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In 2008 (yes only 12 years ago), Satoshi Nakomoto proposed a new electronic form of value that would allow two parties to exchange that value without the need for a financial institute to act as an intermediary.
Bitcoin was born.
There are of course lots of speculators that link Bitcoin to corruption, criminality and money laundering. But is anything they say backed up by actual evidence?
In this post we review a paper that compares the price of bitcoin and the traders within nations with high levels of corruption and lack of economic freedom. Is there a link? Read on to find out.
The author tested the hypothesis in 17 countries that rank highly for corruption in the Corruption Perception Index, lack of economic freedom in the index of economic freedom and changes in economic certainty in the economic certainty index. These measures are respected globally as a good indicator in their respective metric.
The period under examination ran from April 2017 to September 2018 and this gave the price of Bitcoin plenty of market movement, during the period Bitcoin valued at a high of $19000 in the US.
Of course the digital currency has had its fair share of controversy, not least the seizure of Bitcoin held by the infamous ‘Silk Road’ dark website, the rise and fall of Bitcoin exchange Mt Gox which filed for bankruptcy and other thefts of the currency, reported globally.
Clearly, because it provides anonymity, criminals are going to use it to transfer value secretly and help to clean their assets. But this paper posits the relationship to crime goes deeper.
The results of the study show a positive and significant link to traders being prepared to pay over the market value for Bitcoin in nations that are scored highly for corruption and lack of financial freedom. As corruption level goes up, so does the price and conversely, as corruption goes down, so does the price traders are willing to pay.
This is something which you could say is intuitive but it provides some empirical evidence that crime and Bitcoin are linked. The paper also uncovers, through prior research, that the prices for Bitcoin go up when the exchange requires less identification than one that completes more through CDD. This is probably due to supply and demand with the demand from criminal entities being more likely and willing to pay a higher cost and offset that loss as a cost to doing illegal business. This is one way to understand the link between the above cost of Bitcoin in markets in countries that suffer higher levels of Corruption.
Whether this provides regulators with a method to interrogate exchanges more thoroughly based on their locality is debate-able. With a new travel rule method apparently agreed it looks like virtual currencies and more specifically exchanges are set to be more transparent if they are to remain a viable medium of exchange. It would appear the best place to commence this would be in those high ranking corruption index nations.
Read the paper in full, the details of it are cited below.
Johnson, J. (2020). Bitcoin, corruption and economic freedom. Journal of Financial Crime, 27(1), 58-66.
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