The Implications of Cryptocurrencies on Multinational Corporations, State Sovereignty, and

Globalization

Maiyah J. Alexander

Instructor: Gregory Falls

December 17, 2018

 Table of Contents

Abstract 3

Introduction 4

Literature Review 5

Limitations of Study 7

History 8

How Does Cryptocurrency Work? 9

Real-world Implications 11

Regulation 14

Conclusion 17

References 19
 Abstract

Cryptocurrencies are emerging as a legitimate way to purchase goods and services. Once thought

to only be used for devious purposes, cryptocurrencies are now being used for everyday

transactions. As a result, national governments must give consideration to the impact that these

digital currencies have on their economies and trade as a whole. Lawmakers around the world

are beginning to realize that a shift toward digital currencies can allow people to engage in illegal

and untraceable financial transactions, as well. If cryptocurrencies are to succeed and be widely

accepted as legitimate forms of payment, then governments will need to understand and regulate

their use. This paper is intended to investigate and identify the impact that cryptocurrencies are

having on trade, national sovereignty, and global economies.

Keywords​: cryptocurrency, global trade, economics, finance, regulations

Introduction
Cryptocurrencies are defined by Merriam-Webster as “​any form of currency that only

exists digitally, that usually has no central issuing or regulating authority but instead uses a

decentralized system to record transactions and manage the issuance of new units, and that relies

on cryptography to prevent counterfeiting and fraudulent transactions”. ​The use of

cryptocurrencies has become widespread, as the general public increasingly uses them as

payment for everyday items. Yet, it is still surprising to discover that a segment of the population

has not yet accepted cryptocurrencies, however. The expectation is that cash, checks, and card

use will soon become obsolete and cryptocurrencies will become the new means for becoming

financially stable or even wealthy. Before this can take place, however, cryptocurrencies must be

regulated and become more secure. The acceptance of cryptocurrencies at a federal level would

affect multinational corporations and, eventually, governments themselves. Cryptocurrencies

could soon have a major impact on international relations, diplomacy, and state sovereignty.

The idea of a cryptocurrency is not a new one; it was initially brought about in the

Netherlands in the late 1980s after a group of people decided to put their money on “smart

cards”, which launched the in the idea of digital money. This resulted in the creation of a safe

and portable currency that didn’t require the physical possession of dollars and coins. The person

behind this revolutionary idea in 1983 was DigiCash creator, David Chaum. Since then,

cryptocurrencies have sprouted up around North America and Europe. Unfortunately, though, of

all the online currency platforms which surfaced during the 1990s, only PayPal has been

successful (Bigmore, 2018). In 2009, a group of programmers under the alias “Satoshi

Nakamoto” presented Bitcoin to the public as a “peer-to-peer electronic cash system”. This new,
decentralized form of economy was designed to be vastly different than other cryptocurrencies

because it was not backed by a commodity like gold or silver.

Literature Review

History. ​Cryptocurrency itself is not as new as one might suppose. It emerged in the

Netherlands in the late 1980s, after a group of people decided to put their money on “smart

cards”, thus starting the phenomena of electronic money. In 1983, David Chaum, creator of

DigiCash, desired to find a way to create safe financial transactions without the need for physical

currency. So he created a platform on which people could exchange money electronically from

one person to another, without the worry of having their cash stolen. Toward the middle of the

1990s, the idea of cryptocurrency became more widespread in North America and Europe, with

FirstVirtual coming about just before PayPal’s boom of success (Bigmore, 2018). After the

failure of FirstVirtual, other cryptocurrency platforms came and went. That is, until 2009, when a

group of programmers under the alias “Satoshi Nakamoto” presented Bitcoin to the public as a

“peer-to-peer electronic cash system”. Because of its complete disconnect from an actual

commodity, the “money” Bitcoin uses is completely decentralized (Cointelegraph, 2018).

State Sovereignty. ​According to Katalyse.io in an early 2018 article, one of the

significant impacts of cryptocurrencies is their decentralized financial transactions. The fact that

they are not based in any one country or continent can drastically change the dynamics of

international trade and foreign relations. Writer Alex Ward noted that North Korea uses Bitcoin

as a loophole to get around the sanctions that the U.S. has placed on them, which are intended to

prevent North Korea from making nuclear weaponry using U.S. currency ​(Ward, 2018). ​The
usage of cryptocurrency in this manner, though technically violating the sanction, would not be

considered illegal because its use would not have been explicitly stated in sanctions documents.

