Regulating digital currencies

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REGULATING BITCOIN AND DIGITAL
CURRENCIES
Author: Yuri Livshitz. 306927862
Submitted on 27 April 2021

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Table of Contents
Introduction ........................................................................................................................... 3
Theoretical Backgroud - What is bitcoin ................................................................................. 5
Bitcoin complexity – Forks and halving................................................................................... 7
Crypto community.................................................................................................................. 8
The Advantages of Digital Currency.......................................................................................10
The problems of Digital Currency...........................................................................................11
Control entities......................................................................................................................14
Regulating crypto systematic level ........................................................................................20
Granting Digital Currencies Membership to the IMF ..............................................................26
Conclusion.............................................................................................................................27
Bibliography..........................................................................................................................29

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Introduction
The birth of the Internet heralded in a new era of cheaper and more efficient transactions. E-
commerce—has brought with it a number of new and complicated social and economic
challenges. Many theorized that the advent of the Internet would cause a new kind of money to
be born.1 Rather than carrying around paper bills or metal coins, people would instead switch to
digital currency: Internet-based money stored on a computer and transferred over the internet.
Bitcoin is a private digital currency traded online via a peer-to-peer network.1
Bitcoins are stored
as electronic files on a computer’s hard drive, and can be accumulated or transferred just like an
e-mail.3 Software algorithms embedded in the online Bitcoin network protect against fraud and
ensure that the files (bitcoins) cannot be forged. Bitcoin was designed to operate without the
need for intermediaries or any central issuing authority.2
Bitcoin does not rely on a central bank
to issue it, a commercial bank to store it, or a credit card company to transfer it. Instead, users
interact with each other directly and anonymously and without direct third-party intervention.3
Bitcoin’s ability to serve as regulation-free virtual cash poses a number of difficult legal questions
thanks to its transnational and largely decentralized nature. As Bitcoin gains acceptance and
continues to grow in popularity regulatory solutions for the challenges it presents have to shift
form restrictions and disregard to genuine and collaborate attempt to embrace bitcoin as part of

4
international finical system. My research will overview what was done so far by international
institutions and what can be done to make the Bitcoin and risks related to it manageable.
The paper will start with Bitcoin technological overview and then by presenting key academic
research on the subject. Then I will present key organization that aim to control bitcoin operation
and functionality in the modern economical system.4
In terms of the research question the paper aim is to investigate the possibility of effective control
over Bitcoin without alienating the users or slipping to anti-democratic means.
Research Methodology - Most research undertaken for this paper was qualitative in nature and
involved the summary and analysis of primary and secondary literature including publicly
available government documents and communications, academic journal articles and book
chapters, and reports from established research institutes.
Terminology - This research paper will often refer to the concepts of “bitcoin” and “crypto” or
“crypto currency”, sometimes interchangeably. The term “crypto” will be used as general re .
“crypto” is the more prevalent term and covers broad range of currencies derived from bitcoin
4
Andreessen, Marc.‘Why Bitcoin Matters’, The New York Times, 21 January 2014,
http://dealbooknytimes.com/2014/01/21/why-bitcoin-
matters/?_php=true&_type=blogs&_php=true&_type=blogs&_ r=1.

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via code forks or used for other purpose and operating on different blockchains . References to
“crypto regulation” will reflect on actions taken by nation states and international organizations
to mitigate, disrupt, and neutralize potential threats from crypto coins in general to finical system
and global AML policies.
Theoretical Backgroud - What is bitcoin
Bitcoin is two things at once. First, it is a digital currency, which has no paper counterpart. Second,
Bitcoin “private currency”: a currency provided by private enterprise aimed at combatting
government monopolies on the supply of money.
In 2009, a cryptologist calling himself Satoshi Nakamoto created “Bitcoin,” the world’s first digital,
decentralized, and partially anonymous currency. Nakamoto was inspired by an article written
back in 1998 by Wei Dai, a graduate from the University of Washington. Nakamoto sought to
create a medium of exchange that avoided the need for intermediaries in electronic transactions,
and one in which government involvement “permanently forbidden and permanently
unnecessary.”5
5
Nakamoto, Satoshi. ‘Bitcoin: A Peer-to-Peer Electronic Cash System’, 2008,
http://bitcoin.org/bitcoin. pdf.

