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Car leasing and sales can use Blockchian to streamline car leasing. Cloud computing can use Blockchain to execute smart contracts and resist hacking. Government and public records can use Blockchain to reduce paperwork and fraud while increasing accountability. Companies like Kodak intend to launch their own cryptocurrency to make sure photographers are paid properly. The rise of cryptocurrency has brought with it an entire industry that is dedicated to supervising cryptocurrency exchanges that take place throughout the world.
While some early adopters have become rich quickly, others have developed companies that rely on trading as their source of income. The number of jobs in the Blockchain industry increased from just over 1, in to over 4, in Software engineers have been the most directly sought after professionals for the cryptocurrency industry.
And while this job market has fluctuated in the past few years, interest in these professions have not faltered. As cryptocurrency continues to be legalized outside of the western world, we can expect to see more global investments and job creation within the field.
Since the s, confidence in U. And in countries where the domestic currency is constantly fluctuating, causing living conditions to plummet, cryptocurrency can be used to circumvent these situations. Cryptocurrency is a wholly utilitarian practice in which peers oversee each transaction without the oversight of the government. They are financially disadvantaged and often must resort to dangerous lending practices. Interestingly, a large number of this population possess a cell phone, and because cryptocurrencies can be transacted through mobile applications, cryptocurrency can easily become a viable option for them.
Aside from Bitcoin in its current state, transaction costs for most cryptocurrency users are minimal to none. Because cryptocurrencies and Blockchain are decentralized and do not require investment into physical property, there are no extra costs that users are expected to account for. This means, unlike a branch of a bank, there is no need to pay utility bills, rental property, or employee wages. Little to no transaction costs also encourages trust in the system of cryptocurrency and in turn sees more use in financial tools, transactions, and a closer global economy.
Blockchain technology and cryptocurrency transactions are automated, digitized, and tracked on a ledger that can never be manipulated by people, companies, or governments. Not only does this bring power and freedom to the people, but it also diminishes the risk of fraud and corruption. This is particularly beneficial for underdeveloped countries and government-oppressed peoples.
The utilitarian structure of cryptocurrencies allows these people to invest and transact with a global economy, which can boost their own economy and quality of life. The issue of freshness also limits potatoes' ability to be a store of value; a potato eventually sprouts eyes and spoils, and so must be spent quickly or it will lose value. In contrast, an ounce of gold and a dollar bill can be carried easily in a pocket and thus are tradeable.
Each unit is identical and can be divided into fractions of an ounce or cents, respectively, making both gold and dollars effective units of account. Gold is an inert metal and a dollar bill, when well cared for, will not degrade substantively for years, meaning can both function as a store of value.
Likewise, with the use of digital technology, electronic messages to change entries in a ledger can be sent easily by swiping a card or pushing a button and can be denominated in identical and divisible units. Those units could have a stable value, as their number stays unchanging in an account on a ledger. The question becomes how does a lump of metal, a thing called a dollar, and the numbers on a ledger come to be deemed valuable by society, as has been accomplished in traditional monetary systems.
Money has been in existence throughout history. However, how that money came to have value, how it was exchanged, and what roles government and intermediaries such as banks have played have changed over time. This section examines three different monetary systems with varying degrees of government and bank involvement. Early forms of money were often things that had intrinsic value, such as precious metals e. Part of their value was derived from the fact that they could be worked into aesthetically pleasing objects.
More importantly, other physical characteristics of these metals made them well suited to perform the three functions of money and so created the economic efficiency societies needed: 11 these metals are elemental and thus an amount of the pure material is identical to a different sample of the same amount; they are malleable and thus easy divisible; and they are chemically inert and thus do not degrade.
In addition, they are scarce and difficult to extract from the earth, which is vital to them having and maintaining value. Sand also could perform the functions of money and can be worked into aesthetically pleasing glass.
However, if sand were money, then people would quickly gather vast quantities of it and soon even low-cost goods would be priced at huge amounts of sand. Even when forms of money had intrinsic value, governments played a role in assigning value to money. For example, government mints would make coins of precious metals with a government symbol, which validated that these particular samples were of some verified amount and purity.
