Cryptocurrency

A key feature of cryptocurrencies is the absence of any internal or external administrator. Therefore, banks, tax, judicial and other state or private bodies cannot influence the transactions of any participants in the payment system. The transfer of cryptocurrencies is irreversible - no one can cancel, block, dispute or forcibly (without a private key ) make a transaction ^{[8] [9] [10] [6]} . However, participants in the transaction can voluntarily temporarily mutually block their cryptocurrencies as a pledge ^{[11] [12]} or establish that the completion / cancellation of the transaction requires the consent of all (or arbitrary additional) parties ^[13] .

The technology of cryptocurrencies proceeds from the fact that the network does not have a trusted node - one whose actions are guaranteed to be true and who can confirm the correctness of other people's operations (the task of the Byzantine generals ). For the first time this problem was solved in the Bitcoin system due to the artificial complication of making changes to the registry of the history of operations. To store data, transactions are combined into blocks from which a continuous chain ( blockchain ) is formed. Continuity is ensured not so much by numbering as by the inclusion of the hash sum of the previous block in the current block, which does not allow changing the information in the block without changing the hashes in all subsequent blocks. All hashes meet certain requirements; generating hashes that satisfy these requirements is time consuming or very expensive. Only the longest chain is considered true. In different cryptocurrencies, the right to form the next block is granted to the person who has performed a certain work ( Proof-of-work ), who has a certain amount in the account ( Proof-of-stake ), who has provided some resources ( Proof-of-space ), or another procedure is taken as the basis that easy to verify, but difficult to execute or fake.

As a rule, in cryptocurrencies, developers initially specify the upper limit of the total volume of emissions ^{[14] [9] [15]} . However, some cryptocurrencies, such as ^16] , Novacoin , Sifcoin and others, do not have a fixed upper limit on the total volume of emission and both emission and demission are possible (by mandatory destruction of a fixed amount in each transaction).

Most cryptocurrencies provide pseudonymity - all transactions between all addresses are publicly available, but there is no data on the owners of the addresses. However, the identity of the owner can be established if additional information becomes known. ZeroCash provides an opportunity to replace pseudonymity with anonymity ^{[17] [18] [19] [20]} .

Cryptography for confidential payments began to be used since 1990 in the system of David Choma , whose company went bankrupt in 1998 ^[21] . This payment system was centralized.

For the first time, the term “cryptocurrency” began to be used after the appearance of the Bitcoin payment system, which was developed in 2009 by a person or group of people under the pseudonym Satoshi Nakamoto ^[22] , (the identity as of December 2018 has not yet been established). Forks appeared later: Namecoin (decentralized DNS for registration within the .bit domain zone), Litecoin (uses scrypt hashing), PPCoin (uses a hybrid proof-of-work / proof-of-stake mechanism, does not have an upper limit on the volume of emission), Novacoin (similar to PPCoin, but uses scrypt) and many others.

Until July 2013, the software of all cryptocurrencies except Ripple was based on the open source system of the Bitcoin system. Since July 2013, other platforms began to appear that, in addition to cryptocurrencies, support various infrastructure - exchange trading, shops, instant messengers and more. Such crypto platforms include: BitShares , Mastercoin , Nxt . Other platforms are announced. ^[23]

Altcoins

Altcoins (from the English Altcoin, alternative coin ) are all cryptocurrencies that appeared after Bitcoin ^[24] .

The first altcoins appeared in 2011: Litecoin and Namecoin . Their developers sought to overcome a number of problems inherent in Bitcoin (for example, Litecoin has a higher transaction speed ^[25] ) or to use blockchain technology in other areas (Namecoin was developed to build alternative root DNS servers).

Many altcoins are inherently very similar to Bitcoin, have similar characteristics and the same equipment can be used to work with them as for Bitcoin, but some cryptocurrencies have significant differences. Ethereum has become a crypto platform through the use of “ smart contracts ”. Even more independent from Bitcoin is visible in Ripple , which is actually a centralized system. A number of cryptocurrencies, such as Dash , have focused on enhancing anonymity.

There are various ways to acquire cryptocurrencies. New (emitted) quantities are distributed according to the initially agreed upon procedures specific for each cryptocurrency ( mining , forging , ICO ) ^[26] . Mining and forging are aimed at building a blockchain: the creators of new blocks are rewarded with a certain amount of issued cryptocurrency. In this case, usually there is no other way for the circulation of new batches of cryptocurrency. ICO is a way to attract financing through the sale of lots of new cryptocurrency, which were originally generated and belonged to the organizer of the ICO ^[27] . Then, others can get the issued cryptocurrency from those who already own it - in exchange for ordinary money, or in exchange for the goods or services provided, either as donations or as a loan. The exchange can be carried out directly between interested parties without intermediaries or using any of the numerous digital currency exchange sites ^[26] .

The total number of cryptocurrencies as of March 2015 exceeded 2000 ^[28] . The following cryptocurrencies as of May 2018 have the highest capitalization ^[29] :

The legal regime of cryptocurrencies varies greatly from country to country and remains uncertain or changing in many of them. While some countries have allowed cryptocurrency transactions, others have banned or restricted them. For example, the People’s Bank of China in early 2014 banned operations with bitcoins to Chinese financial institutions ^[49] , but did not prohibit transactions with cryptocurrencies for citizens.

