Cryptocurrency

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A cryptocurrency is a virtual or digital asset that uses cryptography for security. The most-well known cryptocurrency thus far is bitcoin, but others include:

Overview

Cryptocurrency uses a decentralized, digital system within a massive shared network, called a blockchain, to manage, archive, and execute transactions between users. In order to carry out a transaction moving cryptocurrency from one user to another, first a user's information - how much of a given cryptocurrency they possess, how much they are attempting to send to another user, technical details between users' digital addresses, and so on - must be verified by everyone within the network. Normally, in a centralized system for example, this process would be carried out automatically by a powerful central computer or server - in a decentralized system, that task is carried out by hundreds, if not thousands of individual computers globally through the Internet.

The data is sent out, verified by each user's computer or computers, and if verification is successful, the data is added to a "chain" of transactions using complex algorithmic cryptography. Each transaction stored in a data cluster, or "block," contains a code, or "hash" of the previous transaction, and each time a block is created, a new one is generated that contains a hash of itself.[1] The identity of users involved is never used, nor are their IP addresses; each user, or "node," uses a unique 30+ character alphanumeric identification code. Because each transaction is linked to the one that came before it, digital records of transactions cannot be altered.[2]

Blockchain is a form of distributed ledger technology. This technology uses complex mathematical algorithms in place of third-party financial institutions like banks or government agencies to regulate themselves. Cryptocurrencies are therefore independent, as they are not issued by any government or central authority, though this may differ from cryptocurrency to cryptocurrency.[3] For example, the blockchain platform EOS is not directly governed by block.one, the company that developed it. It is governed by representatives elected by its own community, who vote on major decisions, form network-wide consensus, and verify transactions on the EOS blockchain. This process is known as delegated proof-of-stake, a variant of the proof-of-stake model used by platforms like Ethereum.[4] Block.one does, however, hold a minority voting stake in major decisions made within the EOS ecosystem.[5]

It is theoretically not impossible to "crack" the blockchain; however, this technology was deliberately designed to be "computationally impractical to reverse," so success in cracking it is very, very unlikely, at least in theory.[6]

Key differences to fiat currency

Cryptocurrencies differ from traditional currencies, also called fiat currencies, in a number of ways. They are not subject to governance standards, accountability and oversight, or regular reporting of trading and related financial data. Although advocates first spoke of cryptocurrencies as an alternative method of payment to currencies like the dollar and the euro, they later drew interest as an investment asset in addition to alternative means of exchange.[7] Notable cryptocurrency proponents include Twitter founder Jack Dorsey, Wall Street Executive Blythe Masters, Overstock.com founder and CEO Patrick Byrne, and the Winklevoss Twins.[8][9][10][11]

The market value of cryptocurrencies is determined by multiplying the number of digital coins in existence by their price, although many question whether that is the right way to value them.[12]

Don't call it 'crypto'

In May 2019, the Associated Press (AP) published a guideline for writing about and discussing cryptocurrency. According to the AP, cryptocurrency is "a type of digital money that uses encryption technology to make it secure. Avoid using the shorthand 'crypto,' which can be confused with cryptography. Cryptocurrency is not the same as virtual currency, which is used in virtual worlds, such as online games."[13]

History

The concept of cryptographically untraceable payments was introduced in 1982 by David Chaum, from the Department of Computer Science at the University of California, Santa Barbara. In his paper, "Blind Signatures for Untraceable Payments," he introduced the cryptographic concept of "blind signatures," which he argued could be applied to payment systems for "improved auditability and control compared to current systems."[14] He took his theory further in 1990, publishing another paper describing the creation of the world's first cryptographic anonymous cash system, based on the principles of blind signatures.[15] Chaum's company Digicash attempted to create a digital currency, called eCash, which would be capable of carrying out anonymous transactions that was compatible on Mac, PC, and Unix systems.[16] Digicash declared bankruptcy in 1998. According to Chaum, the company had difficulty convincing both merchants and individuals to abandon credit cards in favor of the new eCash system.[17] That same year, computer engineer Wei Dai published an essay describing an anonymous, distributed electronic cash system, which he named b-money. Dai argued that such a currency could create a functioning economy without the necessity of intervention by third-parties, such as government or financial institutions. [18][19][20]

The United States National Security Agency (NSA) published "How to Make a Mint," a paper describing a hypothetical cryptocurrency system, in 1996.[21][22]