In contrast to money with intrinsic value, fiat m oney has no intrinsic value but instead derives its value by government decree. If a government is sufficiently powerful and credible, it can declare that some thing—a dollar, a euro, a yen, for example—shall be money. In practice, these decrees can take a number of forms, but generally they involve a mandate that the money be used for some economic activity, such as paying taxes or settling debts. Thus, if members of society want to participate in the relevant economic activities, it behooves them to accept the money as payment in their dealings.
In addition to such decrees, the government generally controls the supply of the money to ensure it is sufficiently scarce to retain value yet in ample-enough supply to facilitate economic activity. Modern monies are generally fiat money, including the U. The dollar is legal tender in the United States, meaning parties are obligated to accept the dollar to settle debts, and U.
In the United States, the Board of Governors of the Federal Reserve System maintains the value of the dollar by setting monetary policy. In addition, the Federal Reserve operates key electronic payment systems, including those involving interbank transfers. Banks have played a role in another evolution of money: providing an alternative to the physical exchange of tangible currency between two parties.
Verifying the valid exchange of physical currency is relatively easy. The payer shows the payee he or she is in fact in possession of the money, and the transfer is valid the moment the money passes into the payee's possession. This system is not without problems, though.
Physically possessing money subjects it to theft, misplacement, or destruction through accident. From early in history, banks have offered services to accomplish valid transfers of value between parties who are not in physical proximity and do not necessarily trust each other. Customers give banks their money for, among other reasons, secure safekeeping and the ability to send payment to a payee located somewhere else originally using paper checks or bills of exchange.
Historically and today, maintaining accurate ledgers of accounts is a vital tool for providing these services. It allows people to hold money as numerical data stored in a ledger instead of as a physical thing that can be lost or stolen. In the simplest form, a payment system works by a bank recording how much money an individual has access to and, upon instruction, making appropriate additions and reductions to that amount.
The mechanics of the modern payment system, in which instructions are sent and records are stored electronically, are covered in more detail in the following section, " The Electronic Exchange of Money. Otherwise, an individual's money could be lost or stolen if a bank records the payer's account as having an inaccurately low amount or transfers value without permission.
A number of mechanisms can create trust in banks. For example, a bank has a market incentive to be accurate, because a bank that does not have a good reputation for protecting customers' money and processing transactions accurately will lose customers. In addition, governments typically subject banks to laws and regulations designed in part to ensure that banks are run well and that people's money is safe in them.
Today, money is widely exchanged electronically, but electronic payments systems can be subject to certain difficulties related to lack of scarcity a digital file can be copied many times over, retaining the exact information as its predecessor and lack of trust between parties. Electronic transfers of money are subject to what observers refer to as the double spending problem. In an electronic transfer of money, a payer may wish to send a digital file directly to a payee in the hopes that the file will act as a transfer of value.
However, if the payee cannot confirm that the payer has not sent the same file to multiple other payees, the transfer is problematic. Because money in such a system could be double or any number of times spent, the money would not retain its value. As described in the preceding section, this problem traditionally has been resolved by involving at least one centralized, trusted intermediary—such as a private bank, government central bank, or other financial institution—in electronic transfers of money.
The trusted intermediaries maintain private ledgers of accounts recording how much money each participant holds. To make a payment, an electronic message or messages is sent to an intermediary or to and between various intermediaries, instructing each to make the necessary changes to its ledgers. The intermediary or intermediaries validate the transaction, ensure the payer has sufficient funds for the payment, deduct the appropriate amount from the payer's account, and add that amount to the payee's account.
Those banks then make the appropriate changes to their account ledgers possibly using the Federal Reserve's payment system reflecting that value has been transferred from the purchaser's account to the seller's account. Significant costs and physical infrastructure underlie systems for electronic money transfers to ensure the systems' integrity, performance, and availability.
For example, payment system providers operate and maintain vast electronic networks to connect retail locations with banks, and the Federal Reserve operates and maintains networks to connect banks to itself and each other. In general, these intermediaries are highly regulated to ensure safety, profitability, consumer protection, and financial stability. Intermediaries recoup the costs associated with these systems and earn profits by charging fees directly when the system is used such as the fees a merchant pays to have a card reading machine and on each transaction or by charging fees for related services such as checking account fees.