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Individual Bitcoin transactions are encrypted, logged by a decentralized network running on
thousands of computers, and recorded in a public ledger.6
This public ledger records which
Bitcoins have been spent or accepted. Bitcoins are transferred from one user to another once
the transaction has been cleared by another Bitcoin user on the peer-to-peer Bitcoin network.
Transactions occur without the presence of a government, bank, payment network, regulator. In
lieu of traditional institutional protections, Bitcoin relies on various technological measures to
ensure its transactions are secure.7
Bitcoin operates using a “cryptographic proof” system, which allows users to deal directly with
one another without needing a third party to authorize the transaction. Each Bitcoin
transaction uses public-key encryption to ensure the transacting parties’ privacy. Public key
encryption generates two mathematically related keys. The private key is used to access the
Bitcoins kept in the payor’s account.
6
Ibid
7
Davidson, Paul. ‘Is Bitcoin “Money”? The Post-Keynesian View’, Real-World Economics Review
Blog, 27 November 2013, http://rwer.wordpress.com/2013/11/27/14335/.

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Bitcoin also uses a widely-published “peer-to-peer distributed timestamp server” to verify that
the digital coins have not been “double spent”—in other words, counterfeited. A timestamp
records the exact time that a Bitcoin is created or a transaction from one user to another
occurs.50 These timestamps are aggregated into a master list of transactions involving a
particular Bitcoin file called a “block chain.”8
Bitcoin complexity – Forks and halving
Bitcoin has very rigid and complex governance system bitcoin logic and operation can be
modified via software updates this however have to be accepted by the miner’s network which
facilities bitcoin transactions. Any modification in operation, block size or other technical
characteristic of bitcoin is subject of popular support. Bitcoin core community is very
conservative in its perception of Bitcoin and only security related changes are accepted. Any
attempt of modification to operation of Bitcoin creates significant opposition as it contradicts
Satoshi design of Bitcoin.
Still multiple groups attempted to modify bitcoin to make it faster, cheaper to transact or provide
other functional benefits via protocol modification all these proposals weren’t accepted by
Bitcoin Core community and the deviants created Forks. Fork is basically different blockchain
8
Davidson, Paul. ‘Is Bitcoin “Money”? The Post-Keynesian View’, Real-World Economics Review
Blog, 27 November 2013, http://rwer.wordpress.com/2013/11/27/14335/.

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which can run different code parameters this way multiple currencies were created Bitcoin Cash
(BCH) , Bitcoin Gold (BTG) and even Bitcoin Satoshi Vision (BSV).
Some of the descendent coin supporters share criticism of current Bitcoin functionality and
community. They often blame Bitcoin for inability to support fast transaction of large transaction
amount.
Apart from forks which can potentially challenge the Bitcoin of functional level (if someone
creates coin with significant better operation) Bitcoin is also subject to halving by design
“For every 210,000 blocks that are mined, the reward for mining a block falls by half. For the first
210,000 blocks in bitcoin’s early days, the reward was 50BTC per block. As more blocks were
mined and more bitcoins went into circulation, the first set of 210,000 blocks were mined by
2012, and the reward was cut in half to 25BTC.”
Crypto community
Crypto community is critical to success of every crypto currency project and Bitcoin’s one in
particular. To summarize crypto community is:
“A community is referred to as being a social group of any size, sharing common characteristics
or interests. The same idea and context apply to crypto and blockchain technology groups where