Nick Szabo, a noted essayist, computer scientist, law scholar, and cryptographer, later published an essay about the concept of "Bit Gold," which many consider the precursor to bitcoin and blockchain.[23][24]

The beginnings of bitcoin

The recipient of the very first bitcoin transaction, Hal Finney, allegedly met and collaborated with both Wei Dai and Szabo. For a time, he also communicated regularly with the anonymous creator of bitcoin, Satoshi Nakamoto.[25]

The first decentralized cryptocurrency, bitcoin, was allegedly created by Satoshi Nakamoto in October of 2008.[26] Using the NSA-developed SHA-2 cryptographic hash function as a proof-of-work function,[27][28] Satoshi created a system that could run on almost any platform to carry out anonymous, secure transactions that are extremely difficult to forge.[29]

Using the Cryptography Mailing List on metzdowd.com, Nakamoto published the bitcoin whitepaper entitled, "Bitcoin: A Peer-to-Peer Electronic Cash System" in October 2008.[30][31] In 2009, Nakamoto released the first bitcoin software client, as well as the first mined bitcoins, marking the start of the bitcoin cryptocurrency. Until 2010, Nakamoto collaborated with an initially small community via mailing lists. Though the team was open-sourced, Nakamoto took care never to reveal anything personal, cementing the ambiguity surrounding Nakamoto's identity. Eventually, Nakamoto faded from the community. On April 23 2011, Nakamoto sent one final communication to the team, stating simply that Nakamoto had "moved on to other things."[32]

The very first blockchain component, or "Genesis Block," was recorded on January 3, 2009.[33] This coincided with the release of the original bitcoin software client. The first recorded cryptocurrency transaction occurred on January 12, 2009.[34][35]

Bitcoin pizza and initial adoption

On May 22, 2010, Florida resident Laszlo Hanyecz traded 10,000 BTC for two pizzas from a Papa John's franchise. This is widely believed to be the first instance in which bitcoin was directly used to purchase something tangible. Since then, this occasion has been celebrated every May 22nd by bitcoin enthusiasts as "Bitcoin Pizza Day."[36]

By 2011, multiple prominent Internet-based institutions began accepting donations through Bitcoin, including WikiLeaks,[37] FreeNet,[38] the Internet Archive,[39] and the Free Software Fondation.[40] By 2012, the Orlando-based bitcoin payment processing company BitPay announced that over 1,000 merchants had signed up for its service within the previous year. By 2017, a number of extremely high-profile companies, including Microsoft, Expedia, Subway, and Newegg.com had begun accepting Bitcoin payments.[41]

Since 2011, thousands of cryptocurrencies have been created, many of which have since failed. At time of writing (February 28, 2018), there are currently 2943 in-market cryptocurrencies worldwide, including bitcoin, ethereum, and ripple.[42]

In June 2017, the market cap for all cryptocurrencies surpassed $100 billion, due to a 300% increase that occurred in just over 2 months.[43]

In August 2017, Wooranna primary school in Victoria, Australia began offering cryptocurrency education programs. The school, which is situated in a "low socioeconomic area," attracted visitors from Europe, North America, and Asia because of this. Students are able to participate in virtual simulations of operating mining rigs, creating wallets, and even hacking accounts to steal digital assets. The goal of these programs are to teach students about the hardware, software, and cybersecurity issues surrounding cryptocurrency and blockchain technology.[44]

Use cases

Cryptocurrency has been utilized in many ways, often in underbanked, economically depressed, or otherwise underserved regions of the world. Stellar, a cryptocurrency developed by Jed McCaleb, began a cross-border payments platform in 2017 with the Hyperledger Project to allow individuals and institutions, like banks, to make cross-border payments at greater speed and lower cost than traditional means.[45] The company behind McCaleb's former project, Ripple, offers similar services, though it markets primarily to institutions like banks.[46]

Some have utilized the decentralized nature of cryptocurrency to adapt to adverse economic conditions. In 2019 citizens of Iran, facing an economic crisis that devalued the rial, began trading cryptocurrencies in greater volume. Crypto trading spiked after the U.S. withdrew from diplomatic negotiations and resumed imposing sanctions on the country. Cryptocurrency, which cannot be devalued by a central institution such as a bank, provided respite from those suffering from the hyperinflation of the rial.[47]

