Cryptocurrencies are thought of as encrypted decentralized digital equivalent of paper currency, i.e. it can be characterized as a set of entries in a database, which no one can change without fulfillingspecific conditions. This is very similar to a banking ledger system. Cryptocurrencies attribute a price accounted to them but the intrinsic value is not universally seen. As a contrast, the values of a federal legal tender such as United States dollar is not something about which anyone needs to be convinced. It is the lynchpin of all international trade.

Cryptocurrencies have some legitimate uses. These uses could span from distributed
trust to authentication certification to confirmation of transactions to international trade
finance and even to non traditional sectors, such as aid finance.

Cryptocurrency Uses and Use Cases

Regardless of the limited equivalency to a real currency, quite a few countries and companies are planning to release their own version of cryptocurrency. Recently, IBM announced its partnership with Stronghold, which is the first digital currency backed by US dollars traded on the Stellar Blockchain Network.

Cryptocurrencies have some legitimate uses. These usescould span from distributed trust to authentication certification to confirmation of transactions to international trade finance and even to non-traditional sectors, such as aid finance. Adoption of cryptocurrencies will rise if it is backed by a transparent asset, such as fiat currency. This would amount to the digitization of real world assets, which can aid and transform many forms of financial transactions conducted around the world.

There are several business use cases that a company can leverage using cryptocurrency or blockchain technology, which is the technology behind cryptocurrency. A few are listed below:

• Any process, wherein multiple parties have to authenticate a transaction.
• Any product, whose authenticity needs to be verified using a ‘multivariate’ approach (an approach to find patterns and relationships between several variables simultaneously) such asfor medicines.
• Any financial innovation, which uses derivative instruments,as long as the absolute native asset has some intrinsic value. For example, a company could issue cryptocurrency to allow it certain rights in company transactions or decisions. These could be backed by the company stock,which is eventually backed by equity in the company, which eventually translates into a fiat currency depending on the company’s market cap on a given day.
• Any process ,that can be confirmed only if a consensus threshold has been met, such as a decision to put an issue to be brought up to a vote in a company’s annual stock holder meeting.
• A smart contract implementation. A smart contract is a digital protocol intended to digitally facilitate, verify, or enforce the negotiation or performance and eventual disposition of a contract. Legal and notary services would see tremendous use for these smart contracts.
• For creating a system of trusted timestamping. It is the process by which the time of creation and the time of modification of a document can be secured. Integrity of the timestamp is key for the system to not be compromised. The use cases are immense for the legal and financial industries, amongst others.

As the world of cryptocurrencies is very much evolving, companies who choose to
roll out or in any manner interact with this technology; need to be careful so as not to
run afoul of any regulations and legalities…

Cryptocurrency Protocols

1) Explain in layman’s terms the use case(s), for which the cryptocurrency is intended. This is by far the first and foremost thing that the company would be well advised to do

2) List all jurisdictions (domestic and foreign) from which it accepts customers and transactions

3) Understand the relevant regulations applicable in those jurisdictions, such as General Data Protection Regulation and other relevant regulations. Cryptocurrency could serve both as a breach of these regulations as well as a solution to comply with these regulations. The company should understand the end goals of such regulations and align their cryptocurrency and blockchain use cases so as to not risk noncompliance

4) Detail the linkage between the fiat currency and any derivate instrument created by way of cryptocurrency

5) Specify the methodology and rates at which exchanges occur, in case exchanges are permitted from one cryptocurrency to another service or instrument or an eventual fiat currency

6) If trading is allowed, detail the policies by which a trade is considered legal and executable

7) Have an approach to manage volatility, which would include capital buffers, trade restrictions, liquidity guarantees, etc., since cryptocurrency transactions can tend to cause large fluctuations and variability

And, since we live in a world where good and evil meet often, we would be amiss if we did not focus on the unintended use of cryptocurrency.

The Dark side of Cryptocurrency

It is quite evident that the dark elements have found cryptocurrencies to be a convenient way to finance their activities. This comes as no surprise to the financial gatekeepers. The incentive to develop cryptocurrencies as an alternate way of financing and hence avoiding the international financial system can be easily understood.

This point is well demonstrated by the roll out of Petro, Venezuela’s state backed cryptocurrency.It solicited help from another sanctioned nation, Russia to develop this currency via two state owned companies.Venezuela’s government institutions were mandated tostart accepting Petro as legal tender. International acceptance has not been easy but that has not deterred Venezuela from preparing to launch a secondcryptocurrency backed by the country gold reserves.

An analogy might serve to understand this situation better.One country creates a new currency based on a set of Legoblocks that their citizenry has collected over the years. Legoblocks are not an internationally traded product orconvertible into currency.

The government of this country however, mandates its institutions to accept this Lego blocks based currency,for which the pricing and currency generation mechanism is random. Next it starts to use this currency to purchase sanctioned items, such as iron, or cement or weapons.

The argument that a fiat global currency could also be used by criminals
serves only as is currency an admission that regulation is much needed in the crypto
world to keep the world from becoming a lawless jungle.

Tools for Economic Sanctions

Economic sanctions are a powerful foreign policy tool. However, in the age of cryptocurrencies,economic sanctions would have to work a little differently to still be as effective. A similar framework including education, deterrence, detection, and enforcement against financial crime, which applies to fiat currency would have to be applied when dealing with cryptocurrencies to apply economic sanctions.Cryptocurrencies eventually need to be converted into real goods. Economic sanctions can target those specific points of conversion. Also, these cryptocurrencies need to go past the country of origin to complete international transactions, their raison d'être.

Sanctioning entities may have the following tools at their disposal. This is of course not a complete list but the intent is to generate conversation and fortify the white hats.

Sanction supporting crypto exchanges and trading platforms on which the sanctioned nation’s cryptocurrency trades

Link internationally recognized cryptocurrencies to the release of any aid benefit.

Co-opt a legitimate investigative entity to become part of the consensus mechanism for these rogue cryptocurrencies and blockchain transactions, thereby not letting the transaction reach a consensus threshold, or at least having the ability to detect the transaction

Provide clear guidance for rating websites, such as ICOindex.com, which tracks initial coin offerings of cryptocurrencies, for when to label an ICO a scam

Geographically fencing certain transactions based on suspicion, or at least having delay mechanisms in place so that such transactions can be investigated.

Build and proactively apply signature patterns to identify rogue transactions, based on variables, such as originating country, country of support, transaction antecedents, underlying asset, identification of various levels of ownership, accompanying collateral,other logistical information, etc.

Sanction or use other punitive measures against rogue entities or nations supporting the country originating bogus cryptocurrencies.

Link suspicious transactions for their completion and confirmation to logistical details such as, shipping routes, distribution parties, counter parties, insurance providers, etc.

To Conclude

As we know, fiat money is currency that a government has declared to be legal tender, but it is not backed by a physical commodity. The value offiat money is derived from the relationship between supply and demand rather than the value of the material from which the money is made. The argument that a fiat global currency could also be used by criminals serves only as an admission that regulation is much needed in the crypto world to keep the world from becoming a lawless jungle. Criminal laws and financial laws are interlinked such that a functioning society depends on these laws.

Nonetheless, anti-crime enforcement bodies will continue to have to make strides in the areas of identification, anti-money laundering, suspicious activity reporting, commodity threading, transaction verification, counter party risk, dark web research, and others.

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