Broadly speaking, cryptocurrency is a type of digital asset that is encrypted and decentralized. Most cryptocurrencies (but not all) operate on a blockchain, which is a type of digital ledger technology (DLT). Simply put, a blockchain digital ledger is a record of transactions that is duplicated and distributed across an entire network of computer systems. The database is filled with entries that must be confirmed, and the network has coins and tokens that possess no intrinsic value. Not all coins and tokens are created equal, and they have varying degrees of utility as media of exchange, stores of value, or units of account. In fact, some are referred to as “shitcoins,” which are cryptocurrency with little to no value and no immediate or discernable purpose. Dogecoin, for example, was created in 2013 as a joke among engineers and was a play on a “doge” meme that features a Kabosu, a Japanese Shiba Inu, and was intended to mock other serious coins. At the time, it was valued at $0.0002979. Today, with no paid staff and no white paper to outline its purpose and utility, as seen with most other serious coins, the altcoin is one of the best-performing digital assets in cryptocurrency and has seen a recorded 14,000 percent growth in 2021. Its market capitalization as of September 27, 2021, is $26.1 billion.

Dogecoin’s evolution from a joke to a multi-billion-dollar asset class that sent the Jamaican bobsled team to the 2014 Olympics and financed about $50,000 for clear water in Kenya underscores a larger shift taking place where individuals and technology are usurping traditional financial structures and creating economic opportunities simply because there is a belief that something is different about the underlying value of the asset. It is the motivating force behind the cryptocurrency market and other disruptive forces challenging the traditional financial landscape as illustrated by the 1,700 percent rise of GameStop’s stock from December 2020 to January 2021 to a total market value of over $10 billion. The chart below outlines some of the many differences among these types of digital currencies and how they have been applied to this Power Map series.

---

Cryptocurrency’s Price Volatility

In addition to the underlying blockchain technology, one of the defining characteristics of cryptocurrency is its price volatility. The market is influenced by its perceived store of value, which causes cryptocurrency values to fluctuate dramatically. This perception is informed by a variety of factors, including the supply of coins, where scarcity can drive the price of coins; investment by other companies and organizations; and a coin’s perceived usability, which is often characterized by institutions’ ability to accept the coin as a form of payment, thereby increasing the coin’s utility and making it a preferred medium of exchange for consumers. To date, cryptocurrency has primarily functioned as a digital, scarce vehicle for speculative investment.

The last cryptocurrency bubble occurred in 2017 when the ecosystem was dominated by individual retail investors, many of whom were attracted to Bitcoin’s scarcity (only 21 million bitcoins can exist) and the fact that it operated outside of the global financial system. But with this heightened interest, cryptocurrency gained massive clout, and initial coin offerings (ICOs) and exchanges exploded. By the end of 2017, the ICO market raised an estimated $4.9 billion. Some observers contend that Bitcoin’s price spike in 2017 was due to market manipulation by influential investors that hold relatively large amounts of cryptocurrency holdings (also known as “whales”), while others argue that the spike was driven by individual investors who were buying in “fear of missing out” (FOMO) on the potential benefits of this new technological innovation. Regardless, the cryptocurrency market rose more than 1,200 percent in 2017, and its total market value was just above $760 billion.

But the market lost momentum and crashed by 2018, losing an estimated $400 billion in value. Some economists have argued that even though investors did not know how cryptocurrency worked (and still do not know), 2017 was a classic financial bubble where new transformational technology incited interest and investors bought into the market because of FOMO. Combined with the market’s price volatility, a crash was inevitable. In addition to these underlying market conditions, there were growing concerns of regulatory crackdowns across Asia. In January 2018, Japanese exchange Coincheck, which was the leading cryptocurrency exchange in Asia at the time, suffered the largest hack in digital currency history, in which hackers stole an estimated $530 million. The exchange used cash from its own funds to pay out $426 million toward covering users’ losses but was unable to cover the total value of the crypto that was stolen. In June 2018, South Korean exchange Coinrail then lost more than $40 million to hackers. These events and the subsequent price drops that followed renewed concerns regarding the security of crypto assets and the immense price volatility of the market, driving, in part, increased scrutiny from regulators that sought to balance cryptocurrency’s benefits while mitigating the risks it poses to their economies. However, consumers became concerned that governments of major cryptocurrency hubs in Asia, particularly Japan and South Korea, would impose regulations, thus leading to major selloffs of assets and causing prices to plummet.