In addition, intermediaries generally are required to provide certain protections to consumers involved in electronic transactions. Notably, certain individuals may lack access to electronic payment systems. To use an electronic payment system, a consumer or merchant generally must have access to a bank account or some retail payment service, which some may find cost prohibitive or geographically inconvenient, resulting in underbanked or unbanked populations i. The use of electronic payment services generates a huge amount of data about an individual's financial transactions.
This information could be accessed by the bank, law enforcement provided proper procedures are followed , 32 or nefarious actors provided they are capable of circumventing the intermediaries' security measures. Cryptocurrencies—such as Bitcoin, Ether, and Litecoin—provide an alternative to this traditional electronic payment system. As noted above, cryptocurrency acts as money in an electronic payment system in which a network of computers, rather than a single third-party intermediary, validates transactions.
In general, these electronic payment systems use public ledgers that allow individuals to establish an account with a pseudonymous name known to the entire network—or an address corresponding to a public key—and a passcode or private key that is paired to the public key and known only to the account holder. The buying party will unlock the cryptocurrency they will use as payment with their private key, allowing the selling party to lock it with their private key.
In addition, certain companies offer applications or interfaces that users can download onto a device to make transacting in cryptocurrencies more user-friendly. Cryptocurrency platforms often use blockchain technology to validate changes to the ledgers. Specifically, before any transaction is entered into the ledger and the ledger is irreversibly changed, some member of the network must validate the transaction.
In certain cryptocurrency platforms, validation requires the member to solve an extremely difficult computational decryption. Once the transaction is validated, it is entered into the ledger. These protocols secure each transaction by using digital signatures to validate the identity of the two parties involved and to validate that the entire ledger is secure so that any changes in the ledger are visible to all parties.
In this system, parties that otherwise do not know each other can exchange something of value i. Cryptocurrency platforms often incentivize users to perform the functions necessary for validation by awarding them newly created units of the currency for successful computations often the first person to solve the problem is given the new units , although in some cases the payer or payee also is charged a fee that goes to the validating member. In general, the rate at which new units are created—and therefore the total amount of currency in the system—is limited by the platform protocols designed by the creators of the cryptocurrency.
Because users of the cryptocurrency platform must perform work to extract the scarce unit of value from the platform, much as people do with precious metals, it is said that these users mine the cryptocurrencies. Alternatively, people can acquire cryptocurrency on certain exchanges that allow individuals to purchase cryptocurrency using official government-backed currencies or other cryptocurrencies.
Cryptographers and computer scientists generally agree that cryptocurrency ledgers that use blockchain technology are mathematically secure and that it would be exceedingly difficult—approaching impossible—to manipulate them. However, hackers have exploited vulnerabilities in certain exchanges and individuals' devices to steal cryptocurrency from the exchange or individual.
Analyzing data about certain characteristics and the use of cryptocurrency would be helpful in measuring how well cryptocurrency functions as an alternative source of payment and thus its future prospects for functioning as money.
However, conducting such an analysis currently presents challenges. The decentralized nature of cryptocurrencies makes identifying authoritative sources of industry data difficult. In addition, the recent proliferation of cryptocurrency adds additional challenges to performing industry-wide analysis. Because of these challenges, an exhaustive quantitative analysis of the entire cryptocurrency industry is beyond the scope of this report.
Instead, the report uses Bitcoin—the first and most well-known cryptocurrency, the total value of which accounts for almost two-thirds of the industry as a whole 42 —as an illustrative example. Examining recent trends in Bitcoin prices, value in circulation, and number of transactions may shed some light on how well cryptocurrencies in general have been performing as an alternative payment system.
The rapid appreciation in cryptocurrencies' value in likely contributed to the recent increase in public interest in these currencies. Since that time, the price of a Bitcoin remained volatile. Other major cryptocurrencies, such as Ether and Litecoin, have had similar price movements. Figure 1. Cryptocurrency Values. Although these statistics drive interest in and are central to the analysis of cryptocurrencies as investments , they reveal little about the prevalence of cryptocurrencies' use as money.