Kaspersky Labs 2019 survey

Kaspersky Labs, a multinational cybersecurity and anti-virus provider headquartered in Moscow, Russia, conducted a survey on cryptocurrency use published in 2019. The study used data gathered from a survey of 12,000 consumers in 22 different countries. According to the results of the survey, 13% of participants reported that they had used cryptocurrency as a payment method. 81% of respondents reported that they preferred paying via debit and credit cards. Vitaly Mzokov of Kaspersky Labs said these results showed that, despite the significant decrease in the price of most cryptocurrencies in 2018, as well as the enduring bear market in 2019, there was "still a strong desire for digital transactions amongst consumers." This countered the sentiment held by many that cryptocurrencies hold no retail utility.[48]

Charitable donations

In February 2019, the rate of bitcoins traded in Venezuela increased by 30 percent of its previous average. CNBC reported that this was likely because the country's official currency had become hyperinflated, leaving many desperate for an alternative currency to trade for food, shelter, and medicine.[49] A charitable fundraising campaign called "Airdrop Venezuela" was created the same month in order to give 100,000 I.D.-verified Venezuelan refugees a total of $1 million. The campaign was started by Steve Hanke, an applied economics professor at Johns Hopkins University who served as an economic adviser to the Rafael Caldera, Venezuela's former president, between 1995 and 1996. Professor Hanke designed the campaign to utilize the blockchain and financial services of AirTM, a Mexico-based fintech startup, in order to manage the funds and transfer them to the refugees.[50]

In April 2019, the Notre-Dame Cathedral in Paris, France caught fire, leading to significant damage to the ancient building's roof and frame. After the fires were extinguished, the French government immediately released a statement saying that it would rebuild the cathedral and created a website to help collect money to help repair the damage. France's Minister for Digital Affairs, Cedric O, said that he is "open to discussing" accepting donations in bitcoin and other cryptocurrencies.[51]

Legality

The United States Internal Revenue Services (IRS) defines cryptocurrency, or virtual currency, as "a digital representation of value that functions as a medium of exchange, a unit of account, and/or a store of value." It also specifies that, although in certain circumstances it can function as a currency, bitcoin and other cryptocurrencies do not have legal tender status in the United States.[52] Employees paid in cryptocurrency, such as bitcoin, must file these wages as taxable income on a W-2, and are subject to federal income tax withholding and payroll taxes.[53]

In August of 2013, the German Ministry of Finance announced its official recognition of bitcoin as a legal currency, classifying it as "private money."[54] This made it the first country in the world to create clear-cut legislature spelling out its embrace of bitcoin.[55]

In November 2013, a committee under Delaware Senator Tom Carper asked the Law Library of Congress to survey over 40 countries worldwide, to see how many of them had regulations in place for bitcoin and altcoins. The LoC reported that surprisingly few, notably China and Brazil, had legislation specific to cryptocurrency use, despite bitcoin being over 5 years old at the time. The report also cited "widespread concern about the bitcoin system’s possible impact on national currencies, its potential for criminal misuse, and the implications of its use for taxation." [56]

On March 25, 2014, the IRS announced that for U.S. tax purposes, cryptocurrency would be treated like an asset such as property, rather than an "actual currency," citing its lack of status as legal tender in any governing jurisdiction.[57] The news was mostly met positively, as it meant not only did the IRS officially recognize bitcoin and, by extension, other cryptocurrencies as legal investments, but also that now, cryptocurrencies would be able to benefit from the U.S. long-term capital gain rate, as well as other tax benefits.[58] Others rejoiced due to the implication that regulations on cryptocurrencies would increase; some had speculated that the instability of bitcoin and altcoin prices were due, in part at least, to a lack of regulation.[59]

Despite the growing support for cryptocurrency on the global market, investors and policymakers alike are concerned with the potential of cryptocurrencies for use in money laundering or other illicit activity, due to the anonymity of crypto transactions.[60][61] While some countries have tentatively embraced bitcoin and other cryptocurrencies, others remain unconvinced of its safety and validity. The Chinese government has not only banned Initial Coin Offerings (ICO's) as well as domestic bitcoin exchanges, but also reported that it will also enlist its "Great Firewall" to block anyone in the country from accessing websites that offer cryptocurrency services.[62]

