The internet was originally used by the military or by people who put it to use for illegal and unethical purposes.
Bitcoin is no different. A revolutionary technology, it is often compared to the internet.
After Bitcoin’s invention in 2009, the earliest adopters were cryptography enthusiasts and cyberpunks.
The second segment to adopt Bitcoin were those engaged in the illegal trade of drugs and various other illegal activities.
Bitcoin Adoption in the Dark Web
Bitcoin became the perfect medium of exchange for illegal trade because of its anonymity and untraceability.
Anyone could create a Bitcoin wallet and start accepting the cryptocurrency without being in view of law enforcement.
There are two factors that made Bitcoin a perfect choice:
Transactions conducted within the Bitcoin network are immutable, which means they cannot be reversed or charged back like transactions via credit cards or online transfer services like PayPal.
Bitcoin’s distributed ledger records transactions while providing complete anonymity to the buyer and the seller.
This is because each transaction only records the details of the wallets of both parties and the number of Bitcoins transferred.
It does not record any other detail of the transaction unlike other banking channels. The wallet addresses could belong to anyone and cannot be traced either.
In a typical transaction, there is no information about what was traded. The only thing one can find out is that 5 Bitcoins were transferred from one wallet to another.
Silk Road: A Case Study of Bitcoin’s Utility
If you are connected to the world of cryptocurrencies, you have most likely heard of the infamous Silk Road and its creator, Ross Ulbricht.
Silk Road was founded in 2011 by Ulbricht with the aim of having users shop without having the traffic monitored.
Users traded drugs and weapons, and even hired killers on this website. It was, however, shut down in 2013.
But various copied sites cropped up and even without the presence of the original Silk Road.
Now, there are countless dark web markets that feature all the services Silk Road initially offered—one just has to know where to shop.
This is possible because the users’ payments cannot be directly tracked when made via Bitcoin or most other cryptocurrencies.
However, it is worth noting here that Bitcoin is not entirely anonymous by nature; in fact, it’s essentially pseudo-anonymous.
While these payments cannot be tracked, these darknet markets feature an escrow service. Bitcoin is sent to the website’s address and is secured by the platform until the product and/or service is delivered.
When the buyer confirms delivery, the platform will transfer the Bitcoins to the seller.
While both parties are not required to provide any identification, they still have a profile with reviews from previous transactions. That is how trusted traders are identified.
Bitcoin: Away from the Shadow of the Dark Web
Ross Ulbricht was arrested and charged with life imprisonment. In November 2014, Operation Onymous, a joint operation by various international agencies, led to the seizure of over 400 dark web domains.
After this, many, including Jeff Macke, a known panellist on CNBC Fast Money, declared Bitcoin to be dead.
But in 2018, that is hardly the case.
Bitcoin thrashed through its previous peak of $1,100 in 2017 and went on to form a hockey stick growth curve scaling a new peak at $19,500 in December of 2017.
The years 2017 and 2018 have seen an invigorated interest in the cryptocurrency space.
Need for Regulation
While Bitcoin is far from dead, so are the illegal activities that use it as a medium.
During the epic bull run of 2017 and the eventual correction of 2018, the market was compared to the Wild West while the possibility of profit was compared to the Gold Rush.
A host of other illegal activities gained limelight including market manipulation, non-disclosure of asset holding while advising retail investors, insider trading, as well as money laundering and tax evasion.
Scam ICOs that had no product and no team to back up their claims managed to raise millions of dollars.
Most trading platforms aren’t regulated and most “advisors,” fund managers and those doling out tips on Telegram groups made sure the market was rigged in a way that hurt the retail investor.
Status of Bitcoin Regulation
Most countries have categorized Bitcoin as a property or a similar asset and have been permissive in the use and trade of Bitcoin.
Only a small number of countries have restricted Bitcoin in some way or the other.
The U.S. Securities and Exchange Commission (SEC) and Commodity Futures Trading Commission (CFTC) have been discussing the possible regulations and inter-agency cooperation for enforcement for quite some time.
