DISADVANTAGES OF CRYPTOCURRENCYnavneet
- Lack of Regulation Facilitates Black Market Activity
Probably the biggest drawback and regulatory concern around cryptocurrency is its ability to facilitate illicit activity. Many grey and black market online transactions are denominated in Bitcoin and other cryptocurrencies. For instance, the infamous “dark web” marketplace Silk Road used Bitcoin to facilitate illegal drug purchases and other illicit activities before being shut down in 2014. Cryptocurrencies are also increasingly popular tools for money laundering funnelling illicitly obtained money through a “clean” intermediary to conceal its source.
The same strengths that make cryptocurrencies difficult for governments to seize and track allow criminals to operate with relative ease though, it should be noted, the founder of Silk Road is now behind bars, thanks to a years-long DEA investigation.
- Potential for Tax Evasion in Some Jurisdictions
Since cryptocurrencies aren’t regulated by national governments and usually exist outside their direct control, they naturally attract tax evaders. Many small employers pay employees in bitcoin and other cryptocurrencies to avoid liability for payroll taxes and help their workers avoid income tax liability, while online sellers often accept cryptocurrencies to avoid sales and income tax liability.
According to the IRS, the U.S. government applies the same taxation guidelines to all cryptocurrency payments by and to U.S. persons and businesses. However, many countries don’t have such policies in place. And the inherent anonymity of cryptocurrency makes some tax law violations, particularly those involving pseudonymous online sellers (as opposed to an employer who puts an employee’s real name on a W-Z indicating their bitcoin earnings for the tax year), difficult to track.
- Potential for Financial Loss Due to Data Loss
Early cryptocurrency proponents believed that, if properly secured, digital alternative currencies promised to support a decisive shift away from physical cash, which they viewed as imperfect and inherently risky. Assuming a virtually uncrackable source code, impenetrable authentication protocols (keys) and adequate hacking defences (which Mt. Gox lacked), it’s safer to store money in the cloud or even a physical data storage device than in a back pocket or purse.
However, this assumes that cryptocurrency users take proper precautions to avoid data loss. For instance, users who store their private keys on single physical storage devices suffer irreversible financial harm when the device is lost or stolen. Even users who store their data with a single cloud service can face loss if the server is physically damaged or disconnected from the global Internet (a possibility for servers located in countries with tight Internet controls, such as China).
- Potential for High Price Volatility and Manipulation
Many cryptocurrencies have relatively few outstanding units concentrated in a handful of individuals’ (often the currencies’ creators and close associates) hands. These holders effectively ’46 control these currencies’ supplies, making them susceptible to wild value swings and outright manipulation similar to thinly traded penny stocks.
- Often Can’t Be Exchanged for Fiat Currency
Generally, only the most popular cryptocurrencies those with the highest market capitalization, in dollar terms have dedicated online exchanges that permit direct exchange for fiat currency. The rest don’t have dedicated online exchanges, and thus can’t be directly exchanged for fiat currencies. Instead, users have to convert them into more commonly used cryptocurrencies, such as Bitcoin, before fiat currency conversion. This suppresses demand for, and thus the value of, some lesser-used cryptocurrencies.
- Limited to No Facility for Chargebacks or Refunds
Although cryptocurrency miners serve as quasi-intermediaries for cryptocurrency transactions, they’re not responsible for arbitrating disputes between transacting parties. In fact, the concept of such an arbitrator violates the decentralizing impulse at the heart of modern cryptocurrency philosophy. This means that you have no one to appeal to if you’re cheated in a cryptocurrency transaction for instance, paying upfront for an item you never receive. Though some newer cryptocurrencies attempt to address the chargeback/refund issue, solutions remain incomplete and largely unproven.
By contrast, traditional payment processors such as Visa, MasterCard, and PayPal often step in to resolve buyer-seller disputes. Their refund, or chargeback, policies are specifically designed to prevent seller fraud.