A Conceptual Framework for the Regulation of Cryptocurrencies

Abstract

This Essay proposes a conceptual framework for the regulation of transactions involving cryptocurrencies. Cryptocurrencies offer tremendous opportunities for innovation and development but are also uniquely suited to facilitate illicit behavior. The regulatory framework suggested herein is intended to support (or at least not impair) cryptocurrencies’ innovative potential. At the same time, it aims to disrupt cryptocurrencies’ criminal utility. To achieve these purposes, this Essay proposes a regulatory framework that imposes costs on the characteristics of cryptocurrencies that make them especially useful for criminal behavior (in particular, anonymity) but does not impose costs on characteristics that are at the core of cryptocurrencies’ generative potential (in particular, the decentralization of value-transfer processes). Using a basic utility model of criminal behavior as a benchmark, this Essay explains how regulatory instruments can be so designed. One such regulatory instrument is proposed as an example — an elective anonymity tax on cryptocurrency transactions in which at least one party is not anonymous.

Keywords: Cryptocurrencies, Bitcoin, Tax Evasion, Regulation, Criminal Behavior, Privacy, Decentralization, Economics of Crime, Public Ledger, Financial Intermediaries

JEL Classification: E62, G18, G28, H20, H23, H24, H25, H26, H29, K14, K23, K29, K34, K42