North Korea is not the only country that currently uses or plans to use cryptocurrency to their

advantage. Ward further notes that “Countries like Russia and Venezuela have considered

creating State-owned cryptocurrencies. In December of 2017, the Venezuelan President

announced the launch of an oil-backed cryptocurrency to help move the country out of a

crippling inflation brought on by US-led economic sanctions.” Thus, the governments of these

countries intend to use cryptocurrencies in ways that are intended to get them out of difficult

economic policies that would otherwise cripple them (Katalyse.io, 2018).

International Relations. ​Internationally, cryptocurrencies are widely considered to be

positive influences on the future of global trade and on international relations among countries.

In a TradeReady article, Jennifer Nesbitt states that cryptocurrencies’ secure transactions,

fast-money movement, and rate stability are positives for international use. Additionally, there

are no taxes or fees tied to the transactions, therefore countries (or even corporations) could

receive the goods they desire without a need for paying more than the item’s actual cost (Nesbitt,

2018).

​ he idea of regulating decentralized, untraceable currencies is a

Regulation. T

controversial one. There are no planned universal strategies for regulating existing

cryptocurrencies and no governmental or global agency has been authorized to do so. Jonathan

W. Lim, the author of ​Handbook of Digital Currency, ​believes that while regulation would be

needed, the overregulation of cryptocurrencies would ultimately be a burden to the consumer.

Singapore has recently been using heavily-regulated cryptocurrencies to uphold their overall
economic status, and though the currency itself would be a benefit to the country, it would still

continue to be burdensome because of the lack of freedom it allows. This could be a detriment to

the country’s financial stability, especially if the cryptocurrency is widely-used among its

citizens. ​(Lim, 2015)

Limitations of Study

The opinions regarding cryptocurrency are largely positive, but the majority of the

sources reviewed do not discuss cryptocurrency in relation to multinational corporations, state

sovereignty, or globalization. The sources which discuss this topic do so in a negative,

sometimes biased, manner, but they also show the accuracy of the projected success or failure of

cryptocurrencies being used. Therefore, relying upon this information alone could cause issues.

Specifically, the sources could unrealistically portray the advancement of the widespread use of

cryptocurrencies in a too-positive or too-negative light, rather than one that is fair and accurate.

In addition to the bias of sources, the number of sources themselves is scarce. Though

online currency has been a topic of discussion since the late 1990s, the documentation of recent

findings in this field have only been made public within the past fifteen years. Because of this,

most of the sources say the same things. While this could be perceived as negative, this author

believes the combination of these sources can offer the opportunity to present an argumentative

paper based on factual evidence.

History

According to Bitcoin Magazine, in 1983, David Chaum studied the possibilities of

creating electronic cash in hopes to eliminate the need for hand-to-hand monetary transactions.

He later invented the “blinding” method, an extension of the RSA algorithm. The RSA

algorithm, also known as the Rivest-Shamir-Adleman algorithm, is described as “​a suite of

cryptographic algorithms that are used for specific security services or purposes -- which enables

public key encryption and is widely used to secure sensitive data, particularly when it is being

sent over an insecure network” (Rouse, n.d.). The algorithm is​ ​typically used for encrypting so

that a bank or the Federal Mint cannot see it. This process is called blinding.

Chaum then went on to create DigiCash to create safe financial transactions without the

risks associated with the transfer of physical currency. While DigiCash was successful, the

company was not. It eventually began cooperating with the DNB, or De Nederlandsche Bank, to

have its electronic cash products sold exclusively to banks, rather than individual people. The

company also had a $180 million deal to bundle DigiCash software on Microsoft products, but

Chaum considered the offer to be too low. Ultimately, DigiCash went bankrupt in 1998 because

of its unwillingness to cooperate with other companies aside from banks. At the same time as

DigiCash’s rise to fame in the Netherlands in the late 1980s, 24-hour gas stations were being

raided for cash. To address this problem, “smart cards” were created, and drivers began using

these cards rather than cash (Griffith, 2016).