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members share the same interests, ideas, and love for cryptocurrencies like bitcoin (BTC) and
thousands of others.
Crypto communities are usually present on social networking platforms such as Telegram, Viber,
Slack, and Discord, among others.”9
Crypto community creates significant benefit to the project as it consists from people who believe
in the project and want to promote its technology or value proposition to others.
Since majority of crypto projects are position as an alternative to government money (fiat).10
While the Crypto community by itself often exhibit libertarian values.
Core values of crypto movement pursue to maximize autonomy and political freedom,
emphasizing free association, freedom of choice, individualism and voluntary association. Crypto
enthusiasts share a skepticism of authority and state power. This makes crypto and Bitcoin eco-
system anarchic in a way and extremely hard to govern or regulate via traditional financial and
legal institutions.
Crypto currencies and Bitcoin have different level of anonymity by design which makes them hard
to track and complex to seize.
9
https://paxful.com/blog/importance-of-crypto-community/
10
https://core.ac.uk/download/pdf/230751255.pdf

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The Advantages of Digital Currency
Digital money offers advantages over traditional, paper-based fiat currencies. First, digital
currencies do not require the physical presence of for transaction finality. Transactions can be
completed anytime, anywhere, without the need to coordinate direct interaction of the
participants. This advantage creates several significant economic benefits. The costs associated
with the production, transportation, and handling of physical currency can be substantial. The
estimated annual costs of handling central bank currency by US retailers and banks are $194
billion, which includes costs of processing and accounting of money, storage and security. The
cost of an electronic payment system is less than 1/8 of a paper payment system.11
Bitcoin also offers a superior store of value - when assessing a currency as a store of value, the
key question is whether the currency is viewed as reliable and stable enough to operate
effectively. After all, storing wealth in any medium that is easily susceptible to collapse or fraud
is unwise. As explained above, traditional currencies are often accepted as stores of value
because they are backed by governments which, in turn, gives them a sense of legitimacy and
11
Falkvinge, Rick. ‘The Target Value for Bitcoin Is Not Some $50 or $100. It is $100,000 to
$1,000,000’, Falkvinge.net, 6 March 2013, http://falkvinge.net/2013/03/06/the-target-value-for-
bitcoin-is-notsome-50-or-100-it-is-100000-to-1000000/.

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stability in the eyes of users. But government backing is problematic. If a government decides to
inflate its currency, the wealth held by individuals in the form of currency decreases.
The problems of Digital Currency
Uncertainty - Despite the potential advantages of digital currencies like Bitcoin, their wide-spread
adoption faces a number of obstacles. First and foremost, economists are worried about the
uncertainty surrounding the operation and growth of digital currencies. Because so much of the
data on these currencies is either supplied directly by the issuer or scattered across the Internet,
it is difficult reach any solid conclusion on whether these currencies might be widely accepted.
Many of the projects suffer from extreme speculation and volatility. In some extreme cases coins
can be manipulated. Some of the projects have small community support which can lead to 51%
attack on the coin and effectively allow double spending of the coin or even blockchain rewrite.
“The Bitcoin Gold (BTG) blockchain has suffered a 51% attack resulting in over $70,000 worth of
BTG being double spent. According to a GitHub post by James Lovejoy, a researcher at MIT’s
Digital Currency Initiative, the hard-fork of Bitcoin was hit by two deep reorganizations of over
10 blocks on Jan. 23 and 24.”12
12
https://cointelegraph.com/news/bitcoin-gold-blockchain-hit-by-51-attack-leading-to-70k-double-spend

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A 51% attack is a situation where a single entity or group controls over half of the hashpower
securing a blockchain. This then allows control over verification of new transactions, and the
power to reverse transactions, allowing the double spending of coins.
Still despite the drawbacks and as a result of COVID-19 extensive money mass creation by central
banks Bitcoin and crypto value sharply increased. Despite potential drawbacks, one thing is clear:
Bitcoin’s value has skyrocketed. In October 2011, one Bitcoin was worth approximately two US
dollars, putting the value of the total number of Bitcoins in circulation at the time at
approximately $20 million.13
As of now in 2021 one Bitcoin worth approximately 55,000 dollars
with makes Bitcoin overall worth more than trillion dollars. Multiple other currencies emerged
with different technical characteristics and total crypto market value reached to more than 2
trilion dollars. Bitcoin ATH (all time high) value reached this year to more than 64,000 $
Significant problem arises from the fact that information and statistics that would be needed in
order to assess the speed at which these virtual currency schemes are growing and the point at
which they could present a threat. The quantitative information that is available is not extensive
and is usually provided by the respective scheme owner.
Multiple Bitcoin skeptics blame bitcoin for possible usage of it for terrorism funding. This risk
however is probably overblown. Several terrorist organizations like Hamas which tried to accept
13
https://coinmarketcap.com/

