ANÁLISIS DEL PROCESO DE INCLUSIÓN

Cryptocurrencies raise expectations for the future, representing a promise for an efficient, transparent, privacy enhancing, and reliable medium of payment in the Internet. Still, there is a set of challenges to be met, if cryptocurrencies are to break out and offer a trust- worthy payment service for the general public. This final section will address these chal- lenges, starting from the question of regulation and touching upon the questions of privacy, volatility, internal organization, and infrastructure.

Regulation is important in order to ascribe cryptocurrencies with a clear and stable legal status, which is going to underlie their economic significance and integrate them

into financial system.22The position that cryptocurrencies should not or need not be reg- ulated is both unrealistic and unproductive. It is unrealistic because regulation agencies, due to security concerns, due to lobbying, and in an effort to maintain their control over the payment systems, will intervene and try to enforce a legal framework upon crypto- currencies (Middlebrookt and Hughestt, 2014, p. 840). Even if one could argue that Internet payments are not easily controllable, because of problems of location, flexibility, and technology, the state could still control the links between cryptocurrencies and offi- cial money by enforcing regulation to exchange markets (Stokes, 2012, p. 231). If altcoins are prevented from being converted to currency, then their economic value and their functionality are compromised rendering them unusable for the general public. Their path to the markets and the general public passes through regulation, and until a clear, consistent, and comprehensive framework is in place, it will be very difficult for them to achieve substantial levels of use.

If regulation is necessary, the optimal solution would be to design a unique crypto- currency regulatory scheme. Both in the United States and in the EU, cryptocurrencies seem to be forced in the established legal framework of payment technologies. Regula- tion usually treats new products and technologies by ceremonial encapsulating them to the existing regulatory framework rather than devising a new, tailor-made framework (Middlebrookt and Hughestt, 2014, p. 840). This is the case with the FinCEN directive, which treats cryptocurrencies as money-transmitting vehicles, and the same applies for the EU, where cryptocurrencies are defined as electronic cash regulated by the Electronic Money Directive 2009/110/EC. Nevertheless, it still possible, even though improbable to enact a regulatory framework specially developed to accommodate them. To that effect, cryptocurrencies need to acquire a critical mass in transactions beyond speculation. Only then could be possible to lobby for a more favorable regulation countering the mis- trust of government and the efforts of competitors to push cryptocurrencies to the estab- lished business model of electronic payments.

Price volatility poses an equally serious barrier as inappropriate legislation (Evans, 2014, p. 6). Most merchants do not keep any of their revenue in cryptocurrencies, but convert them daily in the official currency.23During the early stages, some volatility

22

“Bitcoin appears to suffer by being disconnected from the banking and payment systems of the U.S. and other countries. Most currencies are held and transferred through bank accounts, which in turn are protected by layers of regulation, deposit insurance, and international treaties. Without access to this infrastructure, Bitcoin has proven vulnerable to fraud, theft, and subversion by skilled computer

hackers” (Yermack, 2014, p. 17).

23

“Expedia the big online travel site, announced on Wednesday [the 9th of June 2014] it will begin accepting Bitcoin for hotel bookings through its website, becoming the first major travel-agency to take the digital

currency.. . .Expedia, which is using Coinbase for bitcoin processing, won’t hold the digital currency it

receives, but that’s not ‘a statement on bitcoin, pro or con,’ Mr. Gulmann explained. Rather, Coinbase’s

default setting is for a daily settlement back into U.S. dollars.”The Wall Street Journal, June 11, 2014. Web.

http://blogs.wsj.com/digits/2014/06/11/expedia-starts-accepting-bitcoin-for-hotel-bookings/?

mod¼ST1(accessed July 28, 2014).

169 Blockchain and Digital Payments: Analysis of Cryptocurrencies

is to be expected, but eventually, much of the uncertainty should be resolved if crypto- currencies are to be used as independent media of exchange. The price instability may be a further reason why there is no widespread acceptability of cryptocurrencies by mer- chants, despite their comparably low transaction fees. In the few cases that merchants accept altcoins, they convert their revenues to the official currency immediately or rely to third parties for helping them to manage their operations and their volatility risk (Evans, 2014, p. 10). The requirement of this kind of intermediation adds to the cost of processing transactions but more importantly compromises the business model of alt- coins and makes them dependent to third parties, which take over their operation and their revenues. Volatility creates yet another, potentially, more serious problem. The erratic movement of cryptocurrencies has made them a vehicle of speculation, where individuals bet on the future value in order to achieve short-term profits. The tendency of speculation is further encouraged by the fact that some of the cryptocurrencies, most prominently bitcoin, constrain their supply up to a given number, creating a deflationary effect. Speculation causes ever more price volatility, which prevents cryptocurrencies from serving efficiently and independently their function as media of payment.

Privacy is one of the main issues for regulators at the same time as it is one of the distinguishing characteristics of cryptocurrencies. Their ability to conceal the identity of the transacting parties and to protect them from data mining, surveillance, and exclu- sion gives them an important comparative advantage. At the same time, governments are concerned about money laundering, finance of criminal activities and terrorism, and the use of cryptocurrencies to that effect (Stokes, 2013, p. 2). A delicate balance needs to be kept between ensuring the privacy of transactions and preventing criminal use by placing safeguards in the system. Two recent events make the issue of privacy in economic trans- actions even more contested. The NSA affair proved that mass surveillance is a reality and raised the awareness and the desire of the public for privacy protection. At the same time, the Silk Road marketplace, where bitcoins were used to purchase illegal goods and ser- vices, including narcotics and stolen credit card numbers, pointed to the dangers from the illegitimate use of privacy enhancing payment technologies.24It seems difficult to find a balance between privacy protection and crime prevention, but this is essential not only for the development but also for the survival of cryptocurrencies.

A final challenge relates to the supporting infrastructure of cryptocurrencies, and here, we refer both to the internal management structure of cryptocurrencies, including the deci- sion makers, the programmers, and the miners, and to the providers of external services,

24

“The Silk Road marketplace, an Internet portal for the sale of illegal narcotics which accepted only bitcoins for payment, was sometimes reported to account for as much as half of the early Bitcoin transaction volume although this estimate is subject to considerable dispute. The Silk Road association helped give bitcoins an

early reputation for lawlessness, and this outlaw cachet may not have harmed its appeal at all” (Yermack,

especially the markets and the supporting software providers. The recent collapse of Mt. Gox, the biggest Bitcoin exchange, proves with the most vivid and immediate fashion that the payment industry needs reliable and professional solutions (Yermack, 2014, pp. 1–2). It is imperative that the organization of cryptocurrencies is improved to ensure consumer protection concerning both the operation of cryptocurrencies themselves and the associated services, be it software or exchange support. The question of regulation reemerges with renewed force here and also the role that established companies and business models in the development of cryptocurrencies after the collapse of Mt. Gox.