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Real-World Cryptocurrency Impact
Key Takeaways
- Cryptocurrencies have disruptive nature that has gradually but surely begun to challenge the existing financial system.
- Some observers are concerned that bitcoin transactions' pseudonymous and decentralized structure might be used by criminals to conceal their financial operations from authorities.
- Cryptocurrencies users might utilize a pseudonymous, decentralized platform to hide revenue from tax authorities.
Introduction
In this report, we have provided insights into the current positive and negative impacts of cryptocurrency.
Current Real-World Impact of Cryptocurrency
Wins
1. Potential Economic Efficiency
- According to Kim T, author of On the Transaction Cost of Bitcoin. Finance Research Letters, "is due to its relatively low foreign-exchange transaction cost, as well as its independence from monetary authorities, governments, and third-party financial intermediaries." Glaser, F. Zimmermann, co-author of Bitcoin — asset or currency? Revealing users’ hidden intentions, believes that less-informed "bitcoin users are primarily interested in bitcoin as an alternative investment vehicle, rather than an alternative transaction system."
- Cryptocurrencies have disruptive nature that has gradually but surely begun to challenge the existing financial system.
- Traditional financial institutions bear great costs for employing personnel, operating and maintaining massive electronic networks and other infrastructure. And to meet these costs, they charge users of their services.
- Proponents of cryptocurrencies believe a cryptocurrency is an alternative form of investment and the financial transaction to the traditional financial system will provide: (1.) A Beneficial Rise in Economic Activities. (2.) Great Opportunities for Poorly Banked Countries. (3.) Low Transaction Costs. (4.) Increased Transparency of Transactions. (5.) More Power to Entrepreneurs.
2. Complement or Substitute to Established Financial Systems
- In countries with less advanced economies, traditional financial transactions do not arouse much trust from the public.
- According to Demirguc-Kunt co-author of Measuring Financial Inclusion and the Fintech Revolution, financial technology has the potential to replace "deficient traditional banking services," as demonstrated "by the use of mobile money accounts to transfer money in Sub-Saharan Africa. "
- Lagarde, C., author of Winds of Change: the Case for New Digital Currency, digital currencies have been lauded as a viable way to reach out to businesses and people in rural and marginalized areas.
- Benedikt Eikmanns, Prof. Dr. Isabell Welpe, and Prof. Dr. Philipp Sandner, authors of Decentralized Finance Will Change Your Understanding Of Financial Systems, believe that cryptocurrencies decentralized systems are providing innovative solutions to long-standing challenges in currency exchanges, in the insurance industry, and price volatility of transactions in central banks.
- According to Benedikt Eikmanns, Prof. Dr. Isabell Welpe, and Prof. Dr. Philipp Sandner, "crypto-based finance has reached the next maturity stage," and now "covers all the basic functions of a financial system" by providing efficient value transfers, connecting savers and borrowers, and competing for traditional finance funds.
Losses
1. Money Laundering
- Foley, S., co-author of Sex, Drugs, and Bitcoin: How Much Illegal Activity Is Financed Through Cryptocurrencies?, believes that Bitcoin's unique pseudonymity technology makes it appealing to those involved in illegal operations such as "drug trafficking, weapons trafficking, and prescription drug trade."
- According to Foley, in a recent study, roughly "25% of all bitcoin users and 44% of all transactions" are related to criminal activity.
- Money Laundering Criminals and terrorists are more likely to transact in cash and keep cash as an asset than to employ banks, partly because cash is anonymous to prevent financial institutions from establishing connections and records which "may be subject to anti-money laundering reporting and compliance requirements."
- "Some observers are concerned that" bitcoin transactions' pseudonymous and decentralized structure might be used by criminals to conceal their financial operations from authorities.
- Bitcoin, for example, was the money used on Silk Road, an online illicit drug marketplace. Between January 2011 and October 2013, when the authorities shut down the website and arrested the people behind it, this marketplace and Bitcoin escrow service enabled over 100,000 illicit narcotics purchases.
2. Tax Evasion
- Individuals might utilize a pseudonymous, decentralized platform to hide revenue from tax authorities, similar to how money laundering is done.
- The difficulties the Internal Revenue Service (IRS) had, at least initially, "in identifying individuals who owed taxes on cryptocurrency gains and collecting those taxes" demonstrates the potential for cryptocurrency usage in tax evasion.
- By November 2016, the IRS had "begun to suspect that bitcoin earnings were being under reported, with just 800 to 900 tax returns declaring such gains between 2013 and 2015.
- Even though cryptocurrency exchanges were not required to report transaction information to the IRS at the time, the IRS filed a lawsuit against Coinbase, the largest cryptocurrency exchange in the United States, to compel it to turn over customer data so that the IRS could calculate "the amounts taxpayers owed."
- Coinbase fought the disclosure of the information until a judge ruled against it in November 2017. To comply with the ruling, Coinbase alerted 13,000 clients that information in their accounts will be turned over.
Research Strategy
We have leveraged insights provided by the most reliable public media sources, and from expert opinions and consultancies such as Forbes, Springer. Link, Congretional Research Service and others to provide insights into the current positive and negative real-world impacts of cryptocurrency.