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While blockchain technology offers transactional advantages, not everyone welcomes the opportunity it offers to transact in cryptocurrency. In fact, Warren Buffett, CEO of Berkshire Hathaway, warns: “Stay away from it. It’s a mirage, basically. In terms of cryptocurrencies, generally, I can say almost with certainty that they will come to a bad ending.”
Perhaps Buffett has misgivings about cryptocurrency because he knows that nefarious individuals can exploit blockchain’s features and exchange cryptocurrencies to launder money, finance terrorist activity, evade taxes, and make prohibited purchases. Law enforcement is pursuing prosecution of individuals who transact in cryptocurrency in concert with illegal activity.
Regulators recognize the need to create clear legislation to protect against the criminal use of cryptocurrency exchanged on the blockchain and to ensure it is used only for lawful activities. It is anticipated that regulators, law enforcement and the cryptocurrency industry itself will find ways to use the blockchain technology to prevent and detect illegal activity.
Blockchain is a colloquial term used to describe distributed ledger technology (DLT). It is a type of DLT — essentially a shared, cryptographical secure ledger of transactions. When people talk about blockchain, they usually mean open public systems that anyone can access and interact with in the chain. In contrast, a closed or private blockchain requires users to have credentials to use the system.
Blockchain is groundbreaking for several reasons. First, it enables transactions between two unrelated parties without the need for a trusted intermediary.
Second, through cryptography, the blockchain can provide confidence in the digital identity of the network participant as well as confidence in the integrity of the ledger itself.
Finally, the distribution of a replicated ledger to all participants provides resilience to the network and significant data management efficiencies.
Cryptocurrency is “a math-based, decentralized convertible virtual currency that is protected by cryptography.” Bitcoin, launched in 2009, was the first cryptocurrency to capture the public’s attention. It is estimated that as of May 2018, there were over 17 million bitcoins in circulation.
For the purposes of this discussion, cryptocurrency describes a digital asset transacted on a blockchain, including those referred to as virtual currency, digital currency, or cryptocurrency.
Current Regulatory Landscape
There is presently little regulation specifically governing the blockchain and cryptocurrency. Regulators, government agencies and law enforcement rely on existing laws and regulations to govern participants, such as administrators and exchanges, in the cryptocurrency ecosystem.
These laws and regulations were not constructed or amended to address the nuances of cryptocurrency exchanged on the blockchain. For that reason, it is difficult to apply them seamlessly. The rules are often applied inconsistently, adding additional regulatory uncertainty.
This article was originally published in Thomson Reuters Westlaw Bank & Lender Liability.