Bitcoin is pseudonymous rather than anonymous in that the cryptocurrency within a wallet is not tied to people, but rather to one or more specific keys (or "addresses").
[41] Thereby, bitcoin owners are not identifiable, but all transactions are publicly available in the blockchain.
[41] Still,
cryptocurrency exchanges are often required by law to collect the personal information of their users.
[41]
Additions such as
Zerocoin have been suggested, which would allow for true
anonymity and fungibility.
[42]
In recent years, anonymizing technologies like
zero-knowledge proofs and
ring signatures have been employed in the cryptocurrencies
Zcash and
Monero, respectively. Cryptocurrency anonymizing implementations such as Cloakcoin, Dash, and PIVX use built in mixing services, also known as
tumblers.
Fungibility
Most cryptocurrency tokens are fungible and interchangeable. However, unique
non-fungible tokens also exist. Such tokens can serve as assets in games like
CryptoKitties.
Economics
Cryptocurrencies are used primarily outside existing banking and governmental institutions and are exchanged over the Internet.
Transaction fees
Transaction fees for cryptocurrency depend mainly on the
supply of network capacity at the time, versus the
demand from the currency holder for a faster transaction. The currency holder can choose a specific transaction fee, while network entities process transactions in order of highest offered fee to lowest. Cryptocurrency exchanges can simplify the process for currency holders by offering priority alternatives and thereby determine which fee will likely cause the transaction to be processed in the requested time.
For
ether, transaction fees differ by computational complexity, bandwidth use, and storage needs, while bitcoin transaction fees differ by transaction size and whether the transaction uses
SegWit. In September 2018, the median transaction fee for ether corresponded to $0.017,
[43] while for bitcoin it corresponded to $0.55.
[44]
Exchanges
Atomic swaps
Atomic swaps are a mechanism where one cryptocurrency can be exchanged directly for another cryptocurrency, without the need for a trusted third party such as an exchange.
ATMs
Jordan Kelley, founder of
Robocoin, launched the first
bitcoin ATM in the United States on 20 February 2014. The kiosk installed in Austin, Texas is similar to bank ATMs but has scanners to read government-issued identification such as a driver's license or a passport to confirm users' identities.
[45]
Initial coin offerings
An
initial coin offering (ICO) is a controversial means of raising funds for a new cryptocurrency venture. An ICO may be used by startups with the intention of avoiding regulation. However, securities regulators in many jurisdictions, including in the U.S., and Canada have indicated that if a coin or token is an "investment contract" (e.g., under the Howey test, i.e., an investment of money with a reasonable expectation of profit based significantly on the entrepreneurial or managerial efforts of others), it is a security and is subject to securities regulation. In an ICO campaign, a percentage of the cryptocurrency (usually in the form of "tokens") is sold to early backers of the project in exchange for legal tender or other cryptocurrencies, often bitcoin or ether.
[46][47][48]
According to
PricewaterhouseCoopers, four of the 10 biggest proposed initial coin offerings have used
Switzerland as a base, where they are frequently registered as non-profit foundations. The Swiss regulatory agency
FINMA stated that it would take a "balanced approach" to ICO projects and would allow "legitimate innovators to navigate the regulatory landscape and so launch their projects in a way consistent with national laws protecting investors and the integrity of the financial system." In response to numerous requests by industry representatives, a legislative ICO working group began to issue legal guidelines in 2018, which are intended to remove uncertainty from cryptocurrency offerings and to establish sustainable business practices.
[49]
Legality
The legal status of cryptocurrencies varies substantially from country to country and is still undefined or changing in many of them. While some countries have explicitly allowed their use and trade,
[50] others have banned or restricted it. According to the
Library of Congress, an "absolute ban" on trading or using cryptocurrencies applies in eight countries: Algeria, Bolivia, Egypt, Iraq, Morocco, Nepal, Pakistan, and the United Arab Emirates. An "implicit ban" applies in another 15 countries, which include Bahrain, Bangladesh, China, Colombia, the Dominican Republic, Indonesia, Iran, Kuwait, Lesotho, Lithuania, Macau, Oman, Qatar, Saudi Arabia and Taiwan.