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contributions in Bitcoin failed to receive significant number of coins. During three months of
operation Hamas campaign managed to receive 7500$ worth of bitcoins.
As Rand research states “Current concerns about cryptocurrency as a significant enabler of
terrorist groups are almost certainly overblown”14
. This is also related to sophisticated analytics
solutions which can be used to trace “dirty” bitcoins. Bitcoins aren’t really anonymous as any
attempt to convert them to bank money in a significant amount requires work with traditional
financial institutions.
Governments and financial institutions employee advanced technology to track bitcoin origin and
source . Blockchain analysis is the process of inspecting and identifying and visually representing
data on a cryptographic distributed-ledger known as a blockchain. The goal of blockchain analysis
is discovering worthwhile information about the different actors transacting in cryptocurrency.
Analysis of public blockchains such as the bitcoin is often conducted by private companies.
Companies like Chainalysis claim capability to: “We provide data, software, services, and research
to government agencies, exchanges, financial institutions, and insurance and cybersecurity
companies in over 60 countries. Our data platform powers investigation, compliance, and risk
management tools that have been used to solve some of the world’s most high-profile cyber-
criminal cases and grow consumer access to cryptocurrency safely.”15
14
https://www.rand.org/content/dam/rand/pubs/research_reports/RR3000/RR3026/RAND_RR3026.pdf
15
https://www.chainalysis.com/

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So, despite the drawbacks there are both tools and processes exist to provide visibility into major
blockchains. In fact, according to available data the extent of money laundering preformed with
crypto currencies is negligeable in comparison to money laundering which is preformed using US
dollar and euro.
Control entities
This creates on one hand the need to control bitcoin to prevent usage of bitcoin for money
laundering and other criminal activity. Below I will present key regulator and review current
policies and the policies potential drawbacks.
The International Monetary Fund (IMF) is the international institution tasked with coordinating
the international foreign currency exchange. It sets minimum standards for what member
nations can do to their individual currencies, in order to preserve global economic stability. Like
almost every international institution, the IMF’s rules apply only to nations that have agreed to
adhere to them. Every country—with the exception of North Korea—is a member of the IMF and
bound by its regulations.16
By ensuring that everyone plays by the same rules, the IMF is able to
effectively coordinate global economic policy.
16
https://en.wikipedia.org/wiki/International_Monetary_Fund

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Because Bitcoin is not formally backed by a country’s government, it is not bound to the IMF’s
guidelines. As a result, Bitcoin poses a serious threat to the economic stability of the foreign
currency exchange as it continues to grow in both value and usage. Other digital currencies that
entered widespread use like Ethereum poses similar problems.
As a result, the IMF is limited in what it can do to intervene in the event that a private digital
currency like Bitcoin is used to attack the value of a conventional currency through what is known
as a “speculative attack.” A speculative attack occurs when an investor wishes to take advantage
of a “weak currency,” a currency that has depreciated in value relative to other currencies.17
If
left unchecked, a successful attack can push a weak currency’s value even lower, resulting in a
destabilization of the international foreign currency exchange.18
So far policy of IMF and other central banks was complete neglect of Bitcoin as potential reserve
currency. Substantial energy was invested by leading financial institutions to portray bitcoin
speculative and used by criminals.
“Bitcoin has enabled criminal money laundering and needs to be regulated at a global level” --
ECB president Lagarde says this view of Bitcoin as adversary created negative impact and instead
of empowering the traditional financial system exposed its conservative and restrictive nature.
17
https://steemit.com/bitcoin/@sean-king/central-banks-need-to-own-bitcoin-to-guard-against-speculative-
attack-on-their-currencies
18
Wile, Rob. ‘927 People Own Half of All Bitcoins’, Business Insider, 10 December 2013,
http://www.businessinsider.com/927-people-own-half-of-the-bitcoins-2013-12.