Recent volatility in the price of cryptocurrencies suggests they function poorly as a unit of account and a store of value two of the three functions of money discussed in " The Functions of Money ," above , an issue covered in the " Potential Challenges to Widespread Adoption " section of this report. Nevertheless, the price or the exchange rate of a currency in dollars at any point in time rather than over time does not have a substantive influence on how well the currency serves the functions of money.
The number of Bitcoin transactions, by contrast, can serve as an indicator—though a flawed one 46 —of the prevalence of the use of Bitcoin as money. This number indicates how many times a day Bitcoins are transferred between accounts. One industry data source indicates that the number of Bitcoin transactions averaged about , per day globally in For example, the Automated Clearing House—an electronic payments network operated by the Federal Reserve Bank and the private company Electronic Payments Network—processed more than 69 million transactions per day on average in the fourth quarter of The previous section illustrates that the use of cryptocurrencies as money in a payment system is still quite limited compared with traditional systems.
However, the invention and growth in awareness of cryptocurrencies occurred only recently. Some observers assert that cryptocurrencies' potential benefits will be realized in the coming years or decades, which will lead to their widespread adoption. Later sections—" Potential Challenges to Widespread Adoption " and " Potential Risks Posed by Cryptocurrencies "—discuss certain potential challenges to widespread adoption of cryptocurrencies and some potential risks cryptocurrencies pose.
As discussed in the " The Electronic Exchange of Money " section, traditional monetary and electronic payment systems involve a number of intermediaries, such as government central banks and private financial institutions. To carry out transactions, these institutions operate and maintain extensive electronic networks and other infrastructure, employ workers, and require time to finalize transactions.
To meet costs and earn profits, these institutions charge various fees to users of their systems. Advocates of cryptocurrencies hope that a decentralized payment system operated through the internet will be less costly than the tradition al payment systems and existing infrastructures. Cryptocurrency proponents assert that cryptocurrency may provide an especially pronounced cost advantage over traditional payment systems for international money transfers and payments.
Sending money internationally generally involves further intermediation than domestic transfers, typically requiring transfers between banks and other money transmitters in different countries and possibly exchanges of one national currency for another.
Proponents assert that cryptocurrencies could avoid these particular costs because cryptocurrency transactions take place over the internet—which is already global—and are not backed by government-fiat currencies. Nevertheless, it is difficult to quantify how much traditional payment systems cost and what portion of those costs is passed on to consumers.
Performing such a quantitative analysis is beyond the scope of this report. As discussed in the " Traditional Money " section, traditional payment systems require that government and financial institutions be credible and have people's trust. Even if general trust in those institutions is sufficient to make them credible in a society, certain individuals may nevertheless mistrust them.
For people who do not find various institutions sufficiently trustworthy, cryptocurrencies could provide a desirable alternative. In countries with advanced economies, such as the United States, mistrust may not be as prevalent although not wholly absent as in other countries. Typically, developed economies are relatively stable and have relatively low inflation; often, they also have carefully regulated financial institutions and strong government institutions.
Not all economies share these features. Thus, cryptocurrencies may experience more widespread adoption in countries with a higher degree of mistrust of existing systems than in countries where there is generally a high degree of trust in existing systems. A person may mistrust traditional private financial institutions for a number of reasons. An individual may be concerned that an institution will go bankrupt or otherwise lose his or her money without adequately apprising him or her of such a risk or while actively misleading him or her about it.
Financial institutions store this information and information about the transactions linked to this identity. Under certain circumstances, they may analyze or share this information, such as with a credit-reporting agency. In some instances hackers have stolen personal information from financial institutions, causing concerns over how well these institutions can protect sensitive data.
Certain individuals also may mistrust a government's willingness or ability to maintain a stable value of a fiat currency. Because fiat currency does not have intrinsic value and, historically, incidents of hyperinflation in certain countries have seen government-backed currencies lose most or nearly all of their value, some individuals may judge the probability of their fiat money losing a significant portion of its value to be undesirably high in some circumstances.