[51] In the United States and Canada, state and provincial securities regulators, coordinated through the
North American Securities Administrators Association, are investigating "bitcoin scams" and
ICOs in 40 jurisdictions.
[52]
Various government agencies, departments, and courts have classified bitcoin differently.
China Central Bank banned the handling of bitcoins by financial institutions in
China in early 2014.
In Russia, though cryptocurrencies are legal, it is illegal to actually purchase goods with any currency other than the
Russian ruble.
[53] Regulations and bans that apply to bitcoin probably extend to similar cryptocurrency systems.
[54]
Cryptocurrencies are a potential tool to evade economic sanctions for example against
Russia,
Iran, or
Venezuela. In April 2018, Russian and Iranian economic representatives met to discuss how to bypass the global
SWIFT system through decentralized blockchain technology.
[55] Russia also secretly supported Venezuela with the creation of the
petro (El Petro), a national cryptocurrency initiated by the
Madurogovernment to obtain valuable oil revenues by circumventing US sanctions.
In August 2018, the
Bank of Thailand announced its plans to create its own cryptocurrency, the Central Bank Digital Currency (CBDC).
[56]
Advertising bans
U.S. tax status
On 25 March 2014, the United States
Internal Revenue Service (IRS) ruled that bitcoin will be treated as property for tax purposes. This means bitcoin will be subject to
capital gains tax.
[62] In a paper published by researchers from Oxford and Warwick, it was shown that bitcoin has some characteristics more like the precious metals market than traditional currencies, hence in agreement with the IRS decision even if based on different reasons.
[63]
The legal concern of an unregulated global economy
As the popularity of and demand for online currencies has increased since the inception of bitcoin in 2009,
[64] so have concerns that such an unregulated person to person global economy that cryptocurrencies offer may become a threat to society. Concerns abound that altcoins may become tools for anonymous web criminals.
[65]
Cryptocurrency networks display a lack of regulation that has been criticized as enabling criminals who seek to evade taxes and
launder money.
Transactions that occur through the use and exchange of these altcoins are independent from formal banking systems, and therefore can make tax evasion simpler for individuals. Since charting taxable income is based upon what a recipient reports to the revenue service, it becomes extremely difficult to account for transactions made using existing cryptocurrencies, a mode of exchange that is complex and difficult to track.
[65]
Systems of anonymity that most cryptocurrencies offer can also serve as a simpler means to launder money. Rather than laundering money through an intricate net of financial actors and offshore bank accounts, laundering money through altcoins can be achieved through anonymous transactions.
[65]
Loss, theft, and fraud
In February 2014 the world's largest bitcoin exchange,
Mt. Gox, declared
bankruptcy. The company stated that it had lost nearly $473 million of their customers' bitcoins likely due to theft. This was equivalent to approximately 750,000 bitcoins, or about 7% of all the bitcoins in existence. The price of a bitcoin fell from a high of about $1,160 in December to under $400 in February.
[66]
Two members of the Silk Road Task Force—a multi-agency federal task force that carried out the U.S. investigation of
Silk Road—seized bitcoins for their own use in the course of the investigation.
[67] DEAagent Carl Mark Force IV, who attempted to extort Silk Road founder
Ross Ulbricht ("Dread Pirate Roberts"), pleaded guilty to money laundering,
obstruction of justice, and extortion under color of official right, and was sentenced to 6.5 years in federal prison.
[67] U.S. Secret Service agent Shaun Bridges pleaded guilty to crimes relating to his diversion of $800,000 worth of bitcoins to his personal account during the investigation, and also separately pleaded guilty to money laundering in connection with another cryptocurrency theft; he was sentenced to nearly eight years in federal prison.
[68]
Homero Josh Garza, who founded the cryptocurrency startups GAW Miners and ZenMiner in 2014, acknowledged in a
plea agreement that the companies were part of a
pyramid scheme, and pleaded guilty to
wire fraud in 2015. The U.S.