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FATF
The Financial Action Task Force (on Money Laundering) (FATF), is an intergovernmental
organization founded in 1989 on the initiative of the G7 to develop policies to combat money
laundering.19
The objectives of FATF are to set standards and promote effective implementation of legal,
regulatory and operational measures for combating money laundering, terrorist financing. FATF
is a "policy-making body" that works to generate the necessary political will to bring about
national legislative and regulatory reforms in these areas.
The Travel Rule is a counter-money laundering initiative that obligates traditional financial
institutions to share information about their customers and assume the responsibility to report
suspicious activities. It is important to note that the “Travel Rule” was initially created in the U.S.20
19
https://www.fatf-gafi.org/publications/fatfrecommendations/documents/public-statement-virtual-assets.html
20
https://www.coindesk.com/is-the-travel-rule-good-or-bad-for-crypto-both

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AS United States awarded the presidency of the Financial Action Task Force during 2018/2019,
the economic and political powerhouse seized the initiative to push its domestic policy beyond
its borders, in order to better regulate virtual assets which are essentially borderless in nature.
This strong push helped to break the impasse between the FATF’s 39 member countries on how
to decisively deal with the threat of unregulated and anonymously owned cryptocurrencies
becoming a mainstream asset class.
FATF published multiple regulations regarding usage and risk associated with crypto currencies
and services providers to summarize;
“The obligations require countries to assess and mitigate their risks associated with virtual asset
activities and service providers; license or register service providers and subject them to
supervision or monitoring by competent national authorities—(notably, countries will not be
permitted to rely on a self-regulatory body for supervision or monitoring)—and implement
sanctions and other enforcement measures when service providers fail to comply with their
AML/CFT obligations; and underscore the importance of international cooperation. Some
countries may decide to prohibit virtual asset activities based on their own assessment of the
risks and regulatory context, or to support other policy goals.”21
21
https://www.fatf-gafi.org/publications/fatfrecommendations/documents/public-statement-virtual-assets.html

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FATF proposed and then finalized a guidance urging nations to implement KYC requirements for
all crypto exchanges. The so-called Travel Rule defined virtual asset service providers (VASPs) as
businesses that transfer funds in the form of cryptocurrency (i.e., crypto exchanges, among
others) and mandated that the businesses should have KYC information for both the sender and
the recipient of these transactions.22
Countries are beginning to implement these recommendations – South Korea recently brought
new anti-money laundering (AML) rules into effect, resulting in at least one major exchange
shuttering its operations in the country.
Multiple crypto exchanges oppose the ruling and operate with complete disregard to the rule
most notable of which are: Yobit, Bancor and multiple decentralized exchanges.
Exchanges one the other hand are concerned with ability of the rule to deanonymize legitimate
users and potential government control over user’s activity.
Why personal level bitcoin regulation reduces the risk of criminal activity and money laundering
via Bitcoin. Government regulation creates risk and sometimes looks like attempt to counter
competition with restrictions and bans. Multiple governments aren’t consistent in the policy they
adopt for crypto.23
22
https://kyc-chain.com/an-overview-of-the-fatf-recommendations/
23
http://www.fatf-gafi.org/media/fatf/documents/recommendations/March%202021%20-
%20VA%20Guidance%20update%20-%20Sixth%20draft%20-%20Public%20consultation.pdf

