Friday, July 7, 2017

Basics of a Cryptocurrency

A cryptocurrency (or crypto currency) is a digital asset designed to work as a medium of exchange using cryptography to secure the transactions and to control the creation of additional units of the currency. Cryptocurrencies are a subset of alternative currencies, or specifically of digital currencies.

Bitcoin became the first decentralized cryptocurrency in 2009. Since then, numerous cryptocurrencies have been created. These are frequently called altcoins, as a blend of bitcoin alternative. Bitcoin and its derivatives use decentralized control as opposed to centralized electronic money/centralized banking systems. The decentralized control is related to the use of bitcoin's blockchain transaction database in the role of a distributed ledger.

Overview

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 Federal Reserve System, corporate boards or governments control the supply of currency by printing units of fiat money or demanding additions to digital banking ledgers. In 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.

As of March 2015, hundreds of cryptocurrency specifications exist; most are similar to and derived from the first fully implemented decentralized cryptocurrency, bitcoin. Within cryptocurrency systems the safety, integrity and balance of ledgers is maintained by a community of mutually distrustful parties referred to as miners: members of the general public using their computers to help validate and timestamp transactions adding them to the ledger in accordance with a particular timestamping scheme.

The security of cryptocurrency ledgers is based on the assumption that the majority of miners are honestly trying to maintain the ledger, having financial incentive to do so.

Most cryptocurrencies are designed to gradually decrease production of currency, placing an ultimate cap on the total amount of currency that will ever be in circulation, mimicking precious metals. Compared with ordinary currencies held by financial institutions or kept as cash on hand, cryptocurrencies are less susceptible to seizure by law enforcement. Existing cryptocurrencies are all pseudo-anonymous, though additions such as Zerocoin and its distributed laundry feature have been suggested, which would allow for true anonymity.

Legality of Cryptocurrency

The legal status of cryptocurrencies varies substantially from country to country and is still undefined or changing in many of them. While some countries have explicitly allowed their use and trade, others have banned or restricted it. Likewise, various government agencies, departments, and courts have classified bitcoins differently. China Central Bank banned the handling of bitcoins by financial institutions in China during an extremely fast adoption period in early 2014. In Russia, though cryptocurrencies are legal, it is illegal to actually purchase goods with any currency other than the Russian ruble.

On March 25, 2014, the United States Internal Revenue Service (IRS) ruled that bitcoin will be treated as property for tax purposes as opposed to currency. This means bitcoin will be subject to capital gains tax. One benefit of this ruling is that it clarifies the legality of bitcoin. No longer do investors need to worry that investments in or profit made from bitcoins are illegal or how to report them to the IRS. In a paper published by researchers from Oxford and Warwick it was shown that bitcoin has some characteristics similar to the precious metals market more than to traditional currencies, hence in agreement to the IRS decision even if based on different reasons.

Legal issues not dealing with governments have also arisen for cryptocurrencies. Coinye, for example, is an altcoin that used rapper Kanye West as its logo without permission. Upon hearing of the release of Coinye, originally called Coinye West, attorneys for Kanye West sent a cease and desist letter to the email operator of Coinye, David P. McEnery Jr. The letter stated that Coinye was willful trademark infringement, unfair competition, cyberpiracy, and dilution and instructed Coinye to stop using the likeness and name of Kanye West.

Fraud Cases Involving Cryptocurrency

On August 6, 2013, Magistrate Judge Amos Mazzant of the Eastern District of Texas federal court ruled that because cryptocurrency (expressly bitcoin) can be used as money (it can be used to purchase goods and services, pay for individual living expenses, and exchanged for conventional currencies), it is a currency or form of money. This ruling allowed for the SEC to have jurisdiction over cases of securities fraud involving cryptocurrency.

GBL, a Chinese bitcoin trading platform, suddenly shut down on October 26, 2013. Subscribers, unable to log in, lost up to $5 million worth of bitcoin.