These individuals may place greater trust in a decentralized network using cryptographic protocols that limit the creation of new money than in government institutions. The appropriate policy approach to cryptocurrencies likely depends, in part, on how prevalent these currencies become. For cryptocurrencies to deliver the potential benefits mentioned above, people must use them as money to some substantive degree. After all, as money, cryptocurrencies would do little good if few people and businesses accept them as payment.
For this reason, currencies are subject to network effects , wherein their value and usefulness depends in part on how many people are willing to use them. Recall that how well cryptocurrency serves as money depends on how well it serves as 1 a medium of exchange, 2 a unit of account, and 3 a store of value. Several characteristics of cryptocurrency undermine its ability to serve these three interrelated functions in the United States and elsewhere.
Currently, a relatively small number of businesses or individuals use or accept cryptocurrency for payment. As discussed in the " The Price and Usage of Cryptocurrency " section, there were , transactions involving Bitcoin per day globally out of the billions of financial transactions that take place in , and a portion of those transactions involved people buying Bitcoins for the purposes of holding them as an investment rather than as payment for goods and services.
Unlike the dollar and most other government-backed currencies, cryptocurrencies are not legal tender, meaning creditors are not legally required to accept them to settle debts. As previously mentioned, the recent high volatility in the price of many cryptocurrencies undermines their ability to serve as a unit of account and a store of value. Cryptocurrencies can have significant value fluctuations within short periods of time; as a result, pricing goods and services in units of cryptocurrency would require frequent repricing and likely would cause confusion among buyers and sellers.
In comparison, the annualized inflation of prices in the U. Whether cryptocurrency systems are scalable —meaning their capacity can be increased in a cost-effective way without loss of functionality—is uncertain. As discussed in the " The Price and Usage of Cryptocurrency " section, the platform of the largest by a wide margin cryptocurrency, Bitcoin, processes a small fraction of the overall financial transactions parties engage in per day. The overwhelming majority of such transactions are processed through established payment systems.
As well, Bitcoin's processing speed is still comparatively slow relative to the nearly instant transaction speed many electronic payment methods, such as credit and debit cards, achieve. For example, blocks of transactions are published to the Bitcoin ledger every 10 minutes, but because a limited number of transactions can be added in a block, it may take over an hour before an individual transaction is posted.
Part of the reason for the relatively slow processing speed of certain cryptocurrency transactions is the large computational resources involved with mining—or validating—transactions. When prices for cryptocurrencies were increasing rapidly, many miners were incentivized to participate in validating transactions, seeking to win the rights to publish the next block and collect any reward or fees attached to that block.
This incentive led to an increasing number of miners and to additional investment in faster computers by new and existing miners. The combination of more miners and more energy required to power their computers led to ballooning electricity requirements. However, as the prices of cryptocurrencies have deflated, validating cryptocurrency transactions has become a less rewarding investment for miners; consequently, fewer individuals participate in mining operations.
The energy consumption required to run and cool the computers involved in cryptocurrency mining is substantial. Some estimates indicate the daily energy needs of the Bitcoin network are comparable to the needs of a small country, such as Ireland. In general, when a buyer of a good or a service provided remotely sends a cryptocurrency to another account, that transaction is irreversible and made to a pseudonymous identity.
Although a cryptocurrency platform validates that the currency has been transferred, the platform generally does not validate that a good or service has been delivered. Unless a transfer is done face-to-face, it will involve some degree of trust between one party and the other or a trusted intermediary. If the buyer transfers the Bitcoin before she has received the item, she takes on the risk that the seller will never ship the item to her; if that happened, the buyer would have little, if any, recourse.
Conversely, if the seller ships the item before the buyer has transferred the Bitcoin, he assumes the risk that the buyer never will transfer the Bitcoin. These risks could act as a disincentive to parties considering using cryptocurrencies in certain transactions and thus could hinder cryptocurrencies' ability to act as a medium of exchange. As mentioned in the " Banks: Transferring Value Through Intermediaries " section, sending cash to someone in another location presents a similar problem, which historically has been solved by using a trusted intermediary.
In response to this problem, several companies offer cryptocurrency escrow services. Typically, the escrow company holds the buyer's cryptocurrency until delivery is confirmed. Only then will the escrow company pass the cryptocurrency onto the seller. Although an escrow service may enable parties who otherwise do not trust each other to exchange cryptocurrency for goods and services, the use of such services reintroduces the need for a trusted third-party intermediary in cryptocurrency transactions.
