• Advokat Jeppe R. Stokholm

Practical use of crypto currencies in e-commerce and global payments

Updated: Feb 1, 2018

#Cryptolaw


The first documented commercial bitcoin transaction is dated May 22, 2010 and involves the purchase and delivery of two pizzas fully loaded with toppings for 10,000 BTC (at a value of USD 41 in 2010) by a bitcoin coder named Laszlo Hanyecz.


Today, #cryptocurrencies can be used as payment in various transactions, and crypto currencies can be defined as:


  • encrypted digital assets designed to work as a medium of exchange


When investigating the legal impact of the use of crypto currencies in #ecommerce and #globalpayments, there are both benefits and challenges to be addressed.


The legal benefits of crypto currencies in e-commerce


  • Low cost, fast settlement, no claw back or bouncing: Crypto currencies are designed to work as a medium of exchange in a decentralized ledger, and e-commerce transactions can be carried out peer-to-peer without any involvement of intermediaries or handling agents (banks, credit card companies etc.). E-commerce transactions are instantly processed, verified and publicly recorded at a low fee (if any) and very fast. For a business owner the consequence is, that when an e-commerce transaction is paid by a customer with crypto currencies, the business owner will receive the payment immediately instead of waiting hours or days for a payment to clear before shipping the goods. And when the payment is received, the payment cannot bounce or be “clawed back” by any banks, credit card companies or other financial intermediaries.

  • Verified ledger: Since a blockchain is a cryptographically list of records secured in a chain of blocks, and since each block is timestamped and referring to a previous block in the chain, each chain of blocks is acting as a verified ledger of records relating to the e-commerce transaction. This feature secures the transparency for both business owners and customers, and builds trust and confidence that can be relied on.

  • Better protection against cybercrime: A decentralized ledger prevents leaks from centralized and trusted third parties and is less fragile against cybercrime, since cybercrime often occur in the form of a targeted attack on a specific entity-Cybercrime related to e-commerce comes with many faces: It can be malware or a hack on a website in order to steal sensible data (such as credit card information), to get goods delivered without paying or to use a stolen credit card as payment (e-shoplifting). With blockchain technology it is easier for business owners to keep their site free from hacking and fraud, since all transactions are encrypted and secured in a chain of blocks. Since cyber fraud is more common in international transactions, some business owners are reluctant accepting international payments by credit card. For the customers, a benefit by paying with crypto currencies is, that sensible data relating to the transaction is not subject to a central database with third party and/or cybercriminal access: When a crypto payment has been carried out, the transaction is processed and secured, and there is no risk of double spending, i.e. no fear of being deducted further by a cyber-criminal using the customer’s personal credit card details. But as always, the customer must be aware and take necessary precautions to protect his own wallet, including the “private key” to the crypto currency.

The legal challenges of crypto currencies in e-commerce


When talking legal flip-sides of the benefits related to the use of crypto currencies, an interesting point is, that it is primarily the market regulators (and not the customers) who seems to have an issue with an open (but consumer friendly!) e-market for illegal transactions. The reason is, that:

  • Law enforcement is challenged in a free and anonymous market: E-commerce that can be carried out peer-to-peer without any involvement of intermediaries and with the use of anonymising software such as Tor, constrains the ability of law enforcement to track down IP addresses and following the flow of money. This combined with the use of crypto currencies, opens the market for illegal transactions, such as the exchange of weapons, fake branded goods, stolen credit cards and drugs.

  • Monitoring e-commerce involves multiple jurisdictions: In 2015, the US Federal Bureau of Investigation (FBI) issued a report titled “Virtual Currency: Investigative Challenges and Opportunities”. The report provides a framework for law enforcement to investigate the illegal use of virtual currencies and to prosecute criminals and their e-commerce activities. To investigate the origin of a criminal activity, the open public ledger can be an effective tool for the prosecutors, but it might be necessary to combine the findings with other sources of information. Investigating illegal e-commerce activities is like a classical cat-and-mouse game: Everybody knows, that there is a trail from the transaction(s) in the public ledger, but there are sophisticated ways to confuse the investigators. For instance, criminals can try to hide their identity by applying so-called “mixing services” (also called: Tumblers), which takes crypto currencies from different users and then mix the coins before sending the coins back to the users in different order and timing. However, the use of such “mixing” services may be a violation of anti-structuring laws such as the US Bank Secrecy Act (BSA) and the US Internal Revenue Code (IRC), and may leave a new trail for the prosecutors to follow.

