Essay: Difficulties Facing Regulators in their Regulation of Bitcoin

There are different aspects of Bitcoin, which have presented problems for the regulators as they try to come up with measures of regulation. These aspects are as follows: (1) the decentralized nature of Bitcoin, (2) easy access of Bitcoin through the internet, and (3) Bitcoin unlike any other form of currency was designed for multiple uses, and it has a potential of other uses.
Firstly, Bitcoin was designed to be decentralized in nature . This means that the currency is not denominated by any national currency or central bank, and can only be distributed using the internet. The problem for regulators in this case is that they do not have a central company, as in the case of money (e.g. dollars or euros) that they can target . It is hard for them to regulate the Bitcoin system as they would have to target individual computers of the users of this digital currency.
Secondly, Bitcoin is very easy to access, the only requirement that is needed is for a person to have an internet connection. Therefore, for the regulators, the problem that they face i.e. in the case of UK, is that currently Bitcoins are unregulated in the country, unless they can be adopted worldwide. This creates an opportunity for the criminals because, they will take advantage of the loopholes that they exist in Bitcoin system to be able to conduct their transactions . It provides an easy channel for criminals to trade based on this regulatory flaw.
Thirdly, Bitcoin was designed to fulfill different purposes that have diverse risks and concerns, which the regulators should consider . This means that it will be a challenge to create a specific regulation. The reason for this is that it will limit innovation, and the other uses will be unregulated . It will be difficult to create specific regulations for each Bitcoin potential use, and these regulations would likely be inflexible, expensive, and unbalanced . It shows the difficulties the regulators face when trying to implement Bitcoin specific regulations.
General Areas of Regulation
In order to come up with Bitcoin regulations, there is the need to come up with solutions to the problems that were identified in sub-section one. The first problem that was identified was the decentralized nature of Bitcoin. The problem that exists here is that regulators do not have a target for their regulations because in the Bitcoin system they do not have a central company where regulations can be enforced.
People use Bitcoin for different purposes such as there are Bitcoin exchangers, who exchange Bitcoins for the traditional currencies such as the dollar or euros. There are those who use Bitcoins for trading purposes . To be able to trade Bitcoins or engage in a transaction, people use different platforms such as the Bitcoin exchanges. This means that despite lacking a central company, the regulators can target the Bitcoin exchanges to place their regulations . The regulators should target Bitcoin users whose use of the Bitcoin is purposed for transactions, or who interact with traditional currencies, for these regulations to be able to work.
The second problem that was identified was easy access of Bitcoin, and the regulators faced the challenge of coming up with single country regulations that are ineffective because Bitcoin operates internationally . This means national regulations cannot be used to oversee international matters, unless they are adopted by other countries . The only way for this problem to be solved is by international countries meeting and coming up with laws that will be adopted in all the international countries. They have to understand that the Bitcoin system is not restricted by national boundaries or even the geographical position of people . For a criminal activity to be conducted in the UK, an individual can be even in China or in an African country. If each country has its own national regulations that are different from those of the other countries, it means that there will be loopholes that can be taken advantage of. However, because all these countries want to solve the same problem, they can adopt a similar international regulation to eliminate the loopholes that exist. Individual countries will then need to adopt these international regulations into their own legal laws.
The third problem that was identified as it is hard to come up with specific regulations for Bitcoin as this currency was designed for different purposes and uses. It has been seen that if regulators come up with individual regulations for all the uses of Bitcoin, it will limit the innovations of the Bitcoin technology. For the regulators they must find a way whereby they are protecting the stakeholders who are involved, while at the same time allowing for the innovation of this commodity.
The solution of this problem is a combination of the two solutions that have been identified in the two previous problems. It will be difficult to come up with specific regulations for every Bitcoin use. However, the regulators can target certain uses such as trading Bitcoins for traditional currencies, and when Bitcoin is used for trading transactions . The regulations will be placed on the Bitcoin exchange platforms, and these platforms will be expected to report any suspicious criminal activity that takes place on their platforms. They should have the legal national documents of all the people who use their platform for various transactions (especially those who are moving large volumes of money) for identification purposes . This will help curb criminal activities using Bitcoin. The second solution to this problem will be to adopt international regulations to help reduce the loopholes that currently exist in the national regulations.