Though new ideas for online currency continued to surface, only few were successful.

PayPal--originally called Confinity and X.com--was among the small number of online
currencies which became successful. One of the factors separating PayPal from many other

online currencies was that PayPal allowed users to transfer money directly between individuals;

other online currencies, such as FirstVirtual, required transfers to take place between

“merchants.” This caused PayPal to be favored more.

In 2008, the first Bitcoin paper was publicly posted by Satoshi Nakamoto. The purpose of

Bitcoin was described by Nakamoto as a “peer-to-peer electronic cash system”. This became a

new, revolutionary way to invest money and purchase commodities (Cointelegraph, n.d.).

During this period of time, most Americans were moderately liberal about the value of

cryptocurrencies and believed that cryptocurrencies could encourage innovation and the creation

of new business ideas. This attitude held until the tragic events of September 11, 2001. After this,

people drastically changed their attitudes toward cryptocurrencies. They started to perceive that

“alternative currencies” were used by terrorists, which ultimately meant that cryptocurrencies

included pathways for terrorists to attack Americans.

How Does Cryptocurrency Work?

Cryptocurrencies operate in a complex environment. For an individual to invest, send or

even purchase with Bitcoin (BTC), for example, they would first have to install Bitcoin wallet

software on their phone, tablet, or PC. This allows the individual to create his or her their own

account, similar to an e-mail account, which is specific to the individual. The Bitcoin account

can only be used once. Users employ a digital “wallet” to store their Bitcoins (whether it be a

whole or fraction of one), which are secured there using unique, coin-specific passcodes. The

wallet permits its owner to send and receive Bitcoin to or from other users, respectively.
 Once an owner and wallet holder, a person is free to invest or transfer Bitcoin as often as

he or she pleases. Each transaction is posted to Bitcoin’s blockchain, a publicized online record

of every investor’s transactions. This could be compared to a bank account, which keeps a record

of transactions, deposits, withdrawals, and investments, except anyone can view the blockchain.

This helps users determine and track their balances and verify the transactions that they make.

The blockchain itself is protected with an encryption formula that is intended to prohibit hacking

(Bitcoin.org, n.d.).

The transactions, though they may seem unsafe, are actually highly protected. In

transactions, senders of Bitcoin must first sign using their passkey before the transfer can be

made. This provides evidence that the sender has a legitimate, valid Bitcoin account and wallet.

This passkey also serves as a way to tell if the transaction has been altered in any way after it has

been made. The final stage of Bitcoin’s lengthy process is called “mining”. Mining is the manner

in which pending transactions are confirmed and put into the blockchain. The transactions

themselves-- in groups are called “blocks”-- are added to the never-ending list of past

transactions (Bitcoin.com, n.d.).

The process for the distribution of cryptocurrency investments to their individual

platforms could vary based on the type and popularity of each cryptocurrency. Less popular

cryptocurrencies would require lower costs for investment, and their transaction processes would

be easier (and perhaps even less secure). The opposite of this could be true as well, since a more

complex or more commonly-used platform would have more extensive fees and protections.

Additionally, as certain platforms become more popular, a larger number of affluent individuals

who make investments and transactions will participate on these platforms. These individuals
would also want their investments to be processed using more comprehensive measures, thereby

ensuring that their investments and transactions are not altered, stolen, or mismanaged.

Real-world Implications

Around the world, cryptocurrencies are used for a plethora of things, both on an

individual scale and a national one. Alex Ward of Vox magazine published an article February

2018 about North Korea and its use of Bitcoin to find a loophole in the sanctions made against

them. The sanctions were put in place by the United States, specifically to prevent the purchase

of materials for building nuclear weaponry. The goal of President Trump’s sanction installations

is to “starve the North Korean regime of money it would use to improve its weapons”. North

Korea earns between approximately $15 million and $200 million by investing money into

cryptocurrencies. While not nearly enough to fully fund their nuclear programs, the money it

makes keeps its operations up and running (Ward, 2018).