The prices for digital currencies are set by trading on spot platforms, many of which are based offshore and none of which are registered with the Commodity Futures Trading Commission or the Securities and Exchange Commission.[63]

In 2017, a pro-cryptocurrency independent expenditure-only committee (Super PAC) called the "Cryptocurrency Alliance" was created by cryptocurrency and blockchain advocate, Casey Botticello.[64] According to their website, the CA was created to advocate politically for cryptocurrency consumers, to educate the general public about cryptocurrencies and blockchain technology, and to counter propaganda against cryptocurrency.[65]

In January 2018, Facebook announced a blanket ban on all ads "binary options, initical coin offerings and cryptocurrency, in an effort to block ads for financial products and services "that are frequently associated with misleading or deceptive promotional practices."[66]

In February 2018, the United States Senate hosted a public hearing in Washington, D.C. to discuss the cryptocurrency market and its relationship with the U.S. government going forward. Jay Clayton, chairman of the U.S. Securities and Exchange Commission, mentioned that the federal government may step in to provide extra regulation, but when pressed on the issue he said he could not give a definitive answer. Among those in favor of additional regulation from the U.S. government was Senator Sherrod Brown of Ohio, who expressed concern that "scam artists and hackers know more about [cryptocurrency] than most market participants."[67] However, Brian Quintenz, a member of the Commodity Futures Trading Commission, called on the cryptocurrency industry to create a self-regulatory organization, addressing concerns from within the industry that the CFTC aimed to step in to create regulatory laws.[68] That same month, the CFTC released a document entitled, "Guidance Regarding Ethics Laws and Regulations Related to Employee Holdings and Transactions in Cryptocurrencies," outlining precautions that employees of the CFTC, or any potential investor should consider before investing in cryptocurrency.[69]

Brad Garlinghouse, the CEO of Ripple, stated that he believed much of the market's current volatility is due to its undergoing an "adolescent stage", and that he did not believe the cryptocurrency industry could possibly exist outside of a regulatory framework, despite some in the crypto community championing "anarchistic, libertarian views." He went on to say that "the revolution that is enabled by blockchain technologies is not going to happen from outside the system, it's going to happen from within the system." He then expressed Ripple's intention to continue working with banks and regulators, citing the Bank of England as a "paid customer" of Ripple.[70]

Regulation

United States federal law does not provide for direct, comprehensive oversight of underlying Bitcoin or virtual currency spot markets. As a result, U.S. regulation of virtual currencies has evolved into a multifaceted, multi-regulatory approach. State banking regulators, the Internal Revenue Service (IRS), the United States Treasury's Financial Crimes Enforcement Network (FinCEN), and the Securities and Exchange Commission (SEC) monitor bitcoin and cryptocurrency trading to enforce state money transfer, tax, anti-money laundering, and fraud protection laws.[71]

On March 25, 2014 the Internal Revenue Service announced that bitcoin should be viewed and taxed as property and not as currency. This meant that employers who pay wages in bitcoins would have to report those wages like any other payment made with property, and that bitcoin income will be subject to federal income withholding and payroll taxes. The agency's official statement declared, “it does not have legal tender status in any jurisdiction."[72]

In May 2014 the U.S. Federal Election Commission voted to allow political committees to accept bitcoin donations.[73]

In March of 2017 the SEC refused to grant an exemption that would have let the Winklevoss Bitcoin Trust ETF trade on the Bats BZX Exchange.[74]

Bitcoin is classified by the Commodity Futures Trading Commission (CFTC) as a commodity, under the Commodity Exchange Act (CEA). The CFTC enforces all bitcoin derivatives contacts in the U.S., as well as all fraud and manipulation protection laws.[75][76]

In June 2018, the SEC announced it had appointed Valerie A. Szczepanik as its first-ever senior advisor for digital asssets and innovation.[77] Two days later, SEC Chairman Jay Clayton announced that the SEC would not be changing its definitions of what a security is for the sake of easing the regulation of cryptocurrency.[78]

In December, the CFTC released an official Request for Information (RFI) to the public. The RFI stated that its purpose was to "seek public comment and feedback in order to better inform the Commission's understanding of the technology, mechanics, and markets for virtual currencies beyond bitcoin, namely Ether and its use in the Ethereum Network." The RFI specified that information gathered through the RFI would be considered in future efforts to provide oversight and regulation to the digital asset markets. It also gave three methods members of the public could use to deliver their comments to the Commission, including a mailing address and a link to its public comments website.[79][80]

