Cryptocurrencies

Cryptocurrencies 

The digital currencies story is a continuation of the long-running saga of economics, markets, and commodity exchange in human society. With the constant rise of the global network, we have witnessed many global services becoming widely accepted and, in a way, changing (by adding to) our experience of mutual interaction. Looking back in history of the Internet we can conclude that public-key cryptography and digital signatures make e-money possible. E-money can either be centralized (with the control point of money supply) or decentralized, where the control over the supply can come from various sources or network of sources (Bitcoin and/or other virtual currencies). The main difference between e-money and virtual currencies is that e-money does not change the value of the fiat currency (euro, dollar, etc.), but virtual currency is not equivalent to any fiat currency. In other words, all digital currency is electronic money, but e-money is not necessarily digital currency. 

E-money 

Electronic money or e-money in short is the money balance recorded electronically on a stored-value card or remotely on a server. The Bank for International Settlements defines e-money as ‘stored value or prepaid payment mechanisms for executing payments via point-of-sale terminals, direct transfers between two devices, or even open computer networks such as the Internet’. 

E-money is usually associated with so-called smart cards issued by companies such as Mondex and Visa Cash. Electronic money is a floating claim that is not linked to any account. Examples of e-money are bank deposits, electronic fund transfer, payment processors, and digital currencies. The term ‘stored-value card’ means the funds and/or data are 'physically' stored on the card, in the form of binary-coded data. With prepaid cards, the data is maintained on the card issuer's computers. Typical stored-value cards include prepaid calling cards, gift cards, payroll cards, loyalty cards, travel cards. 

E-money can also be stored on (and used via) mobile phones or in a payment account on the Internet. Most common and widely used mobile subsystems are Google Wallet and Apple pay. The fast introduction of e-money has led to governmental regulatory activities. Hong Kong was among the first jurisdiction to regulate e-money, by allowing only licensed banks to issue stored-value cards. Since 2001, the European Union has implemented a directive on the taking up, pursuit and prudential supervision of the business of electronic money institutions (E-Money Directive - 2009/110/EC).

Electronic currencies can be divided into soft currency and hard currency. Hard electronic currency is one that only supports non-reversible transaction. Reversing transaction, even in case of a legitimate error is not possible. They are more oriented to cash transactions. 

Examples of hard currencies are: Western Union, KlickEx, or Bitcoin. On the other hand, soft electronic currency is one that allows reversal of payments in a case of fraud or disputes. Examples are PayPal and credit cards. 

Digital currency 

Simple intention drives this technological avalanche, based on financial and commercial competition (as is the case with regulated economies). 

In this struggle, the regulated market, and the privacy of the affairs of financial actors are crucial. Fair and constructive financial institutions acting as intermediaries are the safeguards of these principles. In most cases these are state regulatory agencies. But something has changed in the digital era. Regulation is taking a new form of teamwork and networking. 

The European Central Bank defined in 2012 virtual money (virtual currencies) as a ‘type of unregulated, digital money which is issued and usually controlled by its developers and used and accepted among the members of a specific virtual community’. This Internet based medium of exchange has properties like physical currencies, however, allows for instantaneous transaction and borderless transfer-of-ownership. Banks and customers use their keys to encrypt (for security) and sign (for identification) blocks of digital data that represent money orders. 

A bank ‘signs’ money orders using its private key and customers and merchants verify the signed money orders using the banks widely published public key. Customers sign deposits and withdraw using their private key and the bank uses the customer's public key to verify the signed withdraws and deposits. In 2014, the European Banking Authority, defined virtual currency as ‘a digital representation of value that is neither issued by a central bank or a public authority, nor necessarily attached to a fiat currency, but is accepted by natural or legal persons as a means of payment and can be transferred, stored or traded electronically’. Both virtual currencies and cryptocurrencies are types of digital currencies. 

Cryptocurrencies are set to take the online world by storm, as their popularity and use, and understanding of their advantages and limitations increases. Giant companies like Apple, Dell and PayPal have already indicated their plans to integrate cryptocurrencies as a payment method, and more are likely to follow, with Bitcoin emerging as one of the most popular virtual electronic currencies. The main invention of this cryptocurrency is to present the central ledger of all transactions, known as blockchain. This open-source software allows all peers in a network to verify every transaction ever made in the Bitcoin system and therefore serve as guardians to this central ledger. There are signs that central banks are also paying more and more attention to virtual currencies. 

As an example, in early 2016, the People's’ Bank of China announced that it was looking into the possibility of launching its own virtual currency, considering that this would contribute to making economic activities more transparent, while also reducing money laundering and tax evasion. 

The main issues 

There are many comparative advantages of this system of money creation and payments compared to the usual form of online financial transactions. Using one source (the Internet) to connect to a unique global financial system sounds like possible futuristic idea, but with virtual currencies, it is not far away. At the same time, there are also many warnings that virtual currencies could be misused for illegal goods and services, fraud, and money laundering. The anonymity associated with the use of virtual currencies (such as bitcoin) transactions increases the potential of possible misuse. A US government-funded report on the 'National Security Implications of Virtual Currencies', published at the end of 2015, noted that ‘non-state actors’, including terrorist and insurgent groups, may exploit virtual currency by using it for regular economic transactions. Government regulation is still the key to virtual currencies attracting more users, as well as to potentially addressing the risks of misuse. States around the world are currently considering its regulation. This will not only increase consumer confidence in the technology, but it will also involve more companies and investors in the growing business. While some are arguing that unregulated virtual currencies are a heaven for money laundering and illegal flow of money, others present this as an ultimate tool in fighting identity thefts and leakage of personal financial information.