As with the use of intermediaries in traditional electronic transactions discussed above, both a buyer and a seller in a cryptocurrency transaction would have to trust that the escrow company will not abscond with their cryptocurrency and is adequately protected against hacking. For cryptocurrencies to gain widespread acceptance as payment systems and displace existing traditional intermediaries, new procedures and intermediaries such as those described in this section may first need to achieve a sufficient level of trustworthiness and efficiency among the public.
If cryptocurrencies ultimately require their own system of intermediaries to function as money, questions may arise about whether this requirement defeats their original purpose. Policymakers developed most financial laws and regulations before the invention and subsequent growth of cryptocurrencies, which raises questions about whether existing laws and regulations appropriately and efficiently address the risks posed by cryptocurrency.
Some of the more commonly cited risks include the potential that cryptocurrencies will be used to facilitate criminal activity and the lack of consumer protections applicable to parties buying or using cryptocurrency. Each of these risks is discussed below. Criminals and terrorists are more likely to conduct business in cash and to hold cash as an asset than to use financial intermediaries such as banks, in part because cash is anonymous and allows them to avoid establishing relationships with and records at financial institutions that may be subject to anti-money laundering reporting and compliance requirements.
This marketplace and Bitcoin escrow service facilitated more than , illegal drug sales from approximately January to October , at which time the government shut down the website and arrested the individuals running the site. Criminal use of cryptocurrency does not necessarily mean the technology is a net negative for society, because the benefits it provides could exceed the societal costs of the additional crime facilitated by cryptocurrency.
In addition, law enforcement has existing authorities and abilities to mitigate the use of cryptocurrencies for the purposes of evading law enforcement. Recall that cryptocurrency platforms generally function as an immutable, public ledger of accounts and transactions. Thus, every transaction ever made by a member of the network is relatively easy to observe, and this characteristic can be helpful to law enforcement in tracking criminal finances.
Although the accounts may be identified with a pseudonym on the cryptocurrency platform, law enforcement can exercise methods involving analysis of transaction patterns to link those pseudonyms to real-life identities.
For example, it may be possible to link a cryptocurrency public key with a cryptocurrency exchange customer. In addition to law enforcement's abilities to investigate crime, the government has authorities to subject cryptocurrency exchanges to regulation related to reporting suspicious activity. The Department of the Treasury's Financial Crimes Enforcement Network FinCEN has issued guidance explaining how its regulations apply to the use of virtual currencies —a term that refers to a broader class of electronic money that includes cryptocurrencies.
FinCEN has indicated that an exchanger "a person engaged as a business in the exchange of virtual currency for real currency, funds, or other virtual currency" and an administrator "a person engaged as a business in issuing [putting into circulation] a virtual currency, and who has the authority to redeem [to withdraw from circulation] such virtual currency" generally qualify as money services businesses MSBs subject to federal regulation.
The specific requirements generally vary across different states; 80 a state-by-state analysis is beyond the scope of this report. A number of bills related to the criminal use of cryptocurrencies and ways of improving the ability of government agencies to address this problem have seen action in the th Congress:.
As with money laundering, individuals could potentially use a pseudonymous, decentralized platform and thus avoid generating records at traditional financial institutions as a mechanism for hiding income from tax authorities. The IRS has issued guidance stating that virtual currencies are treated as property as opposed to currency for tax purposes, meaning users owe taxes on any realized gains whenever they dispose of virtual currency, including when they use it to purchase goods and services.
By November , the IRS had come to believe that cryptocurrency gains were being underreported, finding that between and only to tax returns declared such gains. In July , the IRS sent letters to 10, taxpayers with cryptocurrency transactions alerting them that they potentially had not met their reporting requirements although the IRS did not explicitly link the letters to the Coinbase case.
The prevalence of using cryptocurrency to avoid taxes is uncertain at this time. The language in certain variations of the letters the IRS sent indicates the IRS did not think these recipients' failure to pay was intentional. Rather, investors may have been seeking to profit from cryptocurrency, and then not paying taxes on the gains after the fact, rather than primarily seeking to hide assets from tax authorities. Indeed, cryptocurrencies' poor performance as a store of value may make them a poor instrument for this purpose at this time.
