure.

Therefore in the current circumstances, it is important for the world to decide that what they
want the most- privacy or protection. For accepting bitcoins as the medium of payment would
mean that the privacy of each person is ensured thereby paving a way for other illicit causes
or otherwise rejecting bitcoins which would mean the follow up with the traditional system of
market. Also it would be necessary to either create a mid way for reaping the benefits of both
the traditional and the modern mediums of payment.
CRYPTOCURRENCY

Crypto currency is the name given to a system that uses cryptography to allow the secure
transfer and exchange of digital tokens in a distributed and decentralised manner. These
tokens can be traded at market rates for fiat currencies. Basic requirement of the introduction
of such currency was the existence of double spending and Byzantine general problems.1

The rationale behind a third party overseeing all the monetary transactions that are via
internet was to secure that no person can spend the same money more than once. This
resulted in the privacy infringement of all the personnel dealing with the transactions.
Confidentiality of the transactions that needed to be preserved between the two parties was
lost. Therefore, it can be implied that it was a necessary evil and had to be remain in
existence. What Bitcoin does is, it loses the third party necessity and thereby secures
confidentiality. Instead of third party overseeing and monitoring transactions, it creates a
public ledger and distributes it to several thousands of workers who along with data mining
keep a check that the transactions are not repeated.

Secondly, the distribution of the ledger to thousands of people means that the falsified
information within the ledger can also be distributed which is actually troublesome for the
miners may not know for sure whether the transactions that they are dealing with were
actually performed or not. This is the Byzantine Problem. Bitcoin provides solution to the
block ledger by which the miners can cross check the relevancy of the transaction. Every
miner that is going through legitimate transactions has to solve a mathematical problem. If
the miner deems the transaction as legal it would be uploaded on the block ledger and along
with it the solution to that problem. Now the other miner who would be getting the
transaction would also be procuring the problem which he solves. Then he can cross check
the solution to that problem and identify whether the transaction is valid or not.

Thus the problems that arise with the present mode of payment provided by several platforms
that are guided by a centralised banking authority are solved by the introduction of crypto
currency.

1
‘Cryptocurrency’, Eli Dorado and Jerry Brito, The new Palgrave Dictionary of Economics, Online Edition,
2014.
PROBLEMS

The problems associated with the use of bitcoin vary on several levels i.e. economic and
legal.

Starting with the economic problems, it is important to understand how the fiat money
derives its value and why certain nation’s currency value is lower than that that of other
nations. "fiat currency" initially derives its value by governmental fiat, a directive that the
currency is legal tender within its issuing jurisdiction. 2 The fiat currency is issued by the
sovereign body and although the body has full control over how much currency it wants to
print, there are several restrictions to the power being vested in the sovereign. Each and every
nation in the modern society depends on the other nations for imports and exports. The
payment of the imports and exports cannot be done in that country’s currency since it would
be practically useless in other nations. Therefore the main monetary value that is paid in
international trade is U.S. Dollars. The currency that is printed within the economy is after
the backing of foreign exchange reserve and the gold reserves. This provision is also required
on events of foreign loans by the Bretton wood twins. IMF and World Bank do not recognise
the crypto currency at this stage and since the Bitcoin do not have the sovereign backing
which have the monopoly over the currency issuance. As Bitcoin is unsupported by any
government or central authority, it is not subject to the political pressures or economic
policies that govern central banking authorities and private money issuers.3 In an economy as
India which aims at being a welfaristic state, there is a dire need of state regulation (minimal)
for curbing the exploit of the market by the players and also to keep a check on artificial
market movements.

The other problem that arises is the legality issue. Bitcoin was also the currency of choice on
Silk Road, an online black marketplace for illegal drugs, weapons, and child pornography. 4
Lack of the third party watchdog in the crypto-currency opens the currency to be utilised for
illicit and illegal activities. It has been investigated into by the Federal agency of U.S.A. for
being used in the entities like Wikileaks, Silk Road etc. also it can be used for tax evasion and
it can be utilised as the cross border transactions, the shell companies can be funded and other
2
Julie Andersen Hill, “Virtual Currencies and Federal Law:, 18 J. CONSUMER & COM. L. 65, 67 (2014)
3
Jon Matonis, “ECB: 'Roots of Bitcoin Can Be Found in the Austrian School of Economics,"
http://www.forbes.com/sites/jonmatonis/2012/11/03/eeb-roots-of-bitcoin-canbe-found-in-the-austrian-
school-of-economics [hereinafter Matonis, ECB].
4
Barrett Sheridan, “Bitcoin: Currency of the Geeks”, BUSINESSWEEK MAG.
http://www.businessweek.com/magazine/content/ 1126/b4234041554873.htm.
illegal processes can be funded by the crypto currency. Since the Bitcoin does not require the
identities of its users, the tracing of the people who undertake advantage of the crypto
currency can become a humongous task. Further since the crypto currency is not backed by
the sovereign body, it does not provide any legal recourse. The disputes arising of the
contracts for which the consideration is bitcoins can’t be resolved in courts of justice and
only mutual trust applies between the parties. Also the confidentiality that is being aimed by
the further use of bitcoins since there is no attachment of the bank accounts of monitoring,
fraudulent activities can easily is carried out.