In March 2019, the Canadian Revenue Agency (CRA) targeted multiple users of cryptocurrency with audits. As part of the audits, they were sent comprehensive questionnaires regarding their involvement with the crypto markets. The questionnaire was 13 pages long and consisted of 54 questions, some of which include questions that had multiple parts to them. The topics of these questions included the user's use of cryptocurrency mixing services, which are services that make it easier to trade crypto without tying a real-world identity to the transaction, as well as any investment activity into ICOs.[81]

In April 2019, France approved a new financial law that required crypto issuers and traders to become certified by the government. This allowed France to tax revenue on these certified individuals. French Finance Minister Bruno Le Maire said at a blockchain event in Paris that he planned on proposing to his "European partners that we set up a single regulatory framework on crypto-assets inspired by the French experience."[82]

The Financial Crimes Enforcement Network (FinCEN) issued a civil money penalty against crypto trader Eric Powers, who was acting as a peer-to-peer crypto exchange operator, or "money transmitter," according to a statement published on FinCEN's website. The statement said that Powers failed to comply with regulations under the Bank Secrecy Act by not reporting suspicious cryptocurrency transactions, failing to register with FinCEN, failing to submit currency transaction reports (CTRs), and failing to develop and implement an effective AML program. Powers was fined $35,000 and prohibited from providing money transmission services in the future.[83]

In April 2019, France passed a new law that guaranteed crypto-related startups a bank account, meaning that banks could no longer reject applications purely on the basis of the applicants being a crypto company.[84]

Federal court rules that "virtual currencies" are commodities

In addition to bitcoin, a federal judge ruled that all "virtual currencies" fall under the legal definitions for "commodities," and thus fall within the jurisdiction of the CFTC. The CFTC used this ruling to begin pursuing legal action against Crater and My Big Coin Pay Inc., two cryptocurrency companies accused of fraud.[85][86]

Fraud

Because much of the bitcoin and cryptocurrency trading that occurs happens via cash markets, the dark web, or other online methods which may not be totally secure or regulated, potential investors or traders of such should be highly vigilant of fraud. Buyers can verify whether a party offering bitcoin or other cryptocurrency options or futures services are registered with the CFTC using SmartCheck.gov, a consumer protection website owned and operated by the United States federal government.[87]

As with regular brokers and investment professionals, consumers can use the CFTC's website Smartcheck.gov to look up investment professionals to see if they are registerd and accredited by the CFTC.[88]

In October 2018 Nouriel Roubini, an economist and New York University professor famous for correctly predicting the popping of the U.S. housing bubble in 2007, called cryptocurrency "the mother or father of all scams and bubbles" while testifying at a congressional hearing on Capitol Hill. He said that everyone he knew that was actively involved in cryptocurrency trading was "financially illiterate," and "could not tell the difference between stocks and bonds."[89]

Pump-and-dump schemes

Similar to "boiler room" fraud schemes, which aggressively pushed penny stocks on investors by misleading them about their potential future value, some individuals or organizations have used social media to mislead victims into investing their money in altcoins, or alternative cryptocurrencies. These "pump-and-dump" ICO scams use misinformation to trick large numbers of people into investing in a new digital asset with the promise of huge returns, then sell all of their shares once its price reaches a certain point, causing a significant price drop, leaving investors with essentially worthless digital tokens. Some use false news reports, testimony from fake "experts," and other unscrupulous means to accomplish their goals. The CFTC warns potential investors that they should be especially wary of very new cryptocurrencies, and that extensive research on a particular company or coin is imperative for potential investors. Fraudulent digital asset scams can be reported at Whistleblower.gov.[90]

"IRS-approved" Digital Asset IRAs

Some frauds have advertised "IRS-approved" IRA funds and similar services involving digital assets. These typically rely on misinforming potential investors (for one thing, the IRS never endorses investments). Because self-directed IRAs can hold unregistered investments and are not taxed until withdrawn from an IRA account, they make for attractive, if false, potential investments to the unwary consumer.[91]

Initial Coin Offerings (ICO's)