Alongside regulators, institutions, macroeconomic trends, and even prominent individuals can also influence prices. In February 2021, Tesla announced that it bought $1.5 billion worth of bitcoin and planned to accept it as payment, resulting in a 20 percent price increase for the coin. Then, in May 2021, Tesla’s CEO Elon Musk tweeted that the company will not accept bitcoin due to environmental concerns, causing the coin’s price to plummet 15 percent. (There are reports as of September 2021 that Tesla will accept Bitcoin payments again if the cryptocurrency is mined using renewable energy.) More recently, following concerns that the Delta variant of COVID-19 could potentially hamper global economic recovery, several coins plummeted, wiping $100 billion from the market. Bitcoin nearly lost all its gains in 2021 following this price drop. Due to the number of variables that can influence prices, some experts have stated that the cryptocurrencies’ stability is extremely difficult to maintain, making it one of the key barriers to widespread adoption as a medium of exchange. The graphic below showcases the volatility of cryptocurrencies over time.

Section 3

Cryptocurrency as a Tool to Access the International Financial System

With thousands of coins in circulation, their utilities and values for countries vary widely. Developing countries in Central and South Asia, Latin America, and Africa are driving native cryptocurrency adoption and usage through peer-to-peer (P2P) payments, electronic money transfers made from one person to another directly, without the involvement of a third party. According to a 2021 report, global adoption has grown by over 2,300 percent since 2019 and over 881 percent from 2020 to 2021, with Vietnam, India, and Pakistan demonstrating the greatest levels of P2P usage. As of January 2021, Asia has the greatest number of users at 160 million, followed by Europe at 38 million and Africa at 32 million.

Individuals in these countries are turning to cryptocurrency in the face of currency devaluation, as well as for sending and receiving remittances and carrying out business transactions. Moreover, for users who wish to opt out of the existing financial infrastructure and the various forces seeking to control it, particularly in authoritarian regimes, crypto is appealing because it theoretically takes monetary-management decisions—and the power to abuse them—away from a single entity. By contrast, developed countries in North America, Western Europe, and East Asia are powering crypto adoption through institutional investment and trading rather than P2P transactions, as well as driving the development of the DeFi market. The United States, for example, dropped from sixth in P2P trade volumes to eighth from 2020 to 2021, according to Chainalysis, but in terms of DeFi adoption, the United States is the leading country, followed by Vietnam, Thailand, and China.

Section 4

For Regulators, Cryptocurrency Is a Competitor and Financial Stability Risk

Today, cryptocurrency is top-of-mind for regulators who are concerned about investor protections, systemic risk to markets from the integration of cryptocurrency with traditional finance, and loss of control over monetary policy. In July 2021, the Federal Open Market Committee, the monthly meetings of which are how the Federal Reserve Board sets monetary policy, discussed cryptocurrency and stablecoins as an official agenda item for the first time. In the meeting, some participants noted the risk that the expanded use of cryptocurrencies can have on financial stability, particularly on counterparties that are unable to convert collateral into cash during times of severe liquidity stress.

