CHAPTER ONE

INTRODUCTION

• Background to the Study

On October 31, 2008, the pseudonymous Satoshi Nakamoto released his proposal for an electronic cash system known as Bitcoin.1 In the nine years that have passed since Bitcoin’s proposal, Bitcoin2 and other cryptocurrencies have gained popularity in the international community as a medium of transaction transcending current financial institutions and cross-border regulations. Additionally, state governments, banks, and investors have shown an increasing interest in using cryptocurrencies to enhance their own financial capabilities. Furthermore, because the blockchain technology used in cryptocurrency allows its users to “transact directly without the need for a trusted third party,” the payee and recipient in transactions remain anonymous outside of their digital wallet signature.3 Despite the advantages that Bitcoin and other cryptocurrencies offer in the marketplace, cryptocurrencies also generate new sets of obstacles for international financial institutions and state governments regulating or monitoring transactions.

The pseudonymity provided to the users by cryptocurrencies, coupled with the ease of transaction, has proved to be a reliable tool for non-state and criminal networks pursuing methods to bypass taxes, governmental regulations, and international sanctions. The questions in this thesis are built upon the premise that cryptocurrencies offer new and unprecedented challenges to sovereign states’ ability to regulate and enforce laws governing its monetary policy, security, and trade; therefore, the state—and by extension the international community—will endeavor to develop policies to increase sovereign states’ control on the use of cryptocurrency. The questions this thesis seeks to answer are: What options are available to the sovereign state to limit cryptocurrency’s capacity to challenge domestic and international laws? What allows cryptocurrency to sidestep the established financial order and enforcement institutions? What are the challenges sovereign states face when introducing cryptocurrency legislation? Finally, as cryptocurrency technology becomes more popular and countries begin developing their own blockchain based tools, what factors will inhibit or promote a sovereign state from developing their own sovereign cryptocurrency?

According to the Bank of International Settlements, foreign exchange trading increased to an average of $5.3 trillion a day. To simply break this down, the average has to be $220 billion per an hour. The foreign exchange market is largely made up of institutional investors, corporates, governments, banks, as well as currency speculators. Roughly 90% of this volume is generated by currency speculators capitalizing on intraday price movements. Unlike the stock market and future markets that are housed in central physical exchanges, the foreign exchange market is an over0 the counter market, decentralized market completely housed electronically. Though investors are familiar with the stock market they are unaware how small in volume it is in relation to the Forex Market.

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