The use of cryptocurrencies in this fashion is allowing North Korea to begin achieving

success in the market of online currency. This doesn’t, however, affect the country’s physical

currency at all; so the money that it spends does not harm or benefit its citizens. So, while the use

of cryptocurrency to evade federal sanctions is illegal, technically the sanctions themselves have

not been broken because the form of payment was not clearly defined.

North Korea is not the only country that uses cryptocurrencies as a means to continue to

better their government and grow their economy. Venezuela and Russia have both considered

creating “state-owned cryptocurrencies”. Venezuelan President Nicolás Maduro proposed

launching a cryptocurrency backed by oil to assist the country out of “crippling inflation” from
the sanctions installed by the United States (Katalyse, 2018). The main reason these nations

desire to use cryptocurrencies in this way is so that they can push their economies out of policies

intended to punish or starve the nations’ economies.

In addition to this, cryptocurrencies affect international relations in a number of ways.

Jennifer Nesbitt, a writer for TradeReady, discusses the main reasons as to why Bitcoin could

positively and negatively affect international trade because of the lack of exchange rates. If

goods and services are being sold internationally, one would have to concern themselves with

converting their funds into the necessary currency. With cryptocurrency involved, this is

eliminated, and goods can now be sold and traded much more easily, without the need to

convert. Along with this, she labels lower taxes and fees, secured payments and detailed records

of transactions to be among the many positives of using cryptocurrency on an international scale

(Nesbitt, 2018).

Cryptocurrencies also remove the need for a “middle man”, according to Medium’s The

Mission Podcasts. The podcast’s hosts states,

“The middleman is no longer required for authorizing and authenticating transactions…

Not to mention, the added allure of anonymity and privacy that is associated with

cryptocurrencies. Just when you thought that was all, you then realize that transactions

occur in a matter of seconds and minutes.”

The host further discusses typical international transfer transactions and how they usually require

clearing houses and banks. In addition, they require approval from SWIFT, or the Society for

Worldwide Interbank Financial Telecommunication. According to the article, SWIFT “is an

organization that provides a network for financial institutions all over the globe to transmit
information to each other in a safe and secure network” (Katalyse.io, 2018). The transactions

made internationally have to go through SWIFT in order for them to be authorized properly.

Without the need for a third-party authenticator--like SWIFT--international monetary transfers

can be processed much more quickly and easily.

Despite the positives for consumers, all cryptocurrencies are not used worldwide. Some

countries that use them have strictly formulated laws and regulations to control them, while the

while others have no control over them whatsoever. Regardless, the biggest possible problem for

using cryptocurrency on a global scale is the uncertainty of the outcome. In other words, because

of the volatility of the market (or trade) value of cryptocurrencies, it is possible that one’s

earnings or spendings could be growing one day and plummeting the next.

How Is Cryptocurrency Used?

Cryptocurrencies have been known as a way for individuals to make purchases that

cannot be tracked or taxed by their governments or policing authorities. For example, Kim

Lachance Shandrow discusses six things that a person could buy with cryptocurrency, including

items that are odd or illegal, such as fake IDs, tickets to space, ancient wooly mammoth tusks, or

one-third of an Indonesian island. However strange or outlandish, cryptocurrencies permit the

sale and purchase of nearly anything.

Because of their encrypted transactions, it is possible to use cryptocurrencies for illegal

activities like human trafficking and drug purchases. These transactions take place on the “dark

web,” a part of the internet which is accessible to users only through anonymous, untraceable

software. In a 2017 CNBC article, Dan Mangan writes about a woman who maxed out her credit

cards to buy cryptocurrency so she could wire money to members of ISIS in Pakistan, China, and
Turkey. Zoobia Shahnaz pled guilty to wiring more than $150,000 to individuals involved with

the terrorist organization. She also pled guilty to a number of charges, including bank fraud and

money laundering.

Thanks to cryptocurrency, the illegalities of this transaction are blurred. The PATRIOT

Act was signed into law on October 26, 2001, as a response to the terrorist attack in New York

on September 11, 2001. Its purpose is to allow federal officers to have more authority in

intercepting and monitoring foreign communications in order to keep the American people safe.

