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The term “cryptocurrencies” has recently become popular among journalists and rather quickly started being associated with the Internet underworld or new socio-economic revolutions. However, cryptography is more common in the modern communications than it is usually perceived. Practically all modern payment technologies use certain amount of cryptographic protection: e.g., online bank users benefit from SSL-channels, one-time keys, asymmetric encryption and other rather effective mathematical tricks. Yet, for at least 15 years there have been payment protocols that rely on cryptography so heavily that they start to exhibit features that go beyond the scope of the common sense. The most important of them is the absence of “account” – funds are stored just like cash: locally on the clients’ computers. That makes centralized storage not only unnecessary, but largely irrelevant.
Every time such cryptographic payment protocol is made available online, the press is usually very prompt in publishing apocalyptic scenarios that include the death of traditional payment instruments, digital anarchy and even rampancy of drug dealers and child pornography sellers. Some authors (Kobrin, 1997) have also long claimed that the erosion of territorial sovereignty will follow as well. However, nothing of the kind happens, and the fierce discussions settle until a new bitcoin emerges. Despite all this attention to the innovative (and provocative) payment protocols, there is still lack of in-depth analysis of what challenges these technologies may pose to the global anti-money laundering and financing of terrorism regime. This article aims at filling that gap. We first start with a brief overview of the mechanics of cryptographic protocols used in private currencies. We then turn to the specifics of ecosystem of cryptocurrencies and propose some approaches to the classification of cryptocurrencies. In the final section, we give some insights of privacy versus anonymity and finish with conclusions and ideas on further research.
Defining cryptocurrencies
Any discussion about cryptocurrencies necessarily requires a short overview of how cryptography is used in private currencies. In this paper, we look exclusively at cryptocurrencies based on the accountless payment protocols. That means that funds can be transferred and stored without using centralized storage or settlement institution. Just like cash can be kept either in the pocket, wallet or elsewhere, cryptocurrency is independent of the storage location. That does not, however,...