Regulators have varying perceptions of the financial stability risk posed by cryptocurrency. St. Louis Federal Reserve president James Bullard, for example, asserted that current trends are a sign of “currency competition, and investors want a safe haven,” but the non-uniformity of the sector makes it difficult for cryptocurrencies to be used a medium of exchange. Therefore, they do not pose much of a threat to the dollar. The European Central Bank echoed these sentiments, noting that crypto’s “price volatility makes Bitcoin risky and speculative, while its exorbitant carbon footprint and potential use for illicit purposes are grounds for concerns,” but also that “crypto-assets are still not used widely for payments, and euro area institutions have little exposure to crypto-linked financial instruments, so financial stability risks appear limited at present.” By contrast, the Financial Stability Board (FSB), an international body that monitors and makes recommendations about the global financial system, asserted that while cryptocurrency assets do not pose a material risk to global financial stability at this time, “should the use of crypto assets continue to evolve, it could have implications for financial stability in the future.”

Indeed, the risks that cryptocurrencies pose to the global financial system remain an open question. But the rise of cryptocurrencies has unleashed a wave of financial innovation. Ripple, for example, created its first coin in 2012 to be an alternative (and potentially a replacement) to the SWIFT system and “the settlement layer between major financial institutions.” In response, SWIFT launched SWIFT gpi (global payments innovation) in 2017, a new standard that facilitates quicker payments with full transparency on costs, with the goal of improving international transactions. As of 2021, more than 4,000 financial institutions use SWIFT gpi, sending over $300 billion daily across over 150 currencies. In 2021, the SWIFT network also established SWIFT Go, a platform that enables SMEs and consumers to send fast, predictable, secure, and low-cost cross-border payments around the world—a service that notably competes directly with the XRP network.

Rapid innovation in cryptocurrencies and payment systems is putting pressure on institutions to transition toward the digital realm. Although the dollar is highly unlikely to become obsolete, fiat currencies, conventional banks, and financial institutions face more competition from cryptocurrencies, which are fundamentally challenging the role of central banks in the international financial landscape. CBDCs, in part, attempt to solve the challenges posed by crypto by presenting digital versions of fiat currency. While Western countries have expressed concerns regarding the privacy issues with respect to CBDCs, 81 countries representing over 90 percent of global GDP (up from 35 countries back in May 2020) are now exploring a CBDC to accommodate to a new digital age and to maintain their reserves.

In May 2021, U.S. Federal Reserve Board chair Jerome Powell announced plans to explore the potential benefits and risks of CBDCs, signaling that regulators are attempting to address the growing popularity of non-traditional currency options such as cryptocurrency by introducing their own digital currencies. More recently, in a September 2021 speech, the Bureau of International Settlements (BIS) Innovation Hub head, Benoît Cœuré, called for central banks to hasten their timelines to develop CBDCs, stating that “the time has passed for central banks to get going. We should roll up our sleeves and accelerate our work on the nitty-gritty of CBDC design. CBDCs will take years to be rolled out, while stablecoins and crypto assets are already here. This makes it even more urgent to start.” So far, Australia, Malaysia, Singapore, and South Africa are working with the BIS Innovation Hub to test the efficacy of CBDCs issued by multiple central banks in cross-border settlements, known as “Project Dunbar.”

Economists warn that if people lose trust in fiat currencies, and institutions are unable to adapt to increased demand for digital forms of financial activity, cryptocurrency may be seen as a safe store of value. Thus, if the current financial system is unable to innovate, even for a transitory period, cryptocurrencies potentially can become the preferred reserve currency for countries around the world. Some of the most bullish advocates predict that Bitcoin will overtake the U.S. dollar within the next few years, while others are more measured, but still projecting the same outcome by 2050.

---

For the Crypto Industry, there is No Competition Among Digital Currencies

The industry notably does not share the perception of regulators that there is a race among different currencies to decide which ones will dominate the financial landscape or that there is a sense of threat among cryptocurrencies, CBDCs, and other coins being developed in the private sector. Technologists and industry leaders assert that cryptocurrency is not meant to be a replacement for the exiting financial system. Instead, it is an alternative for consumers to opt out of the current financial system to address the specific needs of their individual financial situations, including for long-term investment, hedging against inflation and other economic trends, powering DeFi initiatives and tools, trading, or simply fun and speculation. Some industry leaders, such as co-creator of the stablecoin Diem Christian Catalini, have stated that CBDCs and cryptocurrencies should complement one another to “provide new types of digital payment rails and increase competition in payments . . . so that [consumers] have more choice and lower costs.”

