NAVIGATING THE TRANSFORMATIVE POTENTIAL AND LEGAL CHALLENGES OF CRYPTOCURRENCIES AND BLOCKCHAIN TECHNOLOGY

REGISTRO DOI: 10.69849/revistaft/ar10202012011050


Jammylly Fonseca Silva;
Fabiana de Sá Ferreira.


Abstract

The rise of cryptocurrencies like Bitcoin and Ethereum, along with the underlying blockchain technology, is fundamentally transforming the global financial system. This technological advancement offers significant opportunities for innovation but also presents complex legal challenges. The primary issue is the absence of a uniform global regulatory framework, leading to diverse and sometimes conflicting regulatory approaches among different countries. This regulatory inconsistency creates uncertainty for investors and users. Key concerns include the anonymity provided by cryptocurrencies, which raises issues related to money laundering and terrorist financing, as well as consumer protection and the enforceability of smart contracts. Regulatory authorities have begun implementing measures such as “Know Your Customer” (KYC) policies and transaction monitoring to address these issues, yet the effectiveness of these measures is debated, particularly in jurisdictions with lenient regulations. Blockchain’s decentralized nature poses additional challenges for consumer protection, as there is no central authority to reverse fraudulent transactions. Emerging regulations are focusing on ensuring that cryptocurrency platforms adhere to strict cybersecurity standards. Moreover, blockchain technology introduces new questions regarding property rights and the legal status of smart contracts. The technology’s ability to provide a tamper-resistant record system offers potential benefits for various sectors, including finance, healthcare, and entertainment. However, achieving these benefits requires a strategic, market-wide approach and international cooperation to address jurisdictional and regulatory challenges. The studies by Guadamuz and Marsden (2015), Savelyev (2017), Dierksmeier and Seele (2018), Conti et al. (2017), and Morini (2016) highlight these issues and opportunities, offering insights into the legitimacy, regulation, security, privacy, and business applications of cryptocurrencies and blockchain technology. Collaborative efforts are essential to develop a cohesive regulatory framework that balances innovation with protection and integrity.

Keywords: Cryptocurrencies; Blockchain Technology; Regulatory Challenges; Smart Contracts; Consumer Protection.

Cryptocurrencies such as Bitcoin and Ethereum, along with the underlying blockchain technology, are fundamentally transforming the financial landscape by facilitating decentralized and transparent digital transactions. However, this technological advancement has also exposed a range of legal challenges that must be addressed to ensure the security, compliance, and integrity of the global financial system.

One major legal issue is the absence of a unified global regulatory framework for cryptocurrencies. Different countries have adopted varying stances, classifying cryptocurrencies as commodities, currencies, or digital assets, leading to diverse tax regimes and compliance requirements. While nations like the United States and Japan are making strides in regulation, other jurisdictions have less defined rules, creating uncertainty for investors and users.

The anonymity associated with many cryptocurrencies raises concerns about money laundering and terrorist financing. Regulatory bodies, such as the Financial Action Task Force (FATF), have issued guidelines to trace suspicious transactions involving cryptocurrencies. Cryptocurrency exchanges and service providers are now required to implement “Know Your Customer” (KYC) policies and transaction monitoring to address these risks, though the effectiveness of these measures is debated, especially in regions with more lenient regulations.

The decentralized and irreversible nature of blockchain transactions poses additional challenges for consumer protection. Hacking and cyber fraud are significant concerns, and without a central authority to reverse fraudulent transactions, consumers face considerable risks. Emerging regulations aim to enforce stringent cybersecurity standards and ensure that cryptocurrency platforms maintain adequate financial reserves to cover potential losses.

Blockchain technology also raises new questions about property rights and the enforcement of contracts. Smart contracts, which are self-executing programs stored on the blockchain, challenge traditional notions of legal validity and enforceability. While some jurisdictions are starting to recognize these contracts, a global consensus on their legal status remains elusive.

Figure 1: Essential aspects of blockchain technology. Source: Wenner (2017).

Another issue is the legal liability and governance of blockchain networks. The absence of a central authority complicates liability in cases of technological failures, contractual disputes, or security breaches. Governance models, typically based on consensus among network participants, introduce questions about transparency, accountability, and the application of traditional laws in a decentralized environment.

The classification of cryptocurrencies affects their taxation. In many countries, cryptocurrencies are treated as assets and subject to capital gains tax. However, the volatility of these assets complicates tax compliance, especially in jurisdictions where tax guidance is still evolving.

The global nature of cryptocurrencies introduces transnational legal issues. Jurisdictional ambiguity arises in legal disputes involving parties from different countries. International cooperation is essential to address illicit activities and harmonize regulations, but achieving this is challenging due to differing regulatory approaches.

The advancements in cryptocurrencies and blockchain technology offer significant opportunities for innovation but also present complex legal challenges. Regulators, lawmakers, and judicial authorities must develop a legal framework that fosters innovation while safeguarding consumers and ensuring the stability and security of the global financial system. As cryptocurrency usage continues to expand, a more cohesive and harmonized regulatory approach will be crucial, requiring ongoing collaboration between jurisdictions to tackle the challenges posed by this emerging technology.

Guadamuz and Marsden (2015) analyze Bitcoin from a legal and regulatory standpoint, focusing on its legitimacy and regulatory potential. They explain Bitcoin’s relevance, discuss its associated problems, and address questions about its legality, regulatory responses, and the feasibility of regulation. The study highlights the interest in virtual currencies, the failure of self-regulation, and the lessons learned. It concludes that while Bitcoin may be compared to “Second Life” a decade later, blockchain technologies have transformative potential similar to Web 2.0 social networks.