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The most recent example is Turkey. Where all crypto payment were suddenly banned by central
bank without prior warning other countries parodically create contradicting warning statements.
Even USA the leader of “free market” parodically spreads anachronistic declarations . This
however can’t stop “the forces of the market” – the global demand for crypto assets and while
other countries which can’t be regarded as example of proper monetary policy (Morocco,
Nigeria) try to ban bitcoin.
Bitcoin and crypto currencies create immense values for investor and future fintech industry
alike. This is done via both innovation and new financial instruments. 24
U.S SEC (Securities and Exchange Commission) has very conservative approach to crypto
regulation and exchange. Even SEC officials criticize the current policy and decision-making
process.
“I think we’re certainly falling behind the curve,” said Hester Peirce, one of what will soon be five
commissioners at the Securities and Exchange Commission, during an interview at
MarketWatch’s Investing in Crypto virtual event series Wednesday. “We’ve seen other countries
take a more productive approach to regulating crypto. Our approach has been to say no and tell
people wait…we need to build a framework that is appropriate for this industry.”25
24
https://www.bitkom.org/sites/default/files/2020-07/200729_whitepaper_decentralized-finance.pdf
25
https://www.marketwatch.com/story/u-s-is-behind-the-curve-on-crypto-regulations-says-sec-commissioner-
peirce-11617824160

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The attempt to over regulate crypto alienates the crypto community towards traditional financial
institutions. SEC fails to govern some of the more problematic crypto activities like ICO (initial
coin offering) .
The bitcoin potential is recognized by the SEC “Some of the weakness in our financial system
comes from its concentration…you can make a more robust system” by relying more on
decentralized elements, like the cryptocurrencies bitcoin”26
Regulating crypto systematic level
The International Monetary Fund (IMF) plays an important role in regulating the international
foreign currency exchange. It was created in 1944 to help coordinate international monetary
policy following the turmoil of the Great Depression. The IMF’s goal is to regulate international
economic transactions—including the foreign currency exchange—in a way that helps promote
the growth of world trade. It was created to set basic guidelines that all member nations were
expected to follow, particularly with respect to the foreign currency exchange, in order to
promote a stable international economy.
26
ibid

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The IMF’s primary purpose is to ensure the stability of the international monetary system by
monitoring exchange rates and enabling countries to transact with one another. One way it
accomplishes this is by issuing currency loans to member countries. The IMF holds a currency
reservoir created by initial subscription. Upon joining the IMF, each member nation is assigned a
quota—roughly equivalent to its relative size in the world economy—which determines its
maximum contribution to the IMF’s pool of financial resources. Up to 25 percent of a nation’s
quota is payable in widely accepted currencies, such as the dollar, yen, euro, or pound sterling.
The rest must be paid in that nation’s own currency.
The IMF’s pool of currency is available for lending through a drawing system. A member is
allowed to purchase any foreign currency it needs in exchange for an equal value of its own
currency. All drawings are subject to the IMF’s approval. Furthermore, drawings are subject to a
number of restrictions and charges that make it increasingly difficult to draw a currency once
some has already been drawn. A member must eventually repay all drawings that it makes by
repurchasing its own currency in exchange for gold or some other convertible currency. The
drawing system provides the fundamental means by which IMF members acquire the resources
to counter speculative currency flows and to maintain stable exchange rates between their
currencies. Thus, the IMF is able to meet member nations’ borrowing needs (via the drawing

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system) by ensuring that it maintains a diverse and robust currency reservoir (via the quota
system).27
US Treasury plays pivotal role in design and implementation of U.S financial policy. To summarize
different Department of the Treasury (USDT) responsibilities are: to act as the national treasury
of the federal government of the United States where it serves as an executive department. The
USDT also collects all federal taxes through the Internal Revenue Service; manages U.S.
government debt instruments; licenses and supervises banks and thrift institutions
Yes US treasury crypto operations are mainly focused and implemented by The Financial Crimes
Enforcement Network (FinCEN) and share restrictive and prohibitive outlook on crypto and
bitcoin in particular. FinCen is known in particular for it’s controversial crypto wallet rule which
requires crypto exchanges to apply Bank Secrecy Act scrutiny to transfers from their platforms to
so-called self-hosted wallets. Every transaction valued at over $10,000 would require a report to
U.S. authorities, while the exchange itself would need to maintain personal records of ownership
to any off-exchange wallet that exceeded $3,000 in value.28
27
Cadmus, 3(4), 15. Retrieved from http://cadmusjournal.org/article/volume-3/issue4/cryptocurrencies-challenge-
global-governance
28
https://www.theblockcrypto.com/post/99898/what-comes-next-for-the-us-treasury-departments-plans-to-
monitor-crypto-wallets

