Of course, bitcoin is not exactly like cash. It enables electronic transfers. As such, it creates a trail for law enforcement authorities not possible with cash. Although transactions are pseudonymous—that is, virtual addresses are not necessarily tied to physical identities—all transactions are recorded in the public
WILLIAM J. LUTHER 403 ledger, or blockchain. So, once a criminal is identi fi ed in the physical world and linked to a digital address, law enforcement agencies could potentially uncover a string of past criminal transactions. Had they been conducted in cash, these past transactions would be nearly impossible to trace. Moreover, to the extent that exchanges and e-wallet services cooperate—or can be com- pelled to cooperate—the authorities could uncover and investigate a criminal’s past trading partners, who might also be involved in criminal activity. 56 Hence, law enforcement agencies would perhaps be better served by working with the bitcoin network rather than against it. Furthermore, legal uses of bitcoin are likely to be more sensitive to regulation than illegal uses. 57 Legal users o ft en conduct business with a physical presence; even those conducting business exclusively online o ft en make their physical identities known. Illegal users, in contrast, typically employ anonymizing tech- nology like Tor, preferring to conduct business on the so- called dark web. Hence, the illicit transactions justifying regulatory action are exceptionally di ffi cult to stamp out. To the extent that regulatory e ff orts make transacting with bitcoin more costly or cumbersome, one should expect legitimate users to exit the network while illegitimate users merely avoid the channels through which such laws are enforced. Th ere is no denying that bitcoin can be used to make illegal transactions and transfers. Th e relevant question is whether the bene fi ts of regulating bit- coin on these grounds exceed the costs. Given that the fraction of bitcoin users engaged in illicit transactions or transferring funds to terrorist groups is probably quite small and regulatory e ff orts to stamp out such transactions are unlikely to succeed, it seems unlikely that regulating on these grounds would produce many bene fi ts. On the other hand, the costs imposed on a system comprised primarily of legitimate users in search of a few bad apples could be substantial. As such, the prudent course of action would seem to require investing in the requisite technology to de-anonymize users in the event that they are suspected of criminal activity. MACROECONOMIC POLICY Regulators might also worry that bitcoin could impede the government in promoting broader macroeconomic policy goals. As one commentator put it, bitcoin “looks like it was designed as a weapon intended to damage
REGULATING BITCOIN 404 central banking and money issuing banks, with a Libertarian political agenda in mind—to damage [states’] ability to collect tax and monitor their [citizens’] fi nancial transactions.” 58 Having addressed issues of fi
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- Monetary Policy, Federal Reserve System, WILLIAM J. LUTHER