Cryptocurrencies are a medium for the purchase and sale of goods and services via the internet. With countries all over the world embracing digitisation, cryptocurrencies are becoming increasingly popular, enabling people in different countries to do business with each other.
The world’s most famous cryptocurrency, Bitcoin, came onto the market in 2009. It soared in popularity, becoming the most commonly known type of cryptocurrency, and the one most often accepted by people and businesses around the world.
Over time, the value of Bitcoin rose exponentially, although this form of cryptocurrency has also been susceptible to extreme decreases in value, sometimes in a very short timeframe. As finance industry expert Dr Thomson Mpinganjira will be well aware, cryptocurrencies are extremely vulnerable to market volatility, with their value decimated or mushrooming overnight.
A cryptocurrency is a virtual currency that serves as a medium of exchange. Cryptocurrencies rely on cryptography to verify and secure transactions, as well as to regulate the creation of new units of cryptocurrency. Cryptocurrencies are essentially limited entries within a secure database that no party can change without fulfilling certain conditions.
The ’90s tech boom saw many attempts at creating a digital currency system, with forerunners such as Beenz, DigiCash, and Flooz emerging onto the market, but ultimately failing. These early forms of digital currency failed for various different reasons, including financial problems, fraud, and frictions between the company and its employees.
Beenz, DigiCash, and Flooz all used a Trusted Third-Party approach, i.e. the companies verified and facilitated transactions. Following the failure of these pioneering digital currencies, there was industrywide concern that creating an effective digital cash system was a lost cause.
Bitcoin emerged in early 2009, introduced under the alias ‘Satoshi Nakamoto’ by an unidentified programmer or group. It was completely decentralised, with no central controlling authority or servers involved, forming a system that essentially works in a similar way to peer-to-peer file-sharing networks.
One of the most important issues that any online payment network has to address is the problem of ‘double-spending,’ a fraudulent technique where the same amount is spent twice. Early forms of digital currency used a Trusted Third-Party approach, relying on a central server to maintain records of transactions and balances. The flaw in this concept, however, is that a single authority controls all users’ funds, as well as their personal details.
With a decentralised concept like Bitcoin, every participant plays a part in the process. Implemented via blockchain, a public ledger detailing all transactions that ever took place on the network, data is available to all participants, meaning that everyone on the network can view every account balance.
Bitcoin relies on basic cryptography. It enables participants to buy and sell services and goods, with some using the platform to invest. Each transaction creates a file, featuring the sender and recipient’s public keys and recording the number of coins transacted. Transactions must be signed off by the sender using their own private key. Once as transaction is confirmed, it is broadcasted across the network.
Decentralised, self-sustained cryptocurrencies that do not exist in physical form could potentially create uproar among regulators. Bitcoin has been banned in Vietnam, Bolivia, Bangladesh, Ecuador, and Kyrgyzstan, with laws and regulations on the usage of cryptocurrencies varying drastically country by country.
Concerns have been raised that cryptocurrencies like Bitcoin could be used to trade in illegal goods and services or leveraged in tax evasion schemes and money laundering. Nevertheless, platforms such as Bitcoin also show vast potential. As cryptocurrencies grow in popularity, entering the mainstream, legal regulators, tax authorities and law enforcement agencies all over the world must familiarise themselves with the concept of crypto coins, demarcating their place within existing legal frameworks and monetary systems.