In February 2014, cryptocurrency made national headlines due to the world's largest bitcoin exchange, Mt. Gox, declaring bankruptcy. The company stated that it had lost nearly $473 million of their customer's bitcoins likely due to theft. This was equivalent to approximately 750,000 bitcoins, or about 7% of all the bitcoins in existence. Due to this crisis, among other news, the price of a bitcoin fell from a high of about $1,160 in December to under $400 in February.

On March 31, 2015, two now-former agents from the Drug Enforcement Administration and the U.S. Secret Service were charged with wire fraud, money laundering and other offenses for allegedly stealing bitcoin during the federal investigation of Silk Road, an underground illicit black market federal prosecutors shut down in 2013.

On December 1, 2015, the owner of the now-defunct GAW Miners website was accused of securities fraud following his development of the cryptocurrency known as Paycoin. He is accused of masterminding an elaborate ponzi scheme under the guise of "cloud mining" with mining equipment hosted in a data center. He purported the cloud miners known as "hashlets" to be mining cryptocurrency within the Zenportal "cloud" when in fact there were no miners actively mining cryptocurrency. Zenportal had over 10,000 users that had purchased hashlets for a total of over 19 million U.S. dollars.

On August 24, 2016, a federal judge in Florida certified a class action lawsuit against defunct cryptocurrency exchange Cryptsy and Cryptsy's owner. He is accused of misappropriating millions of dollars of user deposits, destroying evidence, and is believed to have fled to China.

Criticism

  • In 2013, journalists Joshua Brustein and Timothy Lee expressed concern that bitcoin is problematic due to its high volatility.
  • In December 2013, Jason O'Grady reported on various pump and dump schemes in altcoins distinct from bitcoin and Litecoin.
  • Community refers to premining, hidden launches, or extreme rewards for the altcoin founders as a deceptive practice, but it can also be used as an inherent part of a digital cryptocurrency's design, as in the case of Ripple. Pre-mining means currency is generated by the currency's founders prior to mining code being released to the public.
  • Most cryptocurrencies are duplicates of existing cryptocurrencies with minor changes and no novel technical developments. One such, Coinye West, a comedy cryptocurrency alluding to the rapper Kanye West, was served a cease-and-desist letter on 7 January 2014, for using West's name and implying a connection that did not exist.
  • Banks generally do not offer services for cryptocurrencies and sometimes refuse to offer services to virtual-currency companies.
  • There are ways to permanently lose cryptocurrency from local storage due to malware or data loss. This can also happen through the destruction of the physical media, effectively removing lost cryptocurrencies forever from their markets.
  • There are many perceived criteria that cryptocurrencies must reach before they can become mainstream. For example, the number of merchants accepting cryptocurrencies is increasing, but still only a few merchants accept them.
  • With technological advancement in cryptocurrencies such as bitcoin, the cost of entry for miners requiring specialized hardware and software is high.
  • Cryptocurrency transactions are normally irreversible after a number of blocks confirm the transaction. One of the features cryptocurrency lacks in comparison to credit cards is consumer protection against fraud, such as chargebacks. This is, however, a non-issue because third-party multisignature-based escrow can be used to mediate a transaction, this is effectively equivalent to enabling chargebacks. This is also much easier than performing an irreversible transaction using a system with native chargebacks, so this aspect is actually an advantage.
  • Some coins may be a project with little to no community backing and no visible developer.
  • 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.
  • Environmentally conscious people are concerned with the enormous amount of energy that goes into cryptocurrency mining with little to show in return, but it is important to compare it to the consumption of the legacy financial system.
  • Traditional financial products have strong consumer protections. However, if bitcoins are lost or stolen, there is no intermediary with the power to limit consumer losses.
  • Regulators in several countries have warned against their use and some have taken concrete regulatory measures to dissuade users.
  • The success of some cryptocurrencies has caused multi-level marketing schemes to arise with pseudo cryptocurrencies, such as Onecoin.

https://en.wikipedia.org/wiki/Cryptocurrency

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