The Bank Secrecy Act, while older (created in 1970), is a law that requires financial institutions

to report suspicious transactions within their systems. Shahnaz violated these laws. By selling

her cryptocurrency earnings to members of ISIS--a terrorist organization-- she engaged in

“terrorism financing,” which is illegal, but there is no chargeable crime that is associated with

the use of Shahnaz’s credit cards to purchase cryptocurrency for that illegal activity.

Regulation

The regulation of an unstable currency is difficult because of the constant shift in the

cryptocurrencies’ markets. To combat this, some countries have instituted regulations and

restrictions on the usage of state-owned cryptocurrencies. Author Jonathan Lim writes in chapter

18 of his book ​Handbook of Digital Currency a​ bout the Singapore government’s use of harsh

regulation on cryptocurrency because of its leaders’ fear of the possible detriment to the

country’s economy. Singapore has recently been using a heavily-regulated cryptocurrency to

uphold its overall economic status. Lim continues in the chapter to clarify that regulation is

necessary in order to use cryptocurrency on a global scale (Lim, 2015).

 Individually, cryptocurrency use on a day-to-day basis could definitely impact an entire

economy’s success and growth. If every citizen decides to use it, the country’s economy could

plummet quickly, because of a lack of use of local, non-digital currency. On the other hand, if

nations overregulate cryptocurrencies, they run the risk of burdening both the consumers and the

producers, and who may stop using cryptocurrencies altogether.

Francine McKenna of MarketWatch wrote an article in 2017 about the manners in which

different countries around the world regulate or monitor Bitcoin and other cryptocurrencies.

Countries like China and Russia have actually banned “accepting, using, or selling”

cryptocurrencies. In China, there are no laws that prevent their usage, but the People’s Bank of

China has very strict regulations on the manner in which cryptocurrencies are used and even

monitors people and their banks.

In Russia, cryptocurrencies were banned altogether until the end of 2017. Currently, the

country’s goal is to begin regulating cryptocurrencies as people begin to use it more. Russia’s

Ministry of Finance recently prepared a bill that “includes a limit of 1 billion rubles [~USD$17.3

million] that can be raised through an ICO [initial coin offering]”. In other words, Russia’s

government has allowed for cryptocurrencies to be used up to the equivalent of $17.3 million in

ICO donations. ICO stands for “Initial Coin Offering,” also known as an IPO, or “Initial Public

Offering”. An IPO is the process of offering shares in a private corporation to the public

(Kenton, 2018). According to Jake Frankenfield, the purpose of an ICO is the same as an IPO,

except within the scope of cryptocurrencies and the mainstream investment world. “Investors

buy into ICOs in the hope of quick and powerful returns on their investments”, writes

Frankenfield after stating that “ICOs are used by startups to bypass the rigorous and regulated
capital-raising process required by venture capitalists or banks”. With the purpose behind ICOs

in mind, political leaders decide whether regulations are needed regarding how much

cryptocurrency is gained from an ICO.

In Canada, leaders are not heavily regulating the actual cryptocurrencies; they have a

“regulate-and-embrace” policy which focuses more on anti-money-laundering concerns. The

Bank of Canada has proposed issuing a digital currency to be used by the general population.

Meanwhile, the Ontario Securities Commission “granted regulatory relief” to FUNDER, Inc., an

organization that uses money won as prizes as fundraising solutions. This became Ontario’s first

ICO. However, the Bank of Canada declared in May of 2017, that “its experiment with

blockchain, or distributed ledger technology, showed it is currently incompatible with operating

within the country’s centralized interbank payment systems” (McKenna, 2017).

On the other side of the spectrum regarding regulations, the United Kingdom does not

have official regulations on cryptocurrency. People are allowed to buy, invest, and sell

cryptocurrencies as much as they wish. In November 2017, however, the Financial Conduct

Authority published a warning to consumers about the risks of being involved with digital

currency. Prior to this, the UK Parliament made plans to amend the EU’s current Money

Laundering Directive to cryptocurrencies. McKenna states that “the proposed amendments

would bring digital currency exchange platforms and custodian wallet providers under the

purview of existing legislation”. The legislation that McKenna refers to in this statement is part

of the policy in the UK which does not require cryptocurrency exchanges or transfers to follow

money laundering regulations. Monies acquired through cryptocurrencies are currently taxed as