However, FinCEN, a U.S. Treasury body, has already issued guidelines for those dealing with the exchange of cryptocurrencies.
Exchanges are categorized as “Money Transmitters” and are required by the law to follow the Know Your Customer (KYC) and Anti-Money Laundering (AML) guidelines.
The SEC had issued numerous warnings regarding the volatility and the risk of fraud in trading as well as participating in ICOs.
The SEC issued a report which essentially meant ICOs fall under the purview of securities regulation.
But many token projects held their ICOs under the impression that they can categorize themselves as a “utility token.”
Recent events, where the SEC announced settlements with two ICO projects, Airpay and Paragon Coin, make the commission’s stance very clear.
While all of this is yet to settle into a less ambiguous, internationally conducive trade environment, the recent G20 nations meeting in Argentina declared that the world’s leading economies will regulate crypto assets to prevent money laundering and terrorism financing in line with the Financial Action Task Force (FATF) standards.
In a move to curb fraud and money laundering in international trade, the G20 nations acknowledged that the financial infrastructure is getting more digitized and the need to take stronger action to curb the illicit trade which could include extradition of individuals involved in asset theft to the countries where the law was broken.
One of the focus areas was taxation. A “globally fair, sustainable and modern international tax system” will be worked upon.
Effects of Crypto Regulations
Bitcoin and cryptocurrencies have, at their core, the ethos of decentralization and many enthusiasts see it as a way to take back the financial control from governments.
Towards the extreme, it is seen as a way to kill Fiat currencies altogether, thereby giving power to the free market. Regulation is often a bad word in these circles.
However, it doesn’t need to be. All regulation doesn’t mean control.
Measures like tracking transactions, verifying identities, taxing income and preventing fraud in trading, ICOs and regulating exchanges will provide significant protection to the retail investors and users of these crypto assets.
Every time the traditional financial or government establishments associate Bitcoin with an illegal activity, the supporters echo the sentiment that: every crime committed with Bitcoin was already being committed with Fiat money.
Even with regulation curbing a large part of Wild West gun slinging, anti-social elements will continue to exist, find measures that will counter the regulation and find technological and political loopholes wherever possible.
Some of the measures that are still in practice and gain momentum are:
Mixing Services or Tumblers
Mixing services help mix tainted Bitcoins with clean funds by sending them through a mesh of channels and wallets, making them very difficult to trace.
Tumblers improve anonymity and are hard to track even with Bitcoin’s open ledger. They usually charge a small fee of 1 to 3 percent.
Another facet to this is peer-to-peer tumblers. This ensures there are no middlemen and they might be difficult to beat by regulators since they do not rely on centralized servers or service providers.
Privacy coins or tokens take Bitcoin’s anonymity to a different level.
They do not have a public ledger and offer more anonymity by way of Stealth Addresses and Ring Confidential Transactions (RingCT).
In simpler terms, it means the wallet addresses are private as well as the balance on every wallet—which is not the case with Bitcoin.
Fungibility is another feature of privacy coins. This means every coin is interchangeable.
While this seems to be true even for Bitcoin, there have been Bitcoins and wallet addresses which have been blacklisted or banned, and hence the value of those Bitcoins is lower than others.
Privacy coins make sure every coin is worth the same amount as the others. Monero, ZCash and Dash are some examples of privacy coins.
Coins like Dash are also highly decentralized. Dash has a built-in incentive for hosting masternodes so that the network stays sufficiently decentralized and cannot be stopped.
The endless fight between regulators and those who wish to flout the rules is as old as human civilization.
Bitcoin and cryptocurrencies are just another technological development which will be employed by players on both the sides of this war.
The illicit uses will continue but the positive ray of light that the regulated market brings will outweigh the negatives without a shred of doubt.
ICE, the parent company of New York Stock Exchange, recently announced a fully regulated cryptocurrency exchange in the near future.
Such developments make sure Bitcoin and cryptocurrencies are disassociated with the illegal uses and are seen for the benefit they have in the long run.