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This approach creates strong opposition by blockchain association and different civil rights
groups which claim the ruling is unconstitutional.
“The proposed rule exceeds appropriate constitutional limits by empowering FinCEN to exercise
Congress’ exclusive legislative power.”29
More about Bitcoin’s potential threat - In order to fully appreciate the potential threat Bitcoin
poses to financial system, in form of a speculative attack on a currency. The attack occurs when
an investor wishes to take advantage of a “weak currency,” a currency that has depreciated in
value relative to other currencies. The attack begins by taking what is known as a “short position”
in the currency. To do this, the attacker borrows a sum of the weak currency and sells it for a
stronger (more valuable) currency, with the intention of buying the weak currency back for less
than the attacker sold it for. If the currency continues to depreciate in value after the short sale,
the attacker makes a profit when they buy it back.30
29
https://news.bitcoin.com/us-treasury-fincen-cryptocurrency-wallet-rule-unconstitutional/
30
Malwa, S. (2018, July 5). $1.2 Billion in Cryptocurrency Laundered Through Bitcoin Tumblers, Privacy Coins.
https://www.ccn.com/1-2-billion-incryptocurrency-laundered-through-bitcoin-tumblers-privacy-coins/

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In order to counteract speculative attacks, banks typically rely on their country’s central bank for
assistance. Central banks are public institutions which manage a state’s currency and interest
rates. Central banks hold currency reserves which can be loaned out in case of an economic or
financial emergency. To counter a speculative attack, central banks can intervene directly into
the foreign exchange market by offsetting, or “absorbing,” the maturity losses felt by commercial
banks as a result of their forward contracts with investors. This requires the central bank to buy
the commercial bank’s excess of the weak currency in exchange for stronger currency at the
exchange rate.
In order for a central bank to absorb the maturity mismatches of a commercial bank, the central
bank must have a reserve of currency upon which to draw. In the event of an emergency, where
the central bank does not have a currency reserve, the nation served by the central bank can turn
to the IMF for assistance.
Herein lies the threat posed by Bitcoin. In the event that a wealthy Bitcoin investors—launch a
speculative attack on a currency, what can be done to counter it? who can it turn to? The IMF
has no supply of Bitcoins; indeed, it has almost no way to obtain them directly. The IMF obtains
currency via the quota system and the IMF can only collect quotas from its members. Bitcoin is
neither a member of the IMF, nor could it become one if it wanted to—IMF membership is only
open to nation-states.

25
In its current state, the IMF would be unable to supply the currency needed to counter the
destabilizing effect of a speculative attack by Bitcoin users on a member nation’s currency.
In short, the ability to increase interest rates and the ability to borrow currency from central
banks and the IMF work best in conjunction with one another. Without a reserve holding of
Bitcoins, the IMF is severely restricted in what it can do to assist member nations facing a
speculative attack by Bitcoin users. In effect, the IMF’s inability to contribute leaves nations with
only one option: to raise interest rates. And, depending on the state of that nations’ economy,
that option may prove economically disastrous.
As Bitcoin usage continues to grow, so does the potential threat it poses to the stability of the
foreign exchange market. Although particular attention has been given to Bitcoin in this regard,
the same can be true for any digital currency that grows enough in terms of usage and value to
be traded for substantial amounts of foreign currency. Without the ability offer digital currency
as part of its currency reserves, the IMF is ill-equipped to ensure global economic stability in a
future where digital currency is a major player.31
31
https://fee.org/articles/imf-head-predicts-the-end-of-banking-and-the-triumph-of-
cryptocurrency/