  • Big brother is not only watching criminals: The problem with all personal data and meta-data to be (in principle) accessible to everyone is, that privacy may be challenged. For instance, using cash in a payment transaction do not leave a trace of personal data. But with digital payments (including the use of crypto currencies) it is (in principle) possible to combine each payment with data to be gathered and used for future purposes by governments, companies, retailers etc.

The legal benefits of crypto currencies in global payments

  • Low cost, fast settlement: Since crypto currencies are designed to work as a medium of exchange in a decentralized ledger, a global payment can be carried out peer-to-peer without any involvement of intermediaries or handling agents (banks, money transfer operators etc.). Transactions are instantly processed, verified and publicly recorded at a low fee (if any) and very fast. For the paying party, the consequence is, that when a transaction is carried out with crypto currencies, the receiving party will receive the payment immediately instead of waiting hours or days for a payment to clear and settle. And neither the sending nor the receiving party is paying any fee to process the payment.

  • No barriers for transfers, no banking holidays: By using a crypto currency, international money transfers can be processed instantly without any frictions or barriers from national regulators, central banks, holiday calendars etc.

  • It promotes financial inclusion and fights poverty: According to the World Bank, more than 2 billion people have no access to established banking services, neither payments nor lending. In 2016, staff members within the International Monetary Fund (IMF) launched the report “Virtual Currencies and Beyond: Initial Considerations” highlighting the fact, that virtual currencies offer many potential benefits, including greater speed and efficiency in making payments and transfers, that ultimately promotes financial inclusion of unbanked and underbanked people in the third world. This issue was also addressed by the World Economic Forum at its 2015-congress in Davos:

“Every year, migrants from developing countries send home more than $500 billion in remittances, a sum that exceeds foreign direct investment. With total fees for international transfers averaging 6-10% for sending $200, the burden on some of the world’s most vulnerable people is substantial. Technology has the potential to help these transfers become fast and cheap. Using virtual currency, private users could even send money directly to their families via mobile phone, with the only remaining fees being those charged by the currency exchanges[1].

The legal challenges of crypto currencies in global payments


When talking legal flip-sides of the benefits related to global payments with crypto currencies, these are almost the same challenges as mentioned above regarding payments and e-commerce, but a few special challenges can be added:


  • Global criminal activity, such as money laundering, terrorist financing, tax evasion and fraud: Global payments that can be carried out peer-to-peer without any involvement of intermediaries and with the use of anonymising software such as Tor, constrains the ability of law enforcement to track down IP addresses. This combined with the use of anonymous crypto currencies, opens the market for illegal transactions, such as money laundering, terrorist financing, sex trafficking, tax evasion and fraud.


But again: Criminal activity have been around for as long there have been anything to abuse. To investigate the origin of a criminal activity, the open ledger can be an effective tool for the prosecutors to “follow the money” and nail down the persons responsible, since everything is recorded and timestamped. The suggested investigating methods are still aiming to find – if not a smoking gun – a virtual public key or similar evidence and then following the e-trail on the public ledger. Yes, it is challenging, but not impossible.

Advokat Jeppe R. Stokholm is based in Zürich, Switzerland. The area of expertise is corporate affairs, including M&A, Venture Capital, Private Equity and Crypto Law. Advokat Jeppe R. Stokholm represents several international oriented Law Firms, Auditors and Family Offices on a case-by-case basis and provide discretionary counselling to global operating companies and private UHNW clients. 


NOTES:


[1] Susan Athey: “5 Ways Digital Currency Will Change the World”, World Economic Forum Agenda (Jan. 22, 2015), found at: https://agenda.weforum.org/2015/01/5-ways-digitalcurrencies-will-change-the-world/

​Zürich, Switzerland