ECOFIN I: Cryptocurrencies

George Tang

YMUN Taiwan
@ymuntaiwan

Letter from the Dais

Dear Delegates, 

My name is George (Shao-chi) Tang, and welcome to the Economic and Financial Committee! In the Second Committee of the General Assembly, delegates will deal with issues relating to economic growth and development such as macroeconomic policy questions, sustainable development, operational activities for development, and so on. In the end, ECOFIN strives towards the common goal of global partnerships. In short, you will figure out how economics, politics, and international relations intertwine, and craft resolutions that will have a huge impact on all these aforementioned fields! 

Let me first introduce myself. I am George, and I am a first-year from Branford College. I am so excited return to my hometown, Taipei, to serve as Under-Secretary General and director for YMUN Taiwan! I started participating in Model UN when I was a freshman in Jianguo High School and I was also once a delegate at Yale MUN Taiwan! Now, actually taking part in organizing YMUNT as a Yale student, I get to examine MUN from a completely different angle, which really motivates me to bring the best experience possible for each and every one of you. Outside of Model UN, I perform magic, make films, play poker, and swim at Yale. I also play the piano, erhu, and ukulele, so please feel free to reach out to me if you have similar interests--it would be the best thing ever to share our passions. As I have mentioned before, this is my first time studying abroad. Sometimes, I really miss the people, culture, and (especially) food from Taiwan. But in the end, we will find that the excitement and satisfaction of exploring new things always outweighs the anxiety we feel when we first step out of our comfort zones. Hence, I invite you to challenge yourselves in this committee. In ECOFIN, I believe that we could bring our discourse to a whole new level! 

We're looking forward to spending this weekend engaging in a thought-provoking and meaningful discussion with you – the world’s future leaders. See you in committee, and please write to us if you’ve got any questions beforehand! 

Yours truly, 

George Tang 

george.tang@yale.edu

Committee History

The Economic and Financial Committee is the Second Committee of the General Assembly. In this committee, countries deal with economic and financial issues in the global community. This committee was officially created in 1945 and first met in San Francisco on April 25th, 1945. ECOFIN is open to all UN member states and follows the same parliamentary procedures as any other main organ; hence, a total of 193 nations are represented in ECOFIN.

Role of the Committee

The resolutions in this committee provide ideas for the redesign of policies to strengthen the impact on poverty and employment as well as to promote structural changes for a more sustainable future for all. ECOFIN's mandate includes discussions relating to economic growth and development (including international trade, international financial system, external debt sustainability and commodities), financing for development, sustainable development, human settlements, poverty eradication, globalisation and interdependence, operational activities for development, and information and communication technologies for development. With that being said, resolutions passed in ECOFIN hold immerse importance in the international community, though they are non-binding in nature. 

Recently, ECOFIN has been putting a lot of focus on economies in the Middle East. Such topics of interest include Israeli exploitation in the Palestinian area and oil slicks on Lebanese shores that are caused by the Israeli air force. ECOFIN also tackles broader issues, like discouraging unilateral economic measures as a means of political coercion against developing countries, strengthening the links between all modes of transport to achieve the Sustainable Development Goals, and so on. 

In the intersection of economics, international relations, and politics, delegates have to find the balance between all of these aspects if they wish to achieve their goals.

Topic History

Cryptocurrencies have significantly impacted the global economy, more so in the recent years. Bitcoin, Dogecoin, Monero, and Ethereum are all examples of digital currencies that are unstable, decentralized, and fluctuant, which made them and extremely challenging to regulate. Although economists and experts warn us about cryptocurrencies' high value volatility, an increasing amount of investors pour their money in the hopes of earning higher profit in for the significant risk they undertake. As cryptocurrencies become more and more mainstream, the international community has to address the existing questions of regulation, accessibility, and reliability. 

In 2009, Satoshi Nakamoto released Bitcoin, the first cryptocurrency system to be decentralised and use a peer-to-peer network to prevent double-spending. Although other forms of digital money had been developed well before Bitcoin, it was the first publicly used means of exchange to combine decentralised control, user anonymity, record-keeping via a blockchain, and built-in scarcity. The decentralising control of cryptocurrencies mean that it utilises the same concept as a Peer-to-Peer network for file sharing. Once a transaction is confirmed, it is no longer forgeable or reversible, Rather, it is now part of an immutable record of historical transactions called the "block chain". That is, cryptocurrencies consist of a network that holds the history of transaction, hence prohibiting paying more than once and other fraudulent actions from happening. 