Kim Grauer, director of research at Chainalysis, echoed the industry’s comments, arguing that CBDCs serve different purposes compared to native cryptocurrencies, the use cases for which vary by coin. However, China is a notable exception, given that the CCP has banned native coins while investing in its own digital yuan. China has been an outlier in the regulatory landscape as one of the few countries with hostile policies toward the crypto industry, all the while developing and deploying a digital currency in pursuit of its own geostrategic goals. Although Chinese companies have historically been at the forefront of digital payments, the CCP is reasserting its control over financial innovation. Cryptocurrencies, especially those developed by the private sector, can threaten the digital yuan’s adoption, particularly given that developing countries in Africa and Latin America—regions that are also critical to the China’s Belt and Road Initiative (BRI)—are leading global cryptocurrency adoption.

Chinese Regulators Crack Down on Cryptocurrency
Amid Financial Stability Concerns

When Bitcoin was first introduced in 2008, China viewed it as a potential financial tool that consumers can use to further the country’s economic development. Sale Lilly, a senior policy analyst from the RAND Corporation, commented, “[China’s] citizens loved it, and then there’s this narrative of tension between a regulator and the people. I think among the regulators, there was also concern that native cryptocurrencies could be an effective tool, and it could be a part of China broadening its financial regulatory abilities by increasing the number of financial instruments available to people.” But since 2013, with the rise of native cryptocurrencies and crypto assets that are managed by the private sector, such as Facebook’s Diem, there is increased concern that decentralized currencies could pull economic activity away from the renminbi. As a result, the CCP has adopted an increasingly restrictive regulatory approach, notably starting in December 2013 when regulators banned financial institutions and payment companies from providing services related to cryptocurrency transactions. Below is a timeline of China’s activities related to cryptocurrency.

Actions by the Chinese government against the cryptocurrency industry suggest that China wants to completely cut crypto-related transactions out of its financial system. Regulators have expressed concerns about protecting investors, managing fraud, and risks to financial stability. However, more fundamentally, it is likely that the driving concern in China is private wealth accrual that the state cannot monitor. The CCP’s legitimacy is also closely tied to the country’s economic growth, which the government has touted as a key indicator of its rising status as a global superpower. As such, cryptocurrency can be seen as a challenge to the government’s economic development and stability, as well as to the Digital Currency Economic Payment (DCEP) program and is therefore perceived to be a challenge to the party itself. 

Despite the perceived economic risks of cryptocurrencies, the ecosystem has provided much of the native development for interest in blockchain and has helped stand up a new innovative technological sector that private companies, individuals, and governments are increasingly interested in and benefitting from. Thus, as governments around the world begin evaluating what regulations to impose on cryptocurrencies, they must consider what benefits cryptocurrencies can provide for their countries. In China’s case, the CCP has managed to separate its interests in blockchain technology and all its various applications (see President Xi’s speech on blockchain declaring “an important breakthrough”) from its interests in developing and deploying a digital currency, which notably is not blockchain-based, unlike existing native cryptocurrencies. 

India appears to be adopting similarly strict regulations toward cryptocurrency. The Reserve Bank of India (RBI), for instance, has expressed concerns about the illicit uses of cryptocurrency, and in 2020 its attempt to prohibit cryptocurrency trading was denied by the Indian Supreme Court. But in 2021, the government proposed stricter legislation called the Cryptocurrency and Regulation of Official Digital Currency bill, which would ban cryptocurrencies and fine individuals for trading or holding them. At the same time, commentators note that the bill will support the Indian central bank’s CBDC initiative, the digital rupee. In July 2021, the central bank announced that it may launch its first CBDC trial programs by December 2021. It is unclear whether India’s CBDC will use blockchain or DLT and whether it will be a retail (aims to act as cash) or wholesale (can only be used by financial institutions as a settlement asset) CBDC. Indeed, Prime Minister Nerenda Modi identified blockchain technology as a critical “frontier technology,” and while regulations may restrict crypto activities, India’s Ministry of Finance stated that blockchain will not be “shut off.”

