What are cryptocurrency and blockchain?

You can’t fail to have heard the terms cryptocurrency and blockchain, but what do they actually mean and how could they affect you and your organisation’s compliance?

In this article, we look at:

  • what they are;
  • what is the technology that drives them;
  • what is the future for this relatively new form of exchange; and
  • what is the software behind it, blockchain?

What are cryptocurrencies?

Cryptocurrencies are a digital means of exchange that exist only as computer code, there are no physical notes and coins. Because most cryptocurrencies aren’t regulated by national governments, they’re considered alternative currencies that exist outside the boundaries of state monetary policy.  Early cryptocurrency proponents shared the goal of applying cutting-edge mathematical and computer science principles to solve what they perceived as practical and political shortcomings of “traditional” currencies. (also known as ‘fiat’ currencies from the Latin ‘let it be done’).

As it had never been traded, only mined, it was impossible to assign a monetary value to the units of the emerging cryptocurrency.  In 2010, someone decided to sell theirs for the first time – swapping 10,000 of them for two pizzas. Those pizzas cost an eye-watering $100 million at the top of the Bitcoin valuation in 2018.

Blockchain

Blockchain is the digital ledger behind cryptocurrencies, blockchains are either the most important technological innovation since the internet or a solution looking for a problem to solve.  

The original blockchain is the decentralised ledger behind the digital currency Bitcoin. The ledger consists of linked batches of transactions known as blocks (hence the term blockchain), of which an identical copy is stored on each of the roughly 200,000 computers that make up the blockchain network.  

Each change to the ledger is cryptographically signed to prove that the person transferring virtual coins is the actual owner of those coins. But no one can spend their coins twice, because once a transaction is recorded in the ledger, every node in the network will know about it. The idea is to both keep track of how each unit of the virtual currency is spent and to prevent unauthorised changes to the ledger. The upshot: No bitcoin user has to trust anyone else, because no one can cheat the system.

Blockchain technology is like the internet in that it has a built-in robustness. By storing blocks of information that are identical across its network, the blockchain cannot:

  1. be controlled by any single entity; and
  2. has no single point of failure.

There are multiple advantages to cryptocurrency including:

  • Loosening of Government Currency Monopolies
  • Fewer Barriers and Costs to International Transactions
  • Robust Privacy Protections
  • There is a built-in scarcity value

With the advantages of cryptocurrency also come certain disadvantages:

  • Lack of Regulation Facilitates Black Market Activity
  • Potential for Tax Evasion in some jurisdictions
  • Potential for Financial Loss Due to Data Loss
  • Often can’t be exchanged for Fiat Currency

Future?

At the time of writing, there is little regulation of cryptocurrencies. The Financial Crimes Enforcement Network (FINCEN) in the USA is due to report to the G20 with proposals for international regulation and the Financial Action Task Force (FATF) is considering the KYC implication of the secrecy surrounding ownership of cryptocurrency.

It’s less than a decade in, and cryptocurrency has already made a statement in the financial sector. Seemingly out of nowhere, this currency has managed to get people’s attention and, often, their admiration. And it’s already affecting some aspects of the general public’s lives, including entrepreneurship.

Institutional investors may not currently have confidence in cryptocurrency as an asset class. Regulation of the sector and recognition of cryptocurrency as an asset class will go some way to improving confidence and therefore cement cryptocurrency into the mainstream much like equities or property today.So, what does this mean for you, your organisation and ensuring your employees are compliant when dealing with both cryptocurrencies and blockchain?

Learning Pool’s dedicated module on Cryptocurrency and Blockchain can help ensure that your employees are compliant and ready for this constantly changing area of finance.

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