Cryptocurrency

Cryptocurrency

A cryptocurrency, crypto-currency, or crypto is a digital currency designed to work as a medium of exchange through a computer network that is not reliant on any central authority, such as a government or bank, to uphold or maintain it. Individual coin ownership records are stored in a digital ledger, which is a computerized database using strong cryptography to secure transaction records, to control the creation of additional coins, and to verify the transfer of coin ownership.[1][2][3] Despite their name, cryptocurrencies are not necessarily considered to be currencies in the traditional sense and while varying categorical treatments have been applied to them, including classification as commodities, securities, as well as currencies, cryptocurrencies are generally viewed as a distinct asset class in practice.[4][5][6] Some crypto schemes use validators to maintain the cryptocurrency. In a proof-of-stake model, owners put up their tokens as collateral. In return, they get authority over the token in proportion to the amount they stake. Generally, these token stakers get additional ownership in the token over time via network fees, newly minted tokens or other such reward mechanisms.[7] Cryptocurrency does not exist in physical form (like paper money) and is typically not issued by a central authority. Cryptocurrencies typically use decentralized control as opposed to a central bank digital currency (CBDC).[8] When a cryptocurrency is minted or created prior to issuance or issued by a single issuer, it is generally considered centralized. When implemented with decentralized control, each cryptocurrency works through distributed ledger technology, typically a blockchain, that serves as a public financial transaction database.[9] A cryptocurrency is a tradable digital asset or digital form of money, built on blockchain technology that only exists online. Cryptocurrencies use encryption to authenticate and protect transactions, hence their name. There are currently over a thousand different cryptocurrencies in the world, and their supporters see them as the key to a fairer future economy.In 1983, the American cryptographer David Chaum conceived an anonymous cryptographic electronic money called ecash.[12][13] Later, in 1995, he implemented it through Digicash,[14] an early form of cryptographic electronic payments which required user software in order to withdraw notes from a bank and designate specific encrypted keys before it can be sent to a recipient. This allowed the digital currency to be untraceable by the issuing bank, the government, or any third party. In 1996, the National Security Agency published a paper entitled How to Make a Mint: the Cryptography of Anonymous Electronic Cash, describing a Cryptocurrency system, first publishing it in an MIT mailing list[15] and later in 1997, in The American Law Review (Vol. 46, Issue 4).[16] In 1998, Wei Dai published a description of "b-money", characterized as an anonymous, distributed electronic cash system.[17] Shortly thereafter, Nick Szabo described bit gold.[18] Like bitcoin and other cryptocurrencies that would follow it, bit gold (not to be confused with the later gold-based exchange, BitGold) was described as an electronic currency system which required users to complete a proof of work function with solutions being cryptographically put together and published. In 2009, the first decentralized cryptocurrency, bitcoin, was created by presumably pseudonymous developer Satoshi Nakamoto. It used SHA-256, a cryptographic hash function, in its proof-of-work scheme.[19][20] In April 2011, Namecoin was created as an attempt at forming a decentralized DNS, which would make internet censorship very difficult. Soon after, in October 2011, Litecoin was released. It used scrypt as its hash function instead of SHA-256. Another notable cryptocurrency, Peercoin, used a proof-of-work/proof-of-stake hybrid.[21] On 6 August 2014, the UK announced its Treasury had commissioned a study of cryptocurrencies, and what role, if any, they could play in the UK economy. The study was also to report on whether regulation should be considered.[22] Its final report was published in 2018,[23] and it issued a consultation on cryptoassets and stablecoins in January 2021.[24] In June 2021, El Salvador became the first country to accept Bitcoin as legal tender, after the Legislative Assembly had voted 62–22 to pass a bill submitted by President Nayib Bukele classifying the cryptocurrency as such.[25] In August 2021, Cuba followed with Resolution 215 to recognize and regulate cryptocurrencies such as bitcoin.[26] In September 2021, the government of China, the single largest market for cryptocurrency, declared all cryptocurrency transactions illegal, completing a crackdown on cryptocurrency that had previously banned the operation of intermediaries and miners within China.Decentralized cryptocurrency is produced by the entire cryptocurrency system collectively, at a rate which is defined when the system is created and which is publicly known. In centralized banking and economic systems such as the US Federal Reserve System, corporate boards or governments control the supply of currency. In the case of decentralized cryptocurrency, companies or governments cannot produce new units, and have not so far provided backing for other firms, banks or corporate entities which hold asset value measured in it. The underlying technical system upon which decentralized cryptocurrencies are based was created by the group or individual known as Satoshi Nakamoto. [44] As of May 2018, over 1,800 cryptocurrency specifications existed.