Researchers call for Bitcoin to be regulated as tech to cut down on money laundering, terror financing

Last modified January 30, 2021. Published January 29, 2021.
Bitcoin should be regulated as technology, researchers say. (AP Photo/Rick Bowmer)

Bitcoin should be regulated as technology, researchers say. (AP Photo/Rick Bowmer)

Bitcoin and other cryptocurrencies should be classified as technology and be regulated primarily by private sector tech firms in order to best prevent the digital currency from being used for money laundering and terrorist financing, three researchers have argued in a new paper. 

The proposal would replace a current maze of regulation around Bitcoin, which occupies a convoluted regulatory gray area. In the U.S. alone, at least four federal regulators classify Bitcoin and other cryptocurrencies in conflicting ways: the Financial Crimes Enforcement Network treats it as a currency; the Consumer Commodity Futures Trading Commission classifies it as a commodity; the Securities and Exchange Commission declares it a security; and the Internal Revenue Service considers it taxable property. The regulatory mishmash confuses consumers, stifles innovation and leaves more room for illicit uses of the currency, the researchers argued. 

Each regulator has a legitimate rationale for its position, the researchers said, but the unique decentralized nature of Bitcoin and other blockchain-based currencies make all of the existing systems imperfect fits. 

“The sector itself has evolved in such a haphazard distributed way that it is very difficult for it to actually regulate itself,” said co-author Charles Larkin, director of research at the University of Bath’s Institute for Policy Research. “And that was made worse because the regulators themselves couldn’t decide what [crypto] really was.” 

Larkin wrote the paper, which is forthcoming in Research in International Business and Finance, alongside Emily Fletcher of Johns Hopkins University and Shaen Corbet of Dublin City University. 

The researchers proposed a three-tiered regulatory system. At the bottom would be individual users who buy and sell cryptocurrencies from companies offering transactional services. These companies would in turn constitute the second tier, which would have to meet standards set by the third tier: the World Wide Web Consortium, or W3C. 

The W3C, which currently sets international standards for internet development, would then establish and enforce uniform standards for Bitcoin transactions alongside national governments. These standards would be enforced for cryptocurrency transactions across the globe, making it easier for authorities to crack down on money laundering and terrorist financing, which can involve international transactions outside the jurisdictions of individual regulators and law enforcement agencies. 

“It’s easier to delegate to somewhere that’s a neutral third space than to try to have one national authority do it,” said Larkin. 

Having a uniform set of global standards would also encourage innovation by companies offering Bitcoin trading and other services involving cryptocurrency, the researchers argued. 

Companies desire “boundaries” and “clear red lines” from regulators that are currently missing in the cryptocurrency space, Larkin said.

For instance, they examined the influx of “initial coin offerings” in 2017 and 2018, when companies like Kik and Unikrn issued their own cryptocurrencies, arguing that they were creating their own currencies. The SEC disagreed, and fined the companies millions of dollars for what the regulator declared was an illegal sale of unregistered securities. 

“When you have regulators that do not agree on things, you create these gaps and lacunae that are not attractive to the private sector,” Larkin said.

And international trade tensions over the past several years have made creating new global standards, including those around cryptocurrencies, exceedingly difficult. 

“When this was being initially drafted, the Trump administration was still in full swing and anything that smacked of multilateralism was shot on sight,” said Larkin. 

But new U.S. President Joe Biden’s administration may be more open to such efforts, he added. 

The researchers also acknowledged that some loopholes for terrorists and money launderers would still exist under their plan, given the decentralized nature of intentionally hard-to-trace digital currencies.

Illicit actors could still avoid regulated cryptocurrency exchanges by conducting transactions on the dark web, an anonymized part of the internet that is more difficult for authorities to track and surveil.  They could also use Bitcoin ATMs, which do not require users to register or use traceable forms of payment such as credit cards. 

“Dark web loopholes are almost impossible to close up,” Larkin said. 

Larkin, who also researches topics like the effects of social media posts on companies’ share prices, said he became interested in writing about a cryptocurrency regulatory regime toward the end of 2019 through conversations with Corbet and Fletcher, who is a graduate student in Johns Hopkins’ global security studies program. 

“Myself and Shaen took aspects of the initial work she did and knocked it into an academic contribution,” said Larkin. 

The trio started work on the paper in early 2020 and submitted it in October. The article was accepted in early January and will be released in print later this year. 

The paper, “Countering money laundering and terrorist financing: A case for Bitcoin regulation,” was published online on Jan. 17 and is forthcoming in Research in International Business and Finance. The co-authors are Emily Fletcher of Johns Hopkins University, Charles Larkin of the University of Bath and Shaen Corbet of Dublin City University. Fletcher is lead author. 

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