Bitcoin Redux

Bitcoin has become “a combination of a bubble, a Ponzi scheme and an environmental disaster,” according to the Bank for International Settlements [Car18]. An idealistic experiment – in which cypherpunks tried to create a currency independent of central banks – went viral after the 2008-9 financial crisis. With its peak valuation of over $840bn exceeding Apple’s market cap, the cryptocurrency bubble has attracted ever more speculators, ever more implausible startups and ever more attempts at regulation. The energy consumed by miners now exceeds that of Ireland, and is six times that of Europe’s biggest wind farm [Her17]. Europol estimates that 3–4% of Europe’s crime proceeds are laundered through cryptocurrencies, with the figure rising rapidly [Eur17]. New criminal applications have emerged, from online 1 drug markets to ransomware, and helped drive demand for bitcoin. Some of them may become permanent even if bitcoin disappears completely (now that its value fluctuates wildly, ransomware authors demand Amazon gift vouchers instead). The latest crime wave is bitcoin robberies – where investors in cryptocurrencies are held up at gunpoint and forced to transfer large sums on the spot to the robbers [Pop18]. The question of how to track and recover stolen bitcoin is urgent.

When asked by policymakers what might be done, technologists tend to be pessimistic: the cryptography appears sound, and as there’s no-one in charge for the courts to go after, there’s no obvious pressure point.

We beg to differ. Time and again, tech firms have challenged incumbent firms by circumventing an established industry’s rules and regulations. Sometimes the outcome has been beneficial: online travel bookings make life easier than it was under old-fashioned travel agents, and online rating services make it more predictable. Sometimes we just replace one set of oligopolists by another: iTunes, YouTube and Spotify have displaced and impoverished the music majors. And sometimes the results are unpleasant. The cosy taxi monopolies in many cities may have been ripe for a shake-up; but when Uber started letting drivers work sixteen hours a day, failed to perform background checks on drivers and didn’t report crimes against passengers, mayors acted. It was not enough for the company to say “We’re not a taxi company, we’re a platform.’ They were found to be a taxi company soon enough, and in some cities – such as London – their license was withdrawn.

In many application areas, from taxis and hotels through insurance broking and air travel to health services, the solution turns out to be simple: just find ways to enforce the rules we already have. They have evolved over decades or even centuries and tend to fit their industries fairly well.

Our question in this paper is therefore whether the harm that cryptocurrencies do could be mitigated using existing laws and existing regulatory structures with at most very minor tweaks. We will answer this question cautiously in the affirmative. To do so we need to consider not just blockchain technology in the abstract, but actual industry practice and the relevant law and economics.

The contributions of this paper are to analyse how the law of stolen goods and existing financial regulations can create a natural framework in which the proceeds of crime can be traced in an efficient and incentive-compatible way. Section 2 deals with the issues of private and public law; section 3 with the shortcomings of existing approaches to blockchain tainting and bitcoin due diligence, and what a better approach would look like in both technical and business terms; section 4 presents empirical results, and section 5 describes the actual operation of the cryptocurrency markets; section 6 discusses policy options, and section 7 summarises our conclusions.

We turn to the law first.

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