Specific Areas of Regulation
Consumer Protection
There is the need to offer consumer protection when the consumers are dealing with Bitcoins. The reason for this is that there are no legal parameters that have been set in place to ensure that the exchange among different parties is assured . Consumers are liable to being defrauded the value of the Bitcoins that they possess . The UK plans to introduce regulations that deal with anti-money laundering activities , and ensuring that the Bitcoin exchange systems report any suspicious activities i.e. the ones that deal with terrorism or criminal activities to the relevant authorities .
However, these regulations do not address the issue of safety for the consumers. This is reflected by the case of Mt Gox, which as required had registered under the FinCEN regulations. It had complied with all the regulations that had been put in place in relation to the Bitcoin system, but it still lost most of its Bitcoins and the account holders with this company were unable to recover their funds. Currently, consumers are faced with many risks when using Bitcoin for business transaction purposes. In the Bitcoin system, one should know that the business transactions are irreversible. This means that once the transfer of Bitcoins has been transferred from owner A to B, it is final. In addition, no central authority can mediate or monitor these transactions. The problem with this is that the consumer is exposed to fraudulent activities, and he or she cannot claim the Bitcoins once he or she has transferred the ownership rights.
To ensure that the security of the consumers is assured, there is the need to conduct self-policing measures. There will be bodies monitoring the transaction processes in the Bitcoin exchange system platforms; identify users who conduct fraudulent activities, and blacklist them. The blacklisted names will then be circulated among the other Bitcoin exchange system platforms, other users will be warned about them, and their accounts will be frozen. This measure can work because it addresses the loopholes whereby criminals can escape because they are in a different jurisdiction to that where they conducted their criminal activities.
However, for this regulation to be able to work, it has to be adopted by all international countries. It will ensure that the correct standards are implemented by the Bitcoin system, which ensures its safety in regards to transactions.
Money Laundering and Crime
In relation to the money laundering activities, it involves people who knowingly transport, transmit, and transfer funds in order to carry out an unlawful activity such as ???cleaning dirty??? money, and even purchasing of drugs. The important factor here is that a person will knowingly transfer funds to promote an illegal activity. In the case of traditional currency to curb this problem is easier because money transactions can be traced.
However, for Bitcoin transactions, the problem exists because of the anonymity of the users , creating a loophole where criminals can be able to engage in criminal activities. Criminals prefer using this mode of transaction because based on their anonymity ; they cannot be identified when conducting illegal activities.
For regulators to curb out this vice there is the need to remove the anonymity clause for people who transact using Bitcoin accounts for purchases of traditional currencies or to conduct business. As was stated in the previous chapter, regulators should target Bitcoin exchange platforms. They should be required to have personal information of all their account holders. This includes their names, areas of residence, and their history of transactions. The reason for this is that in case they conduct any illegal activities using their Bitcoin accounts, they will not only be identified, but they can also be traced, and arrested.
Financial Regulation
The UK financial regulatory bodies such as the Bank of England, PRA, and FCA are coupled with a few challenges when it comes to the regulation of the Bitcoin system. Bitcoin is decentralized in nature, meaning that it does not have a central body that will honor the obligations that are under them when conducting a financial service. This means that under the current financial legal laws, it cannot be regulated under the general financial services regulation. Bitcoin presents another problem because it exists as its own unit of account i.e. it is not tied to any of the traditional currencies that exist. For this reason, it is not considered as e-money, meaning that it cannot be regulated under the existing e-money laws. This means that the only regulations applicable now are the ones in relation to the Bitcoin exchange systems.
Financial regulation can however, be applicable in case an investment is made using Bitcoins. The reason for this is that it does not matter what form of currency is used to purchase an investment as long as the two involved parties agree on the mode of payment. This means that the investment is legal, and therefore the financial product regulation can be applied in order to protect the rights of investors, and the investment that they make . In addition, if in future Bitcoins are accepted to be used by the public, it will mean that an international body such as the IMF will need to control it to avoid the fluctuation trends that it is currently experiencing. It will have control over its distribution, and ensure that it has setup the necessary parameters to ensure that there are no fluctuations, which will have a negative effect on the traditional currencies.