Section 5

Cryptocurrencies Are on the Rise, but Regulations Are Sorely Lacking

Globally, the regulatory landscape varies across jurisdictions, from strict bans on cryptocurrencies and their mining, to differing degrees of regulation, to no regulations at all. Many countries and international organizations are still in the early stages of considering the implications of digital assets, with regulatory bodies focusing on investor and consumer protection, market integrity, bank exposures, payment systems, financial stability, and anti-money laundering and combating the financing of terrorism (AML/CFT). The Financial Action Task Force (FATF), the intergovernmental body that sets global standards related to AML/CFT, issued its first guidance on virtual assets and virtual asset service providers in July 2019, which was in large part modelled after AML/CFT regulations that had already been rolled out in the United States.

However, cryptocurrencies and tokens have numerous uses and can be categorized as securities, commodities, or property, among other classifications. A legal vacuum arises, because coins and tokens do not always precisely fit with pre-existing traditional definitions. Due to the ambiguity surrounding crypto, government agencies, particularly those in the United States, are now competing for authority.

Emerging technologies and new actors in the crypto ecosystem are challenging regulators more than ever, but the lack of policy frameworks is leaving regulatory gaps that malign actors are exploiting, leading to billions of dollars in losses and creating opportunities for other countries to step in as the standard-setters of the digital currency ecosystem. While some countries may follow China, the industry has pointed to the Monetary Authority of Singapore (MAS), the Swiss Financial Market Supervisory Authority (FINMA), the United Kingdom’s Token Taxonomy Act (which specifies that digital tokens are not securities), the Basel Committee on Banking Supervision, Committee on Payments and Market Infrastructures, and the U.S. Presidential Working Group on Financial Markets as examples of regulatory bodies and frameworks that can create a potential model for clearer regulations and forums for continued discussions and high-level engagement between the public and private sectors.

---

Illicit Activities Are a Top Concern for Regulators

Due to several high-profile incidents, the industry has been closely associated with illicit and criminal activities. Although cryptocurrency attracts some nefarious actors, primarily due to its pseudonymous nature and ease with which it allows users to instantly send funds anywhere in the world, a recent study by former Central Intelligence Agency (CIA) acting director Michael Morrell argues that “the broad generalizations about the use of Bitcoin in illicit finance are significantly overstated.” From 2012 to 2020, the illicit activity of Bitcoin was less than 1 percent of total cryptocurrency activities. Other studies by Chainalysis estimate that this figure is even lower, with illicit activity making up less than 0.5 percent of total transaction volume in 2020. 

This 1 percent, however, accounts for $10 billion in transaction volume and is a primary concern for regulators. In 2013, for example, the Federal Bureau of Investigations (FBI) shut down Silk Road, an extensive internet-based criminal marketplace that was used by thousands of drug dealers and other unlawful vendors. At the time it was taken down, Silk Road had nearly 13,000 listings for controlled substances and many more for illegal services, such as computer hacking and murder for hire, generating sales revenue totaling over 9.5 million bitcoins and commissions totaling 600,000 bitcoins. Cryptocurrency is also the payment vehicle of choice for ransomware actors, who pose a critical international security threat. The average total cost of recovery from a ransomware attack has doubled from 2020 to 2021, costing $1.85 million, with only 8 percent of organizations managing to get back all of their data after paying a ransom. By 2031, ransomware is anticipated to cost the global economy more than $265 billion. In September 2021, the U.S. Department of Treasury announced that it will impose sanctions to prevent hackers from using digital currencies in ransomware attacks. While the full list of targets of the sanctions have not been disclosed, it is likely that wallets and exchanges will be affected given that wallets are necessary to store encryption keys and access users’ holdings, and exchanges are the primary on- and off-ramps to the crypto ecosystem. Most recently, the Office of Foreign Assets Control (OFAC) imposed sanctions on Russia-based exchange Suex which the Treasury Department argues facilitated ranswomare payments.