An Initial Coin Offering (ICO), sometimes called an Initial Token Offering (ITO), is a method of crowdfunding a new project, such as a new form of blockchain or distributed ledger technology, a new platform or service, even a new cryptocurrency. It works to provide capital for cryptocurrency startups by collecting money from investors with the promise of returning some sort of profit.[92] The likelihood of this happening, of course, depends on the individuals running the company that launches the ICO. [93] According to the UK Financial Conduct Authority, investing in ICOs is considered a high-risk and speculative investment, as ICOs are currently not subject to regulation and, in most cases, do not offer protection to investors.[94]

ICO Bans

The Chinese government has been perhaps the most outspoken of ICOs, not to mention cryptocurrency in general. The People's Bank of China, the nation's centralized, national bank, announced on September 4, 2017 that buying and selling cryptocurrency is "illegal and disruptive to economic and financial stability." This caused a $35 billion decrease in global cryptocurrency markets within four days.[95] Some market analysts believe this move was made in order to protect China's economy from the looming threat of a potential popping of what many consider to be the crypto market "bubble." It may also have been a move to counter a broad swathe of "scam" ICOs by outlawing ICOs altogether, or even simply a move akin to "hitting the pause button" for awhile, until the crypto market matures. Other analysts criticize the move, saying any attention, be it regulation or outright banning, offers validation to something like cryptocurrency. Besides this, they argue, banning ICOs will not completely eliminate their presence, and lack of regulation from the government will only increase the volume of "shady" crypto market activities, as well as preventing China from reaping the benefits of investing in the integration of crypto technology.[96][97]

The same month China announced its ban, the South Korean government announced a similar ICO ban, citing a wave of recent arrests and closures of companies capitalizing off of fake cryptocurrencies, which occurred amidst a surge in cryptocurrency trading. The statement promised "stern penalties" on violators of the new laws.[98] In December later that year, South Korea's Financial Services Commission (FSC) announced that the ban would be lifted, and that new regulations would be put in place "to curtail money laundering and tax dodging." The new regulations would also likely include the laws that would prevent all but professional investors from participating in ICOs for startups and the financing of companies using cryptocurrency. FSC vice-chairman Kim Yong-beom said of the issue, "Bitcoin is complicated in its technology and investment method. So considering its risk and technology expertise, it is right for professional investors to do an ICO, not regular citizens who are not informed of its technology and complicity."[99][100]

ICO Regulation

ICOs functionally work in a manner similar to IPOs.[101] ICOs are a popular method for new cryptocurrency startups because they do not require existing capital.[102] However, a number of reported ICO-based scams, colloquially referred to as "pump and dump" ICOs, have led to a significant loss of public confidence in ICOs as a whole. In 2017, the United States Securities and Exchange Commission (SEC) announced that ICOs technically fall under the category of securities under U.S. law, and that the SEC should have the power to apply these regulations to ICOs.[103] Earlier that year, the Canadian Securities Administration released a public notice that specified legal requirements to those participating in ICO/ITOs in Canada.[104]

In October 2017, President Vladimir Putin personally approved a timeline for the creation of a regulatory framework for ICOs in Russia. Among the directives and regulations laid out by the Kremlin's official statement, bitcoin and other cryptocurrency miners in Russia will have to register with the government. Furthermore, Russian Prime Minister Dmitry Medvedev and central bank chief Elvira Nabiullina were tasked with drafting policies for taxation on income gained from cryptocurrency, as well as ascertaining the status of cryptocurrency in relation to the ruble, the "only legal tender in the Russian Federation." The report also mentions the Russian government's plan to establish a "regulatory sandbox" for states within the Eurasian Economic Union (EAEU), in order to create and test regulatory measures for cryptocurrencies and other fintech products, as well as creating a "single payment space" for EAEU nations.[105] Some countries, such as the United Kingdom, have created similar "sandboxes", which successfully attracted a number blockchain-centric startup companies to participate.[106][107]

Criminal Activity

The anonymity of crypto transactions has revolutionized digital criminal activity. One study at Newcastle University reported that following the dawn of bitcoin, malware and ransomeware attacks have increased. There have also been attacks by malware designed to mine bitcoins from victims' computers without their knowledge, called cryptojacking, though such attacks have declined somewhat in recent years.[108]

A "bitcoin bank robbery" took place in late 2013, in which a small, Australia-based website run by an 18 year old entrepreneur was hacked, leading to over $1 million worth of bitcoins being digitally robbed. Since transactions can't be reversed once they are completed, and Australia's government lacked regulatory policies, the stolen bitcoins were never recovered.[109][110]