The deregulated nature of Bitcoin has caused its fair share of problems. In 2014, the U.S. government auctioned 17.4 million dollars worth of Bitcoin from Silk Road, an online black market with approximately 1 million users. Living up to its reputation as a means of under-the-table trading, bitcoins were used for illegal weapon and drug trading on the dark web. When they were eventually confiscated, the huge removal of this amount of bitcoin from the market led to a large fluctuation in the value of these currencies themselves.  

The hacking and bankruptcy of Mt. Gox also showcases the instability of cryptocurrencies. Launched in July 2010, Mt. Gox was responsible for 70% of all bitcoin transactions worldwide by 2013, serving as the world’s largest bitcoin intermediary and exchange. However, an alleged security breach and embezzlement by then CEO Karpelès led to a loss of almost 750,000 of its customers' bitcoins, and around 100,000 of its own bitcoins. Summing all these amounts, 7% of all Bitcoins in circulation, around $473 million near the time of the filing, vanished into thin air. Cryptocurrencies’ volatile value fluctuation can also been seen when Bitcoin’s value rapidly plummeted by 23% immediately after the event. This is exactly why volatility is an aspect of cryptocurrencies that is extremely unpredictable and unstable; these huge changes of value in such a short amount of time indeed serve as a warning to the global community of the threats cryptocurrencies might pose. 

Current Situations

Attributes of Cryptocurrencies

Delving deeper, certain aspects of cryptocurrencies have been well-established during these last few years. In a transaction, there are five main attributes that really set cryptocurrencies apart from other means of trade. These attributes will set the tone of following debates about cryptocurrencies' reliability. 

First, transactions are irreversible. This means that there are no safety nets once the transactions are confirmed into the blockchain. This makes cryptocurrencies risky in the sense that it will be extremely difficult to recover a loss from mistaken transactions or hacking. 

Second, transactions are anonymous. The address from which you receive Bitcoins are seemingly random 30-character codes that are not connected to your real-world identity. This is not only why cryptocurrencies are used so much in dark web trading of weapons, drugs, and so on, but also why they are so hard to track down or regulate. 

The last three core aspects are that cryptocurrencies are fast and global, permissionless, and secure. It is evident that digital currencies could cross borders in a rapid and unobstructed manner. Trades can be made in a click of the mouse, which leads to the next facet, permissionless. There are no barriers to entry nor gatekeepers to prevent individuals who want to try out bitcoins (or any other cryptocurrencies, for that matter) from doing so. That is to say, you do not need to ask for anyone’s permission to operate digital currencies--just install the software and you will be all set. The name cryptocurrency in and of itself underscores the last aspect, secure. Cryptocurrency funds are locked in a public key cryptography system, and it is nearly impossible to compromise its cryptography, rendering cryptocurrencies as one of the most secure means of trade.

People around the world choose to invest in cryptocurrency because it is free from political influence. Yet, as investments into cryptocurrencies continue to pour in an exponential rate, it is increasingly harder for governments to craft economics policies without actually missing out on a considerate part of its economy. The question is thus: should the international community regulate or centralize cryptocurrencies because of its tendency to manifest in shady and illegal markets, and its potentially immense impact on the global market?

Advantages of cryptocurrencies

As digital currencies are further developed, their scarcity becomes increasingly important. Since issuers control the total amount in a level, it could be seen as the safer options when it comes to inflation. In other words, cryptocurrencies could be seen as more similar to precious metals than fiat currencies, which is a legal tender determined by the government instead of material value. 

Cryptocurrencies' self-serving nature also keeps the cycle going. Miners are the people who keep track of all the transactions. By taking care of transaction confirmations and encrypting them, they ensure that digital tradings are accountable and secure. In return, they are awarded bitcoin. This self-serving mechanism secures the integrity of the system and the value of the currency. 

Its lack of government control is also a highly captivating aspect for investors. For example, governments could not execute financial retribution on individuals by freezing their assets since cryptocurrencies operate outside governmental control anyway. This also frees people from governments’ near-zero inter-bank lending rates, quantitative easing, and other loose monetary policies that may lead to long-term economic instability. 

Other pros of cryptocurrencies include decent privacy protection, lower international transaction costs, and elimination of transaction fees from traditional electronic trades. Through blockchains, minings, and so on, cryptocurrencies are also one of the safest means of trading there is, because of the complicated technological mechanisms supporting the entire currency. 

Disadvantages of Cryptocurrencies

The cons of cryptocurrencies include its tendency towards illegal trades, price volatility and manipulation, tax evasion, difficulties in converting back to fiat currencies, and unlikeliness to get refunds should something go wrong. 