The taxation purposes are also demolished in the matter of bitcoins since many economies in
the world regard the bitcoin as a property and not currency. Further as was seen in European
court of justice, the V.A.T cannot be ascertained in its transactions hence there still remains a
question of the future prospects of the bitcoin. In the capital market the investors who seek to
earn profit on day to day basis requires that the virtual currency be treated as a security whose
value can be fluctuated artificially since at the least it’s a technology product which is able to
be harnessed for private enjoyment.
CONFIDENTIALITY AND THE ROAD FORWARD

The confidentiality of the virtual currency is preserved by the crypto currency since the
currency becomes crypted but the confidentiality comes at the risk of defraud and ponzi
schemes which are actively being practiced via the bitcoins. Thus the state regulation is
required in the crypto currency and the future prospects of an early legislation for the bitcoin
are very high. Therefore the question that arises is whether the bitcoin should be accepted as
a virtual currency that has equivalent standing as the nation’s currency. According to IMF
Articles of Agreement holds that member nations are responsible not only for their national
currency but also for any separate currency under that nation's control. 5 Thus the nation
would account for the bitcoins in use of the nation and thereby even the international
organisations would also acknowledge the relevancy of the digital currency.

The focus should be on procuring the benefits of both the regulation and a deregulation of the
currency. It is debatable whether the confidentiality is more important or the legal interests of
the economy. In the present scenario, a law that is an output of a public private partnership
would be the most beneficial. Since the public law is rigid and cannot be transformed as fast
as the technology changes, a public and private partnership in creating a law is necessary.
The private companies such as Master Card and Visa can quickly change their regulations
instead of the public law. Moreover the superiority of the private companies over the
regulations can prevent the oppression of users of the system. The leading architect of UCC
regulation claimed that “trade association rules are presumptively efficient when all affected
parties participate in creating the rules.”6 Thus the private companies which are providing the
services of crypto currency should also be part of the legislations making body. With
operational systems issues in the hands of contract law and private consortia operating in a
public-private partnership, the remaining principal matter of public concern is protection of
the end-users of payment systems-individuals and small businesses that do not have the
leverage or the expertise to protect themselves from oppression, fraud, and mistake in the
various payment networks.7 Thus the best interests of the society would be served bythe
public private partnerships in creating the law that would be regulating the crypto currency.

5
ARTICLES OF AGREEMENT, art. IV § 5.
6
Alan Schwartz, “The Still Questionable Role of Private Legislatures”, 62 LA. L. REV. 1147, 1151 (2oo2)
7
Mark Edwin Burge,“Apple Pay, Bitcoin, and Consumers: The ABCs of Future Public Payments Law”, Texas
A&M University School of Law.
Also there is a need for identifying the currency as a property, security or a currency and
finally assessing the taxation requirements of the currency both under domestic regime and
the international regime.

CONCLUSION

Crypto currency is the next step in the payment mechanisms which provides the decentralized
banking and monetary systems and protects the confidential information by keeping the
parties as anonymous beings. Thus it is a step towards the lasiez faire and a basis for a free
market economy. The interference of state is minimised under this but it comes with a set of
faults of its own. Although it provides a range of benefits to its users, it vests a threat towards
the legal boundaries in the society and also is without the safeguards provided to general
public.

Therefore it is imperative for the people to identify the lacunas and plus points of the crypto
currency and rationally balance it with the everyday implications. It has to be recognised
since the momentum of its popularity is increasing gradually, whether the privacy of the users
is more important or the welfare of the people. The recent dangers of bitcoin has been
recognised by various societies as it is used in lieu of hard cash which was previously utilised
for illegal activities such as tax evasion and even the transactions involving the dealings of
weapons of mass destructions. Therefore, accordingly certain level of private public
regulation should be kept intact for keeping in check the usage of virtual or crypto currency.