Digital Assets: 

Cryptocurrencies vs. Tokens

What Is a Digital Asset?

If you’re just starting out in blockchain and cryptocurrency, it’s essential to understand the difference between digital assets, cryptocurrencies, and tokens. While these terms are often used interchangeably, they are different in several keyways. Broadly speaking, a digital asset is a non-tangible asset that is created, traded, and stored in a digital format. In the context of blockchain, digital assets include cryptocurrency and crypto tokens.

Cryptocurrency and tokens are unique subclasses of digital assets that utilize cryptography, an advanced encryption technique that assures the authenticity of crypto assets by eradicating the possibility of counterfeiting or double spending.

The key differentiation between the two classes of digital asset is that cryptocurrencies are the native asset of a blockchain — like BTC or ETH — whereas tokens are created as part of a platform that is built on an existing blockchain, like the many ERC-20 tokens that make up the Ethereum ecosystem.

What Is a Cryptocurrency?

A cryptocurrency is the native asset of a blockchain network that can be traded, utilized as a medium of exchange, and used as a store of value. A cryptocurrency is issued directly by the blockchain protocol on which it runs, which is why it is often referred to as a blockchain’s native currency. In many cases, cryptocurrencies are not only used to pay transaction fees on the network but are also used to incentivize users to keep the cryptocurrency’s network secure.

Cryptocurrencies typically serve as a medium of exchange or store of value. A medium of exchange is an asset used to acquire goods or services. A store of value is an asset that can be held or exchanged for a fiat currency later without incurring significant losses in terms of purchasing power.

Cryptocurrencies typically exhibit the following characteristics:

- Decentralized, or at least not reliant on a central issuing authority. Instead, cryptocurrencies rely on code to manage issuance and transactions.

- Built on a blockchain or other Distributed Ledger Technology (DLT), which allows participants to enforce the rules of the system in an automated, trustless fashion. 

- Uses cryptography to secure the cryptocurrency’s underlying structure and network system. 

What Is a Token?

Tokens — which can also be referred to as crypto tokens — are units of value that blockchain-based organizations or projects develop on top of existing blockchain networks.  While they often share deep compatibility with the cryptocurrencies of that network, they are a wholly different digital asset class.

Cryptocurrencies are the native asset of a specific blockchain protocol, whereas tokens are created by platforms that build on top of those blockchains. For instance, the Ethereum blockchain’s native token is ether (ETH). While ether is the cryptocurrency native to the Ethereum blockchain, there are many other different tokens that also utilize the Ethereum blockchain. Crypto tokens built using Ethereum include DAI, LINK, COMP, and Crypto Kitties, among others. These tokens can serve a multitude of functions on the platforms for which they are built, including participating in decentralized finance (DeFi) mechanisms, accessing platform-specific services, and even playing games.

There are several widely used token standards for creating crypto tokens, the majority of which have been built on top of Ethereum. The most widely used token standards are ERC-20, which allows the creation of tokens that can interoperate within Ethereum’s ecosystem of decentralized apps, and ERC-721, which was designed to enable non-fungible tokens that are individually unique and cannot be interchanged with other similar tokens. As of 2020, there are hundreds of different ERC-20 tokens and thousands of ERC-721 tokens in circulation. As new tokens are developed to address blockchain’s expanding use cases, the number of different tokens likely will continue to grow at a remarkable pace.

Typically, crypto tokens are programmable, permissionless, trustless, and transparent. Programmable simply means that they run on software protocols, which are composed of smart contracts that outline the features and functions of the token and the network’s rules of engagement. Permissionless means that anyone can participate in the system without the need for special credentials. Trustless means that no one central authority controls the system; instead, it runs on the rules predefined by the network protocol. And finally, transparency implies that the rules of the protocol and its transactions are viewable and verifiable by all.

While crypto tokens, like cryptocurrency, can hold value and be exchanged, they can also be designed to represent physical assets or more traditional digital assets, or a certain utility or service. For instance, there are crypto tokens that represent tangible assets such as real estate and art, as well as intangible assets such as processing power or data storage space. Tokens are also frequently used as a governance mechanism for voting on specific parameters like protocol upgrades and other decisions that dictate the future direction of various blockchain projects. The process of creating crypto tokens to serve these various functions is known as tokenization.

As the blockchain industry continues to mature, the number of unique digital assets will only continue to grow in accordance with the multifaceted needs of all ecosystem participants ranging from enterprise partners to individual users. Given that creating new assets within the digital world is less restrictive than in the physical realm, these digital assets are widely expected to improve the way countless industries operate, interact, and generate value, thereby enabling a vast array of new social and economic possibilities.