[45] Within a proof-of-work cryptocurrency system such as Bitcoin, the safety, integrity and balance of ledgers is maintained by a community of mutually distrustful parties referred to as miners: who use their computers to help validate and timestamp transactions, adding them to the ledger in accordance with a particular timestamping scheme. [19] In a proof-of-stake (PoS) blockchain, transactions are validated by holders of the associated cryptocurrency, sometimes grouped together in stake pools. Most cryptocurrencies are designed to gradually decrease the production of that currency, placing a cap on the total amount of that currency that will ever be in circulation.[46] Compared with ordinary currencies held by financial institutions or kept as cash on hand, cryptocurrencies can be more difficult for seizure by law enforcement. Legality The legal status of cryptocurrencies varies substantially from country to country and is still undefined or changing in many of them. At least one study has shown that broad generalizations about the use of bitcoin in illicit finance are significantly overstated and that blockchain analysis is an effective crime fighting and intelligence gathering tool. [114] While some countries have explicitly allowed their use and trade, [115] others have banned or restricted it. According to the Library of Congress, an "absolute ban" on trading or using cryptocurrencies applies in eight countries: Algeria, Bolivia, Egypt, Iraq, Morocco, Nepal, Pakistan, and the United Arab Emirates. An "implicit ban" applies in another 15 countries, which include Bahrain, Bangladesh, China, Colombia, the Dominican Republic, Indonesia, Iran, Kuwait, Lesotho, Lithuania, Macau, Oman, Qatar, Saudi Arabia and Taiwan.[116] In the United States and Canada, state and provincial securities regulators, coordinated through the North American Securities Administrators Association, are investigating "bitcoin scams" and ICOs in 40 jurisdictions. Various government agencies, departments, and courts have classified bitcoin differently. China Central Bank banned the handling of bitcoins by financial institutions in China in early 2014. In Russia, though owning cryptocurrency is legal, its residents are only allowed to purchase goods from other residents using Russian ruble while nonresidents are allowed to use foreign currency. [118] Regulations and bans that apply to bitcoin probably extend to similar cryptocurrency systems. [119] In August 2018, the Bank of Thailand announced its plans to create its own cryptocurrency, the Central Bank Digital Currency (CBDC). The legal concern of an unregulated global economy As the popularity of and demand for online currencies has increased since the inception of bitcoin in 2009,[128] so have concerns that such an unregulated person to person global economy that cryptocurrencies offer may become a threat to society. Concerns abound that altcoins may become tools for anonymous web criminals. [129] Cryptocurrency networks display a lack of regulation that has been criticized as enabling criminals who seek to evade taxes and launder money. Money laundering issues are also present in regular bank transfers, however with bank-to-bank wire transfers for instance, the account holder must at least provide a proven identity. Transactions that occur through the use and exchange of these altcoins are independent from formal banking systems, and therefore can make tax evasion simpler for individuals. Since charting taxable income is based upon what a recipient reports to the revenue service, it becomes extremely difficult to account for transactions made using existing cryptocurrencies, a mode of exchange that is complex and difficult to track.[129] Systems of anonymity that most cryptocurrencies offer can also serve as a simpler means to launder money. Rather than laundering money through an intricate net of financial actors and offshore bank accounts, laundering money through altcoins can be achieved through anonymous transactions. Loss, theft, and fraud In February 2014, the world's largest bitcoin exchange, Mt. Gox, declared bankruptcy. The company stated that it had lost nearly $473 million of their customers' bitcoins likely due to theft, which Mt. Gox blamed on hackers who exploited transaction malleability problems in the network. This was equivalent to approximately 750,000 bitcoins, or about 7% of all the bitcoins in existence. The price of a bitcoin fell from a high of about $1,160 in December to under $400 in February. [130] Two members of the Silk Road Task Force—a multi-agency federal task force that carried out the U.S. investigation of Silk Road—seized bitcoins for their own use in the course of the investigation.[131] DEA agent Carl Mark Force IV, who attempted to extort Silk Road founder Ross Ulbricht ("Dread Pirate Roberts"), pleaded guilty to money laundering, obstruction of justice, and extortion under color of official right, and was sentenced to 6.5 years in federal prison.[131] U.S. Secret Service agent Shaun Bridges pleaded guilty to crimes relating to his diversion of $800,000 worth of bitcoins to his personal account during the investigation, and also separately pleaded guilty to money laundering in connection with another cryptocurrency theft; he was sentenced to nearly eight years in federal prison.[132] Homero Josh Garza, who founded the cryptocurrency startups GAW Miners and ZenMiner in 2014, acknowledged in a plea agreement that the companies were part of a pyramid scheme, and pleaded guilty to wire fraud in 2015. The U.S. Securities and Exchange Commission separately brought a civil enforcement action against Garza, who was eventually ordered to pay a judgment of $9.1 million plus $700,000 in interest. The SEC's complaint stated that Garza, through his companies, had fraudulently sold "investment contracts representing shares in the profits they claimed would be generated" from mining.