In addition, prominent U. Nevertheless, the difficulty the IRS experienced with the largest and most well-known cryptocurrency exchange may suggest that individuals who seek to evade taxes might look to cryptocurrency as a possible avenue. Although it is outside the scope of this report, another potential reason a person or entity may want to move money or assets while avoiding engagement with traditional financial institutions could be to evade financial sanctions.
For example, the Venezuelan government has launched a digital currency with the stated intention of using it to evade U. Nelson and Liana W. Although there is no overarching regulation or regulatory framework specifically aimed at providing consumer protections in cryptocurrencies markets, numerous consumer protection laws and regulatory authorities at both the federal and state levels are applicable to cryptocurrencies.
Whether these regulations adequately protect consumers and whether existing regulation is unnecessarily burdensome are topics subject to debate. This section will examine some of these consumer protections and present arguments related to these debated issues.
A related concern has to do with whether investors in certain cryptocurrency instruments such as initial coin offerings —wherein companies developing an application or platform issue cryptocurrencies or other digital or virtual currency that are or will be used on the application or platform—or cryptocurrency derivatives contracts are adequately informed of risk and protected from scams.
However, this secondary use of cryptocurrency as investment vehicles is different from the use of cryptocurrencies as money, and it is beyond the scope of this report. No federal consumer protection law specifically targets cryptocurrencies. However, the way cryptocurrencies are sold, exchanged, or marketed can subject cryptocurrency exchanges or other cryptocurrency-related businesses to generally applicable consumer protection laws.
In recent years, the FTC has brought a number of enforcement actions against cryptocurrency promoters and mining operations due to potential violations of Section 5 a. In addition, Title X of the Dodd-Frank Act grants the Consumer Financial Protection Bureau CFPB certain rulemaking, supervisory, and enforcement authorities to implement and enforce certain federal consumer financial laws that protect consumers from "unfair, deceptive, or abusive acts and practices.
Although the CFPB has not actively exercised regulatory authorities in regard to the cryptocurrency industry to date, the agency is accepting cryptocurrency-related complaints and previously has indicated it would enforce consumer financial laws in appropriate cases.
Both the FTC and the CFPB have made available informational material, such as consumer advisories, to educate consumers about potential risks associated with transacting in cryptocurrencies. In addition, all states have laws against deceptive acts and practices, and state regulators have enforcement authorities that could be exercised against cryptocurrency-related businesses. For example, money transmitters generally must maintain some amount of low-risk investments and surety bonds—which are akin to an insurance policy that pays customers who do not receive their money—as safeguards for customers in the event they do not receive money that was to be sent to them.
Certain observers assert that consumers may be especially susceptible to being deceived or misinformed when dealing in cryptocurrencies. Although certain federal laws and regulations intended to protect consumers such as those described in " Applicable Regulation ," above do apply to certain cryptocurrency transactions, others may not.
Some of those laws and regulations that do not currently apply are specifically designed to protect consumers engaged in the electronic transfer of money, require certain disclosures about the terms of financial transactions, and require transfers to be reversed under certain circumstances. The application of state laws and consumer protections to cryptocurrency transactions is not uniform, and the stringency of regulation can vary across states. If Congress decides current consumer protections are inadequate, policy options could include extending the application of certain electronic fund transfer protections to consumers using cryptocurrency exchanges and service providers and granting federal agencies additional authorities to regulate those businesses.
Proponents of cryptocurrencies have asserted that the application of a state-by-state consumer protection regulatory regime to cryptocurrency exchanges is unnecessarily onerous. They note that certain state regulations applicable to these exchanges are designed to address risks presented by traditional money transmission transactions i. For example, the previously mentioned requirements to maintain low-risk investments and surety bonds are intended to ensure customers will receive transmitted money.
Supporters of cryptocurrencies further argue that if the United States does not reduce the regulatory burdens involved in cryptocurrency exchanges, the country will be at a disadvantage relative to others in regard to the development of cryptocurrency systems and platforms.