On January 27, 2014, BitInstant founder Charlie Shrem was arrested at JFK International airport returning from a conference in Amsterdam. His company, which allowed users to digitally exchange bitcoins for fiat currency, had knowingly transferred money for criminals trading on the Silk Road website. Although Shrem had been aware of this, and sent an email to the user telling them, "you better stop", Shrem did not inform Federal authorities. This led to BitInstant closing its doors for good, and Shrem sentenced to two years in prison. Shrem became the first high-profile cryptocurrency luminary to be convicted on felony charges.[111][112]

One month later, Tokyo-based Mt. Gox, the world's first cryptocurrency exchange, closed down after a devastating $460 million worth of bitcoin was stolen via the bank's bitcoin wallets. Mark Karpelès, CEO and founder of Mt. Gox, attributed these to "weaknesses in our system." Karpelès added that he and everyone at Mt. Gox were "deeply sorry for what has happened."[113] Later, evidence surfaced that Karpelès was guilty of embezzling cryptocurrency from his own company, which led to his arrest.[114] In July 2017, he plead "Not Guilty" in Japanese court.[115] This was not the first time Mt. Gox had found itself on the wrong side of the judicial system, however; in 2013, the U.S. Department of Homeland Security seized millions from Mutum Sigillum LLC, a subsidiary of Mt. Gox. This was due to failure on MS's part to register with FinCEN as a money services buisness, which violates U.S. law.[116]

Cryptocurrency theft has not been limited to the digital realm, however. On January 22, 2017, three armed men broke into the home of cryptocurrency trader Danny Aston in Moulsford, Oxfordshire, England, demanding at gunpoint that Aston hand over hard drives containing a fortune in bitcoin.[117][118]

Coincheck, a Tokyo-based cryptocurrency exchange lost $534 million worth of XEM, the cryptocurrency used by NEM. This happened on January 26, 2018, making it the largest "crypto heist" to date.[119] In response to this, the Japan Blockchain Association (JBA) and Japan Cryptocurrency Business Association (JCBA) announced they would begin pooling efforts to create Japan's first self-regulatory cryptocurrency body in late February of 2018.[120][121]

On October 31, 2018, Anne-Elisabeth Hagen, wife of Norwegian real estate investor Tom Hagen, went missing. According to a Norwegian tabloid paper Verdens Gang, unnamed sources reported that a demand for €9 million had been made in Monero. Authorities and the family of the victim declined to make any public comments regarding the payment of a ransom.[122] A day before this was publicly reported, the kidnappers of Linathi Titshala, a nine-year-old girl, demanded a payment of 5 BTC in exchange for the girl. Titshala originally went missing December 16th, 2018.[123]

In December 2018, Bloomberg published a story about laundering money using bitcoin ATMs. The story explained how such ATMs, many of which have lax requirements for public use, including easily-faked credentials.[124]

Darknet Markets

Cryptocurrency has been used widely by criminals in the digital realm. This is especially the case in "Darknet" markets, or digital markets hidden from search engines like Google or Bing and thus available only to a select group of people - those "in the know."[125] In 2013, the FBI arrested Ross William Ulbricht (styling himself "Dread Pirate Roberts"), boss of the anonymous online drug marketplace, the Silk Road. Along with Ulbricht, they seized over 26,000 bitcoins, which were apparently the currency of choice for the illegal digital drug market. At the time, the seized amount equated to roughly $3.6 million. On what was to be done with the seized bitcoins, FBI officials stated, "this is kind of new to us...we'll probably just liquidate them."[126]

Criminology researchers Judith Aldridge and David Décary-Hétu published a paper in 2014 focusing on the incident as a case study for the impact cryptocurrencies have had on criminal activity, especially digital crime. The study explored how the Silk Road created a virtual market that significantly reduced the risk involved with criminal activity. Not only did it provide a method to move capital from vendor to buyer without it moving through a central authority like a bank, it also removed the necessity of being in the physical presence of a drug dealer.[127] Because of this, an estimated 1,200 deaths may have been prevented, though these figures are extremely difficult to verify.[128][129] For a time, this system worked so well, Ulbricht was able to carry out his daily operations from his personal laptop while sitting in the Science Fiction section of his local library, connected to its WiFi network.[130]

Since the Silk Road was taken down, there has been a sizable influx of sites offering similar services using the site's model. Consequently, the online drug marketplace has become decentralized.[131] Most transactions carried out over the Silk Road service occurred over TOR, a browser jointly developed by U.S. and Swedish government agencies in a U.S. Naval research lab.[132][133] Using TOR, users' identities and activities are well-protected from network surveillance, as well as third parties. Between the privacy afforded by the TOR service and the anonymity of bitcoin and altcoin services, not to mention the marked decrease of risk inherently involved with participating in criminal behavior,[134] Darknet markets have thrived.