[133] On 21 November 2017, the Tether cryptocurrency announced they were hacked, losing $31 million in USDT from their primary wallet. [134] The company has 'tagged' the stolen currency, hoping to 'lock' them in the hacker's wallet (making them unspendable). Tether indicates that it is building a new core for its primary wallet in response to the attack in order to prevent the stolen coins from being used. In May 2018, Bitcoin Gold (and two other cryptocurrencies) were hit by a successful 51% hashing attack by an unknown actor, in which exchanges lost estimated $18m. [135] In June 2018, Korean exchange Coinrail was hacked, losing US$37 million worth of altcoin. Fear surrounding the hack was blamed for a $42 billion cryptocurrency market selloff. [136] On 9 July 2018 the exchange Bancor had $23.5 million in cryptocurrency stolen.[137] The French regulator Autorité des marchés financiers (AMF) lists 15 websites of companies that solicit investment in cryptocurrency without being authorised to do so in France. [138] A 2020 EU report found that users had lost crypto-assets worth hundreds of millions of US dollars in security breaches at exchanges and storage providers. From 2011 to 2019, between four and 12 breaches were identified a year. In 2019, thefts were reported to have exceeded a value of $1 billion. Stolen assets "typically find their way to illegal markets and are used to fund further criminal activity". Impacts and analysis - Speculation, fraud and adoption Cryptocurrencies have been compared to Ponzi schemes, pyramid schemes [141] and economic bubbles, [142] such as housing market bubbles. [143] Howard Marks of Oaktree Capital Management stated in 2017 that digital currencies were "nothing but an unfounded fad (or perhaps even a pyramid scheme), based on a willingness to ascribe value to something that has little or none beyond what people will pay for it", and compared them to the tulip mania (1637), South Sea Bubble (1720), and dot-com bubble (1999). [144] The New Yorker has explained the debate based on interviews with blockchain founders in an article about the "argument over whether Bitcoin, Ethereum, and the blockchain are transforming the world". [145] While cryptocurrencies are digital currencies that are managed through advanced encryption techniques, many governments have taken a cautious approach toward them, fearing their lack of central control and the effects they could have on financial security. [146] Regulators in several countries have warned against cryptocurrency and some have taken measures to dissuade users. [147] However, research in 2021 by the UK's financial regulator suggested such warnings went unheard, or ignored. Fewer than one in 10 potential cryptocurrency buyers were aware of consumer warnings on the FCA website, and 12% of crypto users were not aware that their holdings were not protected by statutory compensation. [148][149] Additionally, many banks do not offer services for cryptocurrencies and can refuse to offer services to virtual-currency companies. [150] Gareth Murphy, a senior central banking officer has stated "widespread use [of cryptocurrency] would also make it more difficult for statistical agencies to gather data on economic activity, which are used by governments to steer the economy". He cautioned that virtual currencies pose a new challenge to central banks' control over the important functions of monetary and exchange rate policy. [151] While traditional financial products have strong consumer protections in place, there is no intermediary with the power to limit consumer losses if bitcoins are lost or stolen. One of the features cryptocurrency lacks in comparison to credit cards, for example, is consumer protection against fraud, such as chargebacks. The cryptocurrency community refers to pre-mining, hidden launches, ICO or extreme rewards for the altcoin founders as a deceptive practice. [152] It can also be used as an inherent part of a cryptocurrency's design.[153] Pre-mining means currency is generated by the currency's founders prior to being released to the public. [154] Paul Krugman, winner of the Nobel Memorial Prize in Economic Sciences, has repeated numerous times that it is a bubble that will not last [155] and links it to Tulip mania. [156] American business magnate Warren Buffett thinks that cryptocurrency will come to a bad ending.[157] In October 2017, BlackRock CEO Laurence D. Fink called bitcoin an "index of money laundering". [158] "Bitcoin just shows you how much demand for money laundering there is in the world," he said. Environmental impact Mining for proof-of-work cryptocurrencies consumes significant quantities of electricity and has a large associated carbon footprint. [164] Proof-of-work blockchains such as Bitcoin, Ethereum, Litecoin, and Monero were estimated to have added 3 to 15 million tonnes of carbon dioxide emissions to the atmosphere in the period from 1 January 2016 to 30 June 2017.[165] By November 2018, Bitcoin was estimated to have an annual energy consumption of 45.8TWh, generating 22.0 to 22.9 million tonnes of carbon dioxide, rivalling nations like Jordan and Sri Lanka. [166] Critics have also identified a large electronic waste problem in disposing of mining rigs. [167] Mining hardware is improving at a fast rate, quickly resulting in older generations of hardware. [168] Bitcoin is the least energy-efficient cryptocurrency, using 707.6 kilowatt-hours of electricity per transaction.[169] In comparison, the world's second-largest cryptocurrency, Ethereum, uses 62.56 kilowatthours of electricity per transaction.[170] Ripple ($XRP) is the world's most energy efficient cryptocurrency, using 0.0079 kilowatt-hours of electricity per transaction.[171] A few papers concluded that variable renewable energy power stations could invest in Bitcoin mining to reduce curtailment, hedge electricity price risk, stabilize the grid, increase the profitability of renewable energy power stations and therefore accelerate transition to sustainable energy.

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