26
Finding a way to regulate Bitcoin is critical in light of its potential destabilizing effects on the
foreign currency exchange. Due to bitcoin wide adoption and increasing price. Bitcoin can be
controlled only if it's accepted as medium of reserve. Otherwise, it will coexist with traditional
system and threaten is more and more as Bitcoin value will increase.32
Granting Digital Currencies Membership to the IMF
IMF could collect Bitcoins directly from Bitcoin users. Article II, Section 2 explicitly states that
membership to the IMF is only open to other countries.33
Rather than expanding membership to
32
Cadmus, 3(4), 15. Retrieved from http://cadmusjournal.org/article/volume-
3/issue4/cryptocurrencies-challenge-global-governance
33
Harvey, T. (2014, May/June). Cryptocurrencies opening fraud gates. Retrieved from Fraud
Magazine: http://www.fraud-magazine.com/article.aspx?id=4294982435
Jacobs, G. (2018, May 28). Cryptocurrencies & the Challenge of Global Governance*.

27
include non-state actors, Article II could be amended to include a new section, Section 3, which
provides a membership status for digital currencies. Section 3 would allow the IMF to recognize
Bitcoin as an “IMF-official” digital currency once the IMF has obtained a certain number of
Bitcoins.34
The trade-offs would be mutually beneficial. Bitcoin users would sell Bitcoins to the IMF for an
equivalent value of other currencies. In exchange, Bitcoin users would benefit from the increased
legitimacy that official IMF recognition would bring. Direct interaction with the IMF would, in
turn, bolster confidence in Bitcoin as a globally accessible digital currency and would increase the
potential market for Bitcoins. The IMF, on the other hand, would benefit from having the Bitcoin
reserves it needs to counter a speculative attack without requiring member-nations to take any
domestic action.
Conclusion
During the paper we introduced Bitcoin challenges in conjunction with the IMF, Sec and US
treasury in order to demonstrate the possibility what is done to regulate crypto and potential
drawbacks of the process. The peer- to-peer, decentralized, and largely unregulated system that
is Bitcoin has the potential to threaten the global economic stability. As more and more people
come to understand the advantages of digital money over paper money, the threat it poses
34
Virtual Currencies and Beyond: Initial Considerations, Ms.Yasmin Almeida,International
Monetary Fund, 20 Jan 2016 p110-121

28
becomes increasingly real. Since the future of e-commerce entails a transition to digital
currencies, it is critical that our economic, political, and legal institutions are prepared.
Recognizing the importance of Bitcoin and the context of digital currencies is the first step in
understanding how to best plan for the future.
Western and liberal set of values which emphasizes freedom of choice and free market has to
support Bitcoin.
The potential consequences of widespread adoption of the Bitcoin are clear. In order to guard
against the global economic destabilization that could occur if and when the world decides to
adopt digital currencies, we must consider ways in which our national and international
institutions can guide that transition. At present IMF and other institutions try to prohibit or
restrict Bitcoin. This however given the data presented in this paper is a failing strategy. Financial
institutions have need to shift attitude towards Bitcoin and this will significantly reduce Bitcoin
threat to the global law and order. Has at least two options. It can attempt to exercise indirect
control over digital currencies via its member-nations by expanding the scope of Article IV,
Section 5 of the Articles of Agreement. Alternatively, it can attempt to exercise direct control
over digital currencies by offering them a form of quasi-membership status, where increased
legitimacy is traded for Bitcoin users’ business.35
35
Virtual Currencies and Beyond: Initial Considerations, Mr.Vikram Haksar,International
Monetary Fund, 20 Jan 2016 p43-66

29
Regardless of which measure is chosen, the potential need for a method to combat speculative
attacks using Bitcoin is clear. As the Internet continues to play an increasingly important
role in how we conduct commerce, our institutions have to adjust to the new challenges this
change creates. The evolution of Bitcoin is no exception.
The topic of Bitcoin control requires significant further research as it is related to core values
of public policy and democratic discourse. There is now clear answer to some of the challenges
that wide Bitcoin adoption can create for the economy and traditional financial institutions.
Bitcoin can disrupt banking sector as we know it the potential is far bigger in a way Bitcoin for
banks can be as Youtube is for TV. What however is clear from this research that any regulation
need to take into account the existing eco system, the crypto community because over regulation
might jeopardize community cooperation and create crypto underground.
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32
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