Countries are also using cryptocurrency to evade sanctions and access the international financial system to procure U.S. dollars to fund and facilitate their policy goals. North Korea notoriously has turned to cryptocurrency in pursuit of its nuclear weapons program, with a UN report estimating that the country has stolen $2 billion in cryptocurrency and is targeting cryptocurrency exchanges for cyber theft as it can “more readily” use these proceeds abroad. Iran also uses cryptocurrency mining to circumvent trade embargoes and earn hundreds of millions of dollars in cryptocurrency assets that can be used to bypass sanctions. In 2019, Iran established a licensing regime that requires miners to identify themselves, pay a higher, but still relatively low, tariff for electricity, and sell their mined bitcoins to Iran’s central bank. Iran’s vast oil supply makes power cheap in the country. As a result, it has attracted investment from Chinese mining equipment manufacturers and Chinese miners. These miners are concentrated in a Special Economic Zone (SEZ) in southeast Iran, where cheaper electricity is reportedly sold to them. According to the Iranian Ministry of Industries, most mining farms in Iran operate unofficially and generate $660 million per year. As of July 2021, there are reports that the Iranian parliament will propose a bill entitled “Supporting Cryptocurrency Mining and Regulation of Domestic Cryptocurrency Trade,” which would ban all cryptocurrency payments other than those in the country’s national cryptocurrency. (Iran has temporarily banned mining due to local electricity shortages caused by mining operations.) The graphic below highlights the costs of illicit activities related to cryptocurrency.

While difficult, it is not impossible to trace back transactions, as seen with the Colonial Pipeline ransomware attack, where $2.3 million in Bitcoin was recovered from the initial $4.4 million ransom demand. Cryptocurrency’s reliance on blockchain technology can potentially allow governments to monitor the flow of cryptocurrency transactions and track financial activity. By working with intergovernmental forums such as the FATF, governments create a regulatory framework that ensures that sanctioned actors cannot easily transfer and use cryptocurrency without oversight. Experts have notably pointed to Canada, Singapore, and Japan as examples of strong AML/CFT regulations for cryptocurrency businesses aligned with FATF guidance. 

Greater attention also must be paid to other types of digital assets, specifically “Anonymity-Enhanced Cryptocurrencies,” also known as “privacy coins,” such as Monero and Zcash. Compared to native cryptocurrencies, privacy coins ensure the privacy and anonymity (not the pseudonymity) of their users. Due to the private nature of these coins, data regarding their use and circulation is limited. However, there has gradually been increased pressure to regulate them. In some cases, exchanges such as LiteBit have delisted privacy coins, in part because regulators in the Netherlands have stated that they were “too high a risk.” Other exchanges in Australia, South Korea, Japan, and the United States are similarly delisting privacy coins such as Monero, Zcash, and Dash amid regulatory and banking pressures that view them as conflicting with AML and Know Your Customer (KYC) rules. In some countries, such as France, authorities are recommending total bans on privacy coins. Privacy coins present a real concern, and delisting them from exchanges does not limit their use and accessibility. However, Bitcoin remains the dominant cryptocurrency for criminal activities. Since 2013, the FBI has noted the “enormous growth” in the number of cases involving digital currency payments, with 75 percent of all cryptocurrency-based illegal activities involving Bitcoin. Continued regulation of both native cryptocurrencies and privacy coins is necessary to mitigate their uses in illicit activities.

Scams, Pump-and-Dump Schemes, and Market Manipulation Pose Risks to Investors

In the last two years, massive exit scams have dominated crypto-related crimes. In 2019, a Ponzi scheme on PlusToken, a cryptocurrency wallet, totaled $2.9 billion, and in 2020 a similar scheme defrauded investors at WoToken, a dApp cryptocurrency wallet project, out of $1.1 billion. In 2020, DeFi protocols particularly suffered from hacks and scams, with nearly 99 percent of major fraud volume in the second half of 2020 coming from DeFi protocols. 