Securities and Exchange Commission separately brought a civil enforcement action against Garza, who was eventually ordered to pay a judgment of $9.1 million plus $700,000 in interest. The SEC's complaint stated that Garza, through his companies, had fraudulently sold "investment contracts representing shares in the profits they claimed would be generated" from mining.
[69]
On 21 November 2017, the
Tether cryptocurrency announced they were hacked, losing $31 million in USDT from their primary wallet.
[70] The company has 'tagged' the stolen currency, hoping to 'lock' them in the hacker's wallet (making them unspendable). Tether indicates that it is building a new core for its primary wallet in response to the attack in order to prevent the stolen coins from being used.
In May 2018,
Bitcoin Gold (and two other cryptocurrencies) were hit by a successful 51% hashing attack by an unknown actor, in which exchanges lost estimated $18m.
[71] In June 2018, Korean exchange
Coinrail was hacked, losing US$37 million worth of altcoin. Fear surrounding the hack was blamed for a $42 billion cryptocurrency market selloff.
[72] On 9 July 2018 the exchange Bancor had $23.5 million in cryptocurrency stolen.
[73]
The French regulator
Autorité des marchés financiers (AMF) lists 15 websites of companies that solicit investment in cryptocurrency without being authorised to do so in France.
[74]
Darknet markets
Cryptocurrency is also used in controversial settings in the form of
online black markets, such as
Silk Road. The original Silk Road was shut down in October 2013 and there have been two more versions in use since then. In the year following the initial shutdown of Silk Road, the number of prominent dark markets increased from four to twelve, while the amount of drug listings increased from 18,000 to 32,000.
[65]
Darknet markets present challenges in regard to legality. Bitcoins and other forms of cryptocurrency used in dark markets are not clearly or legally classified in almost all parts of the world. In the U.S., bitcoins are labelled as "virtual assets". This type of ambiguous classification puts pressure on law enforcement agencies around the world to adapt to the shifting drug trade of dark markets.
[75]
Reception
While cryptocurrencies are digital currencies that are managed through advanced encryption techniques, many governments have taken a cautious approach toward them, fearing their lack of central control and the effects they could have on financial security.
[80] Regulators in several countries have warned against cryptocurrency and some have taken concrete regulatory measures to dissuade users.
[81]Additionally, many banks do not offer services for cryptocurrencies and can refuse to offer services to virtual-currency companies.
[82] Gareth Murphy, a senior central banking officer has stated "widespread use [of cryptocurrency] would also make it more difficult for statistical agencies to gather data on economic activity, which are used by governments to steer the economy". He cautioned that virtual currencies pose a new challenge to central banks' control over the important functions of monetary and exchange rate policy.
[83] While traditional financial products have strong consumer protections in place, there is no intermediary with the power to limit consumer losses if bitcoins are lost or stolen.
[84] One of the features cryptocurrency lacks in comparison to credit cards, for example, is consumer protection against fraud, such as
chargebacks.
An enormous amount of energy goes into
proof-of-work cryptocurrency mining, although cryptocurrency proponents claim it is important to compare it to the consumption of the traditional financial system.
[85]
There are also purely technical elements to consider. For example, technological advancement in cryptocurrencies such as bitcoin result in high up-front costs to miners in the form of specialized
hardware and
software.
[86] Cryptocurrency transactions are normally irreversible after a number of blocks confirm the transaction. Additionally, cryptocurrency private keys can be permanently lost from local storage due to malware, data loss or the destruction of the physical media. This prevents the cryptocurrency from being spent, resulting in its effective removal from the markets.
[87]
The cryptocurrency community refers to pre-mining, hidden launches,
ICO or extreme rewards for the altcoin founders as a deceptive practice.
[88] It can also be used as an inherent part of a cryptocurrency's design.
[89] Pre-mining means currency is generated by the currency's founders prior to being released to the public.
[90]
Academic studies