Savelyev’s study (2017) explores legal aspects of blockchain technologies in the context of copyright. The author identifies challenges in distributing copyrighted works digitally, how blockchain could address these challenges, and the associated issues. Savelyev argues that blockchain could enhance transparency in copyright ownership, mitigate online piracy risks, and create a more organized market for “used” digital content. However, challenges include deciding where to store protected content and balancing blockchain’s immutable nature with copyright law’s informal ownership basis. The study calls for further legal work to ensure trust in blockchain records, legalize cryptocurrency transactions, and address the legal status of smart contracts.

Dierksmeier and Seele (2018) examine the impact of cryptocurrencies, including Bitcoin and others, from a business ethics perspective. They note the extensive discussion about cryptocurrencies’ technological implications and their potential as alternatives to centralized banking. However, there is limited academic literature on the ethical significance of cryptocurrencies. The authors develop a 3 × 3 framework to analyze the ethical impacts of cryptocurrencies, considering their potential as morally beneficial, detrimental, or ambiguous. They also suggest future research directions, including the evolving roles of miners and regulators, and the prosocial and antisocial uses of cryptocurrencies.

Conti et al. (2017) provide a comprehensive survey of Bitcoin’s security and privacy aspects. They review Bitcoin’s system, its components, and the vulnerabilities associated with its underlying technologies, including blockchain and proof-of-work consensus protocol. The study assesses the effectiveness of current security solutions, discusses anonymity and privacy threats, and explores privacy-preserving measures. The authors highlight critical challenges and propose directions for future research to enhance Bitcoin’s security and privacy.

Morini (2016) explores blockchain technology’s business applications, emphasizing its potential to improve financial markets. While there is significant enthusiasm about blockchain’s efficiency gains, Morini argues that its true potential lies in reforming financial business models rather than merely applying blockchain to existing models. The study highlights how aspects of market organization, new accounting and legal frameworks, and technological elements from cryptocurrencies can create more robust, efficient, and stable financial markets, albeit requiring a strategic, market-wide perspective. Morini also presents a business case for collateralizing financial derivatives, demonstrating quantifiable benefits in reducing costs, capital, and risk.

Beck et al. (2017) investigate blockchain as a distributed ledger technology, noting its potential to revolutionize economic and social transactions beyond cryptocurrencies. The study highlights blockchain’s role in creating a tamper-resistant digital asset ownership record and its potential to transform traditional record-keeping systems. Despite significant practical advancements, academic research on blockchain’s broader implications is still developing. The study presents early research on blockchain’s positive impacts, specifically in financial services and asset management, and explores its potential applications across various industries.

The evolution of cryptocurrencies and blockchain technology is profoundly reshaping the global financial system, offering significant opportunities for innovation while also presenting complex legal challenges. The lack of a uniform global regulatory framework and the diversity of regulatory approaches among countries create an environment of uncertainty for investors and users. Concerns about anonymity, consumer protection, and the validity of smart contracts highlight the urgent need for a cohesive and harmonized regulatory approach. Additionally, the transnational nature of cryptocurrencies imposes further challenges related to jurisdiction and international cooperation.

The studies by Guadamuz and Marsden (2015), Savelyev (2017), Dierksmeier and Seele (2018), Conti et al. (2017), and Morini (2016) provide a comprehensive overview of these challenges and opportunities. While Guadamuz and Marsden explore the legitimacy and regulation of cryptocurrencies, Savelyev examines how blockchain can transform copyright management. Dierksmeier and Seele assess the ethical impact of cryptocurrencies, and Conti et al. analyze the security and privacy aspects of Bitcoin. Morini, on the other hand, discusses the potential of blockchain to reform financial business models.

In summary, while blockchain technology and cryptocurrencies offer transformative potential for the financial system and other sectors, it is crucial for regulators, lawmakers, and judicial authorities to work together to create a regulatory environment that fosters innovation, protects consumers, and ensures the integrity of the global financial system. Ongoing research and international collaboration will be essential in addressing legal challenges and ensuring that the benefits of this emerging technology are widely realized.

References 

Beck, R., Avital, M., Rossi, M., & Thatcher, J. (2017). Blockchain Technology in Business and Information Systems Research. Business & Information Systems Engineering, 59, 381-384. https://doi.org/10.1007/S12599-017-0505-1.

Conti, M., Kumar, S., Lal, C., & Ruj, S. (2017). A Survey on Security and Privacy Issues of Bitcoin. IEEE Communications Surveys & Tutorials, 20, 3416-3452. https://doi.org/10.1109/COMST.2018.2842460.

Dierksmeier, C., & Seele, P. (2018). Cryptocurrencies and Business Ethics. Journal of Business Ethics, 152, 1-14. https://doi.org/10.1007/S10551-016-3298-0.

Guadamuz, A., & Marsden, C. (2015). Blockchains and Bitcoin: Regulatory Responses to Cryptocurrencies. Sustainable Technology eJournal. https://doi.org/10.5210/FM.V20I12.6198.

Morini, M. (2016). From ‘Blockchain Hype’ to a Real Business Case for Financial Markets. Governance. https://doi.org/10.2139/ssrn.2760184.           

Savelyev, A. (2017). Copyright in the Blockchain Era: Promises and Challenges. ERN: Regulation (IO) (Topic). https://doi.org/10.2139/ssrn.3075246.