“goods and services based on profits from a sale”, according to McKenna’s article.
 As for the United States, the use of cryptocurrencies is not regulated at all. In an

interview with Angela Knight-Davis, an executive at the U.S. Federal Reserve Bank, she states,

“the [Federal Reserve Bank] doesn’t have the authority to regulate cryptocurrency as its own

entity. While it could be regulated through the Treasury as currency, it’s so disconnected from

other forms of currency, it’d be hard to keep track of”. In addition to this, the Financial Crimes

Enforcement Network (known commonly as FinCen) says that “virtual currency does not have

legal tender in any jurisdiction”, according to an early 2018 CNBC article by Kate Rooney.

When talking about the U.S.’s ideals regarding the exchange of cryptocurrencies, Rooney

describes that the Securities and Exchange Commission now views cryptocurrencies as a form of

security. She states, “​the agency expanded its scrutiny and said it is looking to apply securities

laws to everything from cryptocurrency exchanges to digital asset storage companies known as

wallets” (Rooney, 2018).

Conclusion

The future as it relates to the national and international use of cryptocurrency is

uncertain. The volatility of cryptocurrencies and their markets, combined with varying regulatory

systems, ensures that it will be some time before there is widespread acceptance and use.

Countries continue to be challenged by the use of cryptocurrencies for illegal activities and by

their ability to cripple existing markets by allowing users to skirt tax requirements and dismiss

non-digital currencies.

Regardless, it is quite likely that people will continue to invest in, buy, and sell

cryptocurrencies because the world is moving in a digital direction. Goods and services will
continue to be more accessible because of the internet and the opportunities it provides. Rather

than shying away from digital currencies because they are unchartered territory, nations should

move forward in the shift toward cryptocurrency and all it has to offer.
 References

Bank Secrecy Act. (n.d.). Retrieved from https://www.irs.gov/businesses/sma

ll-businesses-self-employed/bank-secrecy-act

Bitcoin.com. (n.d.). Bitcoin Mining. Retrieved from https://www.bitcoin.com/bitcoin-mining

Bradbury, D. (n.d.). Silk Road and Beyond: Bitcoin's Complex Relationship With the Dark
Web. Retrieved from https://www.thebalance.com/what-is-a-dark-market-391289

Cryptocurrency. (n.d.). Retrieved from

https://www.merriam-webster.com/dictionary/cryptocurrency

Griffith, K. (2014, April 16). A Quick History of Cryptocurrencies BBTC - Before Bitcoin.
Retrieved from
https://bitcoinmagazine.com/articles/quick-history-cryptocurrencies-bbtc-bitcoin-1397682
630/

How does Bitcoin work? (n.d.). Retrieved from https://bitcoin.org/en/how-it-works

Mangan, D. (2018, November 27). Bitcoin, bank fraud and bloodshed: New York woman
pleads guilty to supporting ISIS terror group. Retrieved from
https://www.cnbc.com/2018/11/26/new-york-woman-pleads-guilty-to-using-bitcoin-to-lau
nder-money-for-isis.html?__source=sharebar|email&par=sharebar

PayPal. (2018, December 12). Retrieved from https://en.wikipedia.org/wiki/PayPal

Rooney, K. (2018, March 27). Your complete guide to cryptocurrency regulations around the
world and where they are headed. Retrieved from
https://www.cnbc.com/2018/03/27/a-complete-guide-to-cyprocurrency-regulations-around
-the-world.html

Shandrow, K. L. (2014, May 12). 6 Crazy Things You Can Buy With Bitcoin (Paradise
Included). ​Entrepreneur.​ Retrieved from https://www.entrepreneur.com/article/233809

The PATRIOT Act. (n.d.). Retrieved from https://www.justice.gov/archive/ll/highlights.htm

Ward, A. (2018, February 28). How North Korea uses bitcoin to get around US sanctions.
Retrieved from
https://www.vox.com/world/2018/2/28/17055762/north-korea-sanctions-bitcoin-nuclear-w
eapons

What is Cryptocurrency. Guide for Beginners. (n.d.). Retrieved from

https://cointelegraph.com/bitcoin-for-beginners/what-are-cryptocurrencies#history