It is estimated that approximately 1,000 entities own about 40 percent of the entire Bitcoin market, thereby allowing them to have a tremendous effect on the crypto economy and have the potential to manipulate currency valuations through single trades. Referred to as “whales,” they include investment groups such as Pantera Capital, Fortress Investment Group, and Falcon Global Capital. Due to the relatively smaller size and greater volatility of the cryptocurrency market, compared to the traditional financial market, whales have an outsized impact on prices and can potentially harm smaller investors. A whale in one cryptocurrency can also adversely impact other altcoins, because they are heavily indexed on exchanges. This phenomenon was observed in February 2021 when a massive sell-off of Ether caused the coin to fall from $1,628.82 to $700 (a price drop of more than 50 percent) in the span of three minutes, and over 24 hours, the global cryptocurrency market tumbled by 14 percent, which the cryptocurrency exchange Kraken posited was due to the activities of a whale. 

Unlike the stock market, pump-and-dump schemes in the cryptocurrency world—which involve bad actors spreading false or misleading information to create a buying frenzy that will “pump” up the price of an asset and then “dump” the asset by selling at the inflated price— can also last minutes instead of months, and encryption techniques allow the perpetrators to hide their identity. In the first 70 seconds of a typical crypto pump-and-dump scheme, prices increase by 25 percent on average, and trading volume increases 148 times. In some cases, organizations are created specifically to manipulate the market. A Russian-based organization called Gotbit, for example, inflates trading volumes on obscure cryptocurrency exchanges for a fee and has about 30 cryptocurrency projects as clients.  

Scams also present a concern. The Federal Trade Commission (FTC) warned that since October 2020, approximately 7,000 consumers have lost more than $80 million in cryptocurrency scams, increasing “more than ten-fold, year-over-year,” with consumers losing around $1,900 on average. ICOs, where start-ups can crowdsource funding to kick-start their cryptocurrency businesses, have been the sources of multiple instances of manipulation. For example, in May 2021, consumers lost over $2 million in cryptocurrency to scammers impersonating Elon Musk. Moderators struggled to rein in the activity on Twitter, and such deceptive tactics remain prevalent on the platform. Digital asset exchanges work independently without being governed by a common forum, resulting in a highly fragmented market. In the absence of a common forum, it is difficult to detect malicious activity, and very taxing to conduct cross-market surveillance. 

In the last two years, massive exit scams have dominated crypto-related crimes. In 2019, a Ponzi scheme on PlusToken, a cryptocurrency wallet, totaled $2.9 billion, and in 2020 a similar scheme defrauded investors at WoToken, a dApp cryptocurrency wallet project, out of $1.1 billion. In 2020, DeFi protocols particularly suffered from hacks and scams, with nearly 99 percent of major fraud volume in the second half of 2020 coming from DeFi protocols. 

Globally, regulations concerning investor protections are scarce. Countries such as Bulgaria, Ghana, Guatemala, Honduras, Hungry, Kenya, Kuwait, and Poland, among others, have no cryptocurrency legislation and only warn investors and consumers about the risks regarding the industry and its volatility. Coupled with the unique characteristics of new assets and frequent changes to market structures, inconsistent regulatory guidance makes the cryptocurrency industry highly susceptible to abusive practices, thus impacting investors and markets. Moreover, the lack of guardrails to protect investors, particularly smaller ones, allows market manipulators and other bad actors to operate with impunity.

