Cryptocurrency All-in-One For Dummies. Peter Kent

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СКАЧАТЬ of handling cash and that is traceable as it moves through the financial system was an intoxicating and threatening proposal. The idea that value can be held outside the control of central authorities also piqued the interest of financial institutions and governments that back currencies.

      Initially, these financial institutions and governments tried to squelch blockchain with regulation. Today, they’re embracing blockchain through investment across the board.

      In 2013 and 2014, the U.S. Securities and Exchange Commission (SEC) issued a warning to investors about the potential risks of investments involving virtual currency. The warning was that investors might be enticed with the promise of high returns and would not be skeptical enough of the new investment space that was so novel and cutting edge. According to the SEC, digital currency was one of the top ten threats to investors. Today, the SEC stands ready to engage with companies and investors as cryptocurrency gains traction within all industries.

      Not even two years later, countries around the world — including the U.K., Canada, Australia, Japan, and China — began investigating into how they could create their own digital currencies, seize cryptocurrency for themselves, and put money on the blockchain. History was made in 2021 by Purpose Investments, a Canadian asset management company that launched the world’s first Bitcoin ETF (exchange-traded fund). The Purpose Bitcoin ETF further shocked the investment world by crossing the $1 billion-in-assets mark within 30 days!

      Blockchain’s promise of an uncompromisable ledger has made it an appealing system for governments that are seeking to reduce fraud and improve trust. Innovations in blockchain technology promise to increase its ability to handle the billions of transactions needed to support economies, making a cryptocurrency feasible at scale.

      Blockchains are in themselves permanent and unalterable records of every transaction that is inputted. Putting a country’s money supply on a blockchain controlled by a central bank would be utterly transformative because there would be a permanent record of every financial transaction, existing at some level within their blockchain records, even if the records weren’t viewable by the public. Blockchain technology and digital currencies would reduce risk and fraud and give central banks ultimate control in executing monetary policy and taxation. It would not be anonymous in the way that Bitcoin initially was. In fact, it would be quite the opposite, giving central banks a full and auditable trail of every digital transaction made by individuals and companies. This system might even allow central banks to replace commercial banks’ role in circulating money.

The question of what the future for banking will look like can be both scary and exciting. Consumers can now pay friends through their phones almost instantly in almost any type of currency or cryptocurrency. More and more retail stores have begun utilizing cryptocurrency as a way to pay for goods and accept payment from customers. In Kenya, using cryptocurrency is now the norm. But this is still not the mainstream option for most of the world. Western markets are still in the early adoption phase.

      Given that most individuals have their wealth locked into legal tender issued by governments or locked into assets that are within existing government systems, fintech innovations must merge with these existing systems before the public sees the mainstream utility of blockchain or digital currencies. If regulators find ways to tax and register accounts, then mass adoption of customer-facing wallets with digitized tokens is only two or three years down the road.

      The business-to-business market will start utilizing blockchain much more quickly. In fact, a production-hardened system with the associated policies and operations is now being tested. Ripple and R3, among others, have been hard at work making this possible. These systems will first focus on the institutional creation of digitized representations of deposits. These are IOUs between internal organizational departments and between trusted partners, like vendors. Regulators, central banks, and monetary authorities are all investing heavily in making this possible. Canada and Singapore are two countries that have been moving very quickly in this direction.

      Know your customer (KYC) and anti-money-laundering (AML) regulations require banks to know who they’re doing business with and to ensure that they’re not participating in money laundering or terrorism. Banks issuing cryptocurrencies still have significant challenges to overcome. In order to stay compliant with KYC and AML regulations, they need to know the identity of all the individuals utilizing their currency. In many cases, people’s bank accounts are already offering debit and credit service transactions, like distributed ledgers in blockchains. The first candidates in this area are going to be regions where regulators, banks, and central banks work together. Singapore and Dubai are good candidates that already have blockchain initiatives: Singapore used blockchain technology to verify COVID-19 test results, and the UAE government launched the Emirates Blockchain Strategy in 2021, aiming to transform 50 percent of government transactions into the blockchain.

      Moving money faster: Across borders and more

It is difficult to assess the transaction volume that needs to be met by a blockchain handling the currency of an economy like that of the U.K. or U.S. The U.S. alone is processing billions of transactions a day and over $17 trillion in value a year. That’s a lot of responsibility for a new technology! The nation would be crippled if its monetary supply were compromised.

      The International Monetary Fund, the World Bank, the Bank for International Settlements, and central bankers from all over the world have met to discuss blockchain technology. The first step toward faster and cheaper money would be adopting a blockchain as the protocol to facilitate bank transfers and interbank settlement. Official digital currencies that ordinary citizens use on a daily basis would come much later.

      Individual consumers wouldn’t directly feel the cost reduction from utilizing a blockchain for interbank settlement. The savings would be seen in the bank’s bottom line as cost reductions for fees charged by intermediaries.

      Consumers will still want retail locations and commercial banks for the foreseeable future. But millennials have already adopted app-activated payments through PayPal, Venmo, Cash, and more. A new way of paying through their phones won’t faze them.

      The great challenge is that if all money is digital, compromising it could be catastrophic. It’s possible that the architecture of blockchain systems could be strong enough. Instead, the issue might be that the code within the system is executed in an unexpected manner, as happened in the decentralized autonomous organization (DAO) hack on Ethereum (see Chapter 5 of this minibook). If the cryptocurrency were operating on a traditional public blockchain, then 51 percent of the nodes in the network would have to agree to fix the issue. Getting an agreement in place might take a lot of time, and it wouldn’t be practical for businesses and people who need stable and secure money at all times.

      

Many blockchains operate as democracies. A majority (51 percent) of a blockchain’s nodes network is needed to make a change.

      Creating permanent history

      Data sovereignty and digital privacy are going to be huge topics in the future. Fraud prevention will be easier because if the entire economy is utilizing a cryptocurrency, then there will always be an auditable trail inside the blockchain that secures it. This is enticing for law enforcement but a nightmare for consumer privacy.

From a customer perspective, there’s already an audit trail for everything you purchase with a credit or debit card. From an institutional perspective, it’s beneficial to have audit trails because it increases transparency of documentation and life cycles of the movements of these assets between different regions. It adds legitimacy to the trading of assets and allows them to bake compliance into their day-to-day СКАЧАТЬ