Law enforcement agencies have had an exceptionally difficult time keeping up with the market's constantly-changing nature.[135] Users and vendors have begun to feel so safe, in fact, websites offering illicit services have been able to post publicly without incriminating individual users. In a bizarre development, the dichotomy of being able to operate within the opacity of services like TOR and financial systems based on bitcoin, combined with the resulting transparency of services provided and discussed throughout the broader criminal community (some users have posted experiences they had with drug and weapons dealers, even the results of chemical tests performed on contraband they purchased), customer service and product quality have become key aspects of competition between vendors of illegal goods and services like never before.[136]

In late 2018, the U.S. Treasury Department of Foreign Assets Control (OFAC) announced that two bitcoin addresses known to belong to two individuals suspected of engaging in money laundering and cybercrime. The individuals were Ali Khorashadizadeh and Mohammed Ghorbaniyan, both citizens of Iran suspected of being involved with ransomware attacks on U.S. citizens using the malicious software known as "SamSam," which targeted hospitals, corporations, universities, and government securities. The OFAC published both addresses, saying that the organization would be continuing to publish digital currency addresses "to identify illicit actors operating in the digital currency space."[137]

In April 2019, cybersecurity analytics firm Coveware published a report saying that the average payout for cryptocurrency ransomware attacks increased by the end of Q1 in 2019. The average amount of money demanded by ransomware attacks during this period was about $12,762.[138]

Cyber Attacks

Cryptocurrency has been used to commit cyberattacks. In March 2019, the United Nations Security Council published an expert panel report on illicit cryptocurrency-related hacking activities committed by the North Korean government. According to Nikkei Asian Review, which obtained and reported on the U.N. report, the North Korean government used crypto to bypass international economic sanctions. The report said that North Korean authorities used crypto this way because they give the regime "more ways to evade sanctions, given that they are harder to trace, can be laundered many times and are independent from government regulation." The report also said that an estimated $571 million in digital assets were lost as a result of North Korean crypto hacking attacks against Asian cryptocurrency exchanges between January 2017 and September 2018. This matched information reported by the South Korean government in 2018, which said that tens of millions of dollars worth of crypto stolen in 2017 were stolen by North Korean hackers.[139]

Ransomware

Ransomware is a type of computer virus that takes control of a computer system, steals information, or uses similar malicious tactics to gain leverage over the infected machine's user. Typically, the virus displays some type of message that instructs the victim to send money in exchange for returning control to the user. Cryptocurrency tends to be the preferred method of payment for these attacks; this is due to the anonymity that crypto technology creates for users transacting with it. The two most popular cryptocurrencies used for ransomware schemes are bitcoin (BTC) and Monero (XMR), according to a report by cybersecurity research firm Coveware published in April 2019.[140][141] In May 2019, a study by ProPublica found that the majority of cybersecurity firms that specialize in dealing with ransomware tend to deal with cryptocurrency by paying the amount of money demanded by the hacker carrying out the ransomware attack.

Some of the most common ransomware viruses include "Ryuk," "Bitpaymer," "Iencrypt," "WannaCry," and "SamSam."[142]

Tax Reporting

According to the IRS, all digital assets must be taxed as property. In 2019, the IRS said that like-kind exchanges only apply to actual property (not virtual currencies), so crypto-to-crypto transactions must be reported as well as transactions involving fiat currency. The IRS also counts mined cryptocurrencies as taxable income.[143]

Mining

The IRS counts mined cryptocurrency as taxable income. There are two ways to file:

  • Business miners must include their income from mined cryptos as well as expenses on Schedule C. Their income is subject to 15.3 percent self-employment tax. Some deductions can be claimed against income.
  • Hobbyist miners add their income from mined cryptocurrencies in Form 1040 and are not subject to self-employment taxes. Some deductions can be made.

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