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[m7;July 3, 2018;21:58]

computer law & security review 000 (2018) 1–8

quirements on intermediaries, creates opportunities for tax avoidance and other criminal activity to proceed undetected. On the tax front, U.S. law considers a cryptocurrency to be property, which means that when it is exchanged for a good or service (including another cryptocurrency), that creates a potential taxable gain. 79 Cryptocurrency traders are known for their tendencies to ignore these complex and potentially costly tax rules. 80 However, the IRS has subpoenaed customer information from Coinbase, one of the largest cryptocurrency exchanges, for the apparent purpose of engaging in enforce- ment activity against traders with large balances. 81 Initial coin offerings also present tax compliance concerns. Unlike issuing stock to new investors, which is tax exempt to the issuing cor- poration, 82 the firm issuing coins to investors must presum- ably recognize gain from this disposition of its property. This tax obligation has the potential of significantly depleting the capital generated from an initial coin offering, as compared with an offering for securities. But tax avoidance may be the least significant of gov- ernment concerns about cryptocurrencies. Bitcoin and other cryptocurrencies have become the medium of exchange for criminal enterprises engaged in activities that include ran- somware attacks. 83 The so-called “dark web” has reportedly funneled more than $660 million in cryptocurrencies during 2017 to enterprises that specialize in criminal activity, pre- senting significant law enforcement challenges. 84 The efficacy of regulatory responses, such as restricting coin offerings and regulating exchanges that permit individuals to acquire and dispose of cryptocurrency in exchange for local fiat currency is limited: at best, by increasing the friction involved in acquiring and disposing of cryptocurrency, it becomes less likely to fund an international adversary engaged in a ransomware attack or otherwise undermine national interests throughmaking illicit payments. Similar rationales have supported government ef- forts to restrict access to large cash notes, which are also often used in criminal activity. 85 While the conversion of fiat currency in exchange busi- nesses such as Coinbase presents an opportunity for govern- ment to exercise of regulatory powers, prospects for expanded usage of cryptocurrencies as a medium of exchange for goods 79 Notice 2014-21, 2014-16 I.R.B. 938. 80 See Aaron Hankin, Nearly Half of crypto traders refuse to pay taxes, survey finds (April 17, 2018), https://www. marketwatch.com/story/nearly-half-of-crypto-traders-refuse-to- pay-taxes-survey-finds-2018-04-17 . 81 See Kari Paul, Bitcoin exchange Coinbase is handing over user information to the IRS (Feb. 28, 2018), https:// www.marketwatch.com/story/bitcoin-exchange-coinbase-is- handing-over-user-information-to-the-irs-2018-02-27 . 82 See IRC § 1032 (nonrecognition of gain to corporation on ex- change of stock for money or other property). 83 See Kharif, supra note 52. 84 See Corrine Ramey, The Crypto Crime Wave is Here, Wall Street Journal, April 26, 2018, https://www.wsj.com/ articles/the-crypto-crime-wave-is-here-1524753366?mod= searchresults&page=1&pos=2 . 85 See Williams, supra note 1, at 308, n.27. See also Kenneth Rogoff, Costs and benefits to phasing out paper currency, NBER Macroeconomics Annual Conference Working Paper (Corrected May 16, 2014), available at http://scholar.harvard.edu/files/rogoff/ files/c13431.pdf .

and services will present new challenges. Government regu- lation that may be feasible when targeting the business of a large actor within its own jurisdiction, which is therefore re- sponsive to legal coercion, becomes less effective as the locus for activity is diffused among a larger number of actors, in- cluding those located in other jurisdictions that may not share the same regulatory priorities.

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Concluding thoughts

Technology usually achieves its intended function of simplify- ing our lives, but there are often complications we do not an- ticipate. Electronic payment systems have made purchasing goods and services easier and safer for consumers, dispensing benefits on both consumers and merchants, as well as creat- ing new economic opportunities. The quest for improvement and innovation show no signs of pausing, as we seek out pay- ment systems that are more secure, reliable, and efficient. If recent history offers any lessons, they should include the staying power and advantages of existing networks, particu- larly when cost allocations are not fully transparent. On a per- sonal level, I am quite pleased with my bank and with my pay- ment cards that offer fraud protection, dispute resolution and other rewards. I am also willing to pay something for those features, but I am glad that the market allows others to bear those costs, at least nominally. However, if I lived in a juris- diction where my government sought to oppress me or if I changed my line of business or lifestyle in a manner that re- quires more privacy, the cryptocurrency option might become more attractive. There will be continued demand for thoughtful, careful re- sponses to both technological and legal changes required to adapt to the new environment. A multidisciplinary approach will be needed, so that we can take into account social, eco- nomic, technological, and legal considerations in formulating policy for the common good. And since this involves the in- ternet, cross-border cooperation (or competition) will become an essential dimension of this new payments frontier.

Acknowledgment

As this issue is dedicated to the longtime editor of this publi- cation, Steve Saxby, we hope that future issues of the Review will build on his efforts to provide an effective platform for dis- course, dialogue, and understanding to contribute toward bet- ter policy outcomes. Thank you, Steve, for your years of ded- icated service and thoughtful contributions to this important work.

Author Information

Professor of Law & McGrath North Mullin & Kratz Endowed Chair in Business Law, Creighton University School of Law, Omaha, Nebraska, USA. Professor Morse is also the editor of Electronic Payment Systems: Law and Emerging Technologies (American Bar Association 2018).

Please cite this article as: E.A. Morse, From Rai stones to Blockchains:The transformation of payments, Computer Law & Security Review: The International Journal of Technology Law and Practice (2018), https://doi.org/10.1016/j.clsr.2018.05.035