Due to its high anonymity, cryptocurrencies are used a lot on the dark web for illegal trades, such as in the aforementioned Silk Road case. Since governments cannot trace the senders and receivers of cryptocurrencies from the encrypted transactions, it is incredibly difficult for law enforcements to detect and follow suspect deals. 

For a lot of cryptocurrencies, most units are concentrated in a few people’s hands, often friends and families of the creator. This leads to a high volatility in price, and thus easy to manipulate. We could see that in the previous case of Silk Road, currency instability can lead to drastic price changes. 

Since there are no safety nets nor government inspection on these transactions, it stands to reason that tax evasion is far easier in digital trades. Also, once these transactions are confirmed in the blockchain, they then become irreversible-- rendering mistakes, embezzlements, and frauds unlikely to recover. In addition, in order to exchange digital for fiat currencies, most cryptocurrencies have to be exchanged into the more common ones, bitcoin, for example, to be processed. This potential risk of being unable to get fiat currency in return is also one of the major setbacks for investors.

Case Studies

The only way to really restrict cryptocurrencies is to shut down the Internet. Yet, governments try to operate in the area where virtuality touches reality. By restricting the trade from digital currencies to actual currencies and regulating how banks and cryptocurrencies cross paths, government could effectively separate cryptocurrencies from their economies, hence lowering their risk. Listed below are some countries policies on virtual currencies, which may help this committee find the best response to ongoing trends. 

China 

In September 2017, China banned new projects to raise cash or other virtual currencies through cryptocurrencies, and has begun an inspection on 60 major ICO platforms. ICO, Initial Coin Offerings, are unregulated means by which funds are raised for a new cryptocurrency venture. During ICO campaigns, supporters and backers buy cryptocurrencies through fiat currencies, and in return, these coins (referred to as tokens) are offered to these backers, similar to the situations of IPOs (Initial Public Offerings). 

China not only bans all ICOs, but also bans banks and other financial institutions from making trades with businesses related to ICOs. Moreover, China states that ICOs should arrange fund returns through fiat currencies immediately to protect investors' interests. 

Singapore

The MAS (Monetary Authority in Singapore) claims that cryptocurrencies are unstable and subject to great risks. For examples, MAS claims that ICOs are "vulnerable to money laundering and terrorist financing (ML/TF) risks due to the anonymous nature of the transactions, and the ease with which large sums of monies may be raised in a short period of time." 

In addition, the MAS is also considering tokens as shares, which represents ownership over the issuer’s asset or property. As a result, the MAS has started to regulate cryptocurrencies that are actually more than virtual currencies, that is, cryptocurrencies that take part in other asset, share and property. Thus, platforms that trade cryptocurrencies in this manner should also be recognized and inspected by the MAS as an approved operator. In the meantime, the MAS is still trying to craft regulations about cryptocurrencies and ICOs. 

EU 

In 2016, the Economic and Financial Affairs Ministers Council of the EU asked for an amendment that would allow the national governments of the EU to monitor suspicious virtual tradings. The committee believes that because of its anonymous and highly untraceable virtual currencies could be a possible gateway for terrorism trading. Especially given the multiple terrorist attacks in Europe recently, their concerns are not unfounded. 

To obtain informations on the identity of payment account holders, some sort of a central registry or an electronic data retrieval system at the member state level needs to be put into place. But by doing so, the anonymity and decentralized nature of cryptocurrencies is also compromised. The committee noted that in this case, anonymity would be more of a hindrance than an asset to cryptocurrencies, since it lays down numerous possibilities for criminal purposes. 

In conclusion, different governments around the world have come up with different attitudes and regulations for cryptocurrencies. Some focus on ICOs, some focus on trade monitoring, some focus on potentially losing economic power. But by understanding what measures could be taken on for cryptocurrencies and the reasoning behind these measures, ECOFIN could learn from these experiences and come up with better resolutions.

Questions to Consider

1. Should governments regulate cryptocurrencies? What are the pros and cons of cryptocurrency? Does the pros outweigh the cons or is it the other way around? 

2. How could governments regulate cryptocurrencies? What method could they utilise to control a currency that is created to be decentralized and anonymous? 

3. Is it more effective to have a unified regulation in the international community, or is it best left to each government's discretion? 

4. Will individual government’s regulation affect the global market? If so, how; and how could the committee decrease this?

5. How could government include virtual trading in their economy? Is it possible for them to craft economic policies while taking into account cryptocurrencies? 

6.Will international relations and politics affect the regulations of cryptocurrencies? If so, how could ECOFIN work through it?

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