Cybersecurity Challenges Present Risks to the Growing Crypto Sector

One of the biggest challenges for cryptocurrency is uncertainty regarding cybersecurity and the integrity of transactions. Stakeholders are increasingly concerned about the authentication, authorization, and confidentiality limitations of cryptocurrency transactions as they evaluate engaging in this new sector. Although moving transactions on a blockchain is generally reliable and secure, there are several vulnerabilities that can affect a cryptocurrency’s network. From mining pools to wallets to smart contracts to specific mechanisms within the protocol that verify transactions, each component has its own unique set of vulnerabilities that can cause double spending (where a user could make a company of a coin or token then send it to another party while holding onto the original, as an example) or force a platform to upgrade to a system that is favorable to hackers, distributed denial of service (DDoS) attacks, or the theft of encryption keys. In August 2020, for example, Ethereum Classic suffered a 51 percent attack that resulted in $5.6 million worth of the currency being double spent. 

Another significant vulnerability withing the ecosystem is data quality. One of the main arguments made by proponents of blockchain technology and cryptocurrency is that data cannot be revised once it has been recorded in the blockchain. Platforms can only take responsibility for the quality and accuracy of information once it has been input, meaning that the data being pulled from organizations and individuals must be trustworthy. A corrupted oracle—a scalable relational database architecture that manages and processes data across wide and local area networks—could cause a domino effect across the entire network, particularly if blockchain oracles are centralized. (This is known as the “Oracle Problem.”)

As the DeFi sector continues to grow with the support of institutional investments, so too do the number and variety of cyberattacks. Most recently, in August 2021, the Poly Network—a DeFi provider that allows users to transfer tokens tied to one blockchain to another network—suffered a cyberattack where $600 million was stolen by hackers who exploited a vulnerability in its system. The attack is considered the “biggest [hack] in the decentralized finance history.” Given that the hacked systems operate differently, reports indicate that the companies have struggled to work together to address the fallout of the attack. Losses stemming from hacks, fraud, and thefts in the DeFi sector totaled around $474 million from January to July 2021. Most attacks have been conducted by outside agents, though 24 percent have been inside jobs.

Absent effective government regulation, the industry is taking the lead in addressing the growing concerns regarding the environmental impact of cryptocurrency mining. Some networks have adopted a proof of stake consensus mechanism, which uses less energy than the traditional proof of work method. Technical changes such as these may demand less computational power from the networks and reduce energy use. Cryptocurrency mining equipment manufacturers have also noted that innovations in the mining rigs themselves and the systems used to maintain them can help reduce energy consumption. For example, immersion cooling systems, which are often used in data centers, are being used on rigs to reduce the cost of cooling. According to some estimates, they can reduce cooling costs by as much as 90 percent and increase power efficiency by 25 percent. Indeed, the industry’s motivations for improved cooling systems are largely about reducing operational costs rather than environmental ones, but such technological developments can also support goals to reduce overall energy consumption. 

In addition to technical changes, the industry and the United Nations launched the Crypto Climate Accord (inspired by the Paris Climate Accord) in April 2021. Currently, the Accord includes more than 150 companies and individuals spanning the cryptocurrency, finance, technology, energy, and NGO sectors, with a collective goal of achieving net-zero emissions from the electricity consumption associated with their respective crypto-related operations by 2030. As renewable options also grow more efficient and viable for mining, industry leaders contend that cryptocurrency can serve as an incentive for miners to build out new renewable technologies. Commenters also note that the current level of mining is unlikely to continue to expand. Bitcoin protocols subsidize mining, but those subsidies have a built-in check on their growth, known as “halving,” which cuts the revenue that miners receive in half every four years to account for inflation. Unless the price for Bitcoin doubles every four years in perpetuity (which is impossible for any currency), the share of miner revenue will eventually be zero, and miners will not be incentivized to continue mining.

While mining consumes vast amounts of electricity, conducting transactions also comes at an environmental cost. Bitcoin’s annual energy consumption for transactions is more than three times Ireland’s annual energy use, almost twice that of Singapore’s, and over one-third of Australia’s. As NFTs also grow in popularity, it is likely that Ethereum’s carbon footprint will also grow, given that many NFTs and marketplaces operate on Ethereum’s network.