In Russia, cryptocurrencies as such do not fall under the ban or restrictions on ownership, but cannot be used as a means of payment, since it is illegal to buy goods in any currency other than rubles ^[50] .

Government agencies, departments and courts of different countries classify cryptocurrencies in different ways. On March 25, 2014, the United States Internal Revenue Service (IRS) decided that Bitcoin would be treated as property for tax purposes, and not as a currency. This means that Bitcoin will be taxed on capital gains . One of the advantages of this solution is that it clarifies the status of bitcoin. Investors no longer have to worry about whether investments or profits from bitcoins are illegal or how to report them to the IRS ^[51] . In an article published by researchers from Oxford and Warwick, it was shown that bitcoin has characteristics closer to the precious metals market than to the traditional currency market, which is consistent with the IRS decision ^[52] .

On October 22, 2015, the European Court ruled that transactions for exchanging bitcoins for fiat money are exempt from VAT . Transactions in Bitcoins were classified as payment transactions with currencies, coins and banknotes, and therefore are not subject to VAT ^[53] . The court recommended that all member states of the European Union exclude cryptocurrencies from the list of assets subject to taxation ^[54] .

In March 2016, the Cabinet of Ministers of Japan approved a package of bills that, in particular, recognized Bitcoin as legal tender . ^{[55] [56] [57]} .

Fraud

On August 6, 2013, Justice of the Peace Amos Matsant of the East Texas County Federal Court ruled that since cryptocurrency (in particular Bitcoin) can be used as money (it can be used to purchase goods and services, pay individual living expenses and exchange for regular currencies ), it is a currency or a form of money. This ruling allowed the US Securities and Exchange Commission to have jurisdiction over cases of securities fraud using cryptocurrency. ^[58]

GBL, the Chinese trading platform for bitcoins, suddenly closed on October 26, 2013. Subscribers unable to log in lost up to $ 5 million in bitcoins. ^[59]

In February 2014, cryptocurrency appeared in the headlines due to the world's largest bitcoin exchange: Mt. Gox filed for bankruptcy . The company said it lost nearly $ 473 million from its customers' bitcoins, probably due to theft. This is equivalent to approximately 750,000 bitcoins, or about 7% of all existing bitcoins. Due to this crisis, among other news, the price of bitcoin fell from a maximum of about $ 1,160 in December to less than $ 400 in February. ^[60]

On March 31, 2015, two former U.S. Drug Enforcement and Secret Service agents were charged with digital fraud, money laundering, and other crimes for allegedly stealing bitcoin during a federal investigation on Silk Road , an underground illegal black market closed by federal prosecutors in 2013. ^[61]

On December 1, 2015, the owner of the now defunct GAW Miners website was accused of securities fraud after he developed a cryptocurrency known as Paycoin. He is accused of leading a complex financial pyramid under the guise of "cloud mining" with mining equipment located in the data center. He stated that cloud miners, known as “hashlets," would mine cryptocurrency in the cloud-based Zenportal, when in fact there were no miners. Zenportal had more than 10,000 users who purchased hashlets totaling more than $ 19 million. ^{[62] [63]}

On August 24, 2016, a federal judge in Florida approved a group action lawsuit ^[64] against the defunct Cryptsy cryptocurrency exchange and the owner of Cryptsy. He is accused of appropriating millions of dollars of user deposits, destroying evidence, and is believed to have fled to China. ^[65]

On November 21, 2017, the Internet company Tether, which supports cryptocurrency with an application for the status of fiduciary money , was hacked, losing $ 31 million in USDT form from its main wallet. ^[66] The company “marked” the stolen currency, hoping to “block” them in the hacker's wallet (making them unusable). Tether indicates that it is creating a new core for its main wallet in response to an attack to prevent the use of stolen coins.

Darknet Markets

Cryptocurrency is also used in black online markets such as Silk Road. The original Silk Road was closed in October 2013, and since then two more options have appeared; the current version is Silk Road 3.0. The successful Silk Road format is widely used in dark markets on the Internet, which led to the subsequent decentralization of the black online market. During the year after the closure of the original Silk Road, the number of notable black markets increased from four to twelve, and the volume of drug lists increased from 18,000 to 32,000 entries. ^[67]

Darknet markets are facing growing challenges regarding the rule of law. Bitcoins and other forms of cryptocurrency used in black markets are not legally classified in almost all parts of the world. In the US, bitcoins are referred to as “virtual assets”. This ambiguous classification exacerbates pressure on law enforcement agencies around the world, creating barriers to pulling the drug trade out of black markets. ^[68]

Since most darknet markets operate via Tor , they can be found with relative ease in public domains. This means that their addresses can be found, as well as customer reviews and open forums related to drugs sold on the market, without exposing users. ^[67] This anonymity allows users on both sides of dark markets to hide from law enforcement. As a result, law enforcement agencies are campaigning to separate markets and drug dealers to reduce supply. However, dealers and suppliers can stay one step ahead of law enforcement, which cannot keep up with the rapidly expanding and anonymous sites of dark markets. ^[68]

ICO

ICO is an unregulated means by which funds are raised for a new enterprise in the form of cryptocurrency. ICO используется стартапами для обхода строгих и регулируемых процессов привлечения капитала, необходимых венчурным предпринимателям или банкам. В кампании ICO процент криптовалюты продается ранним сторонникам проекта в обмен на законные платёжные средства или другие криптовалюты, часто Bitcoin или Ethereum. ^[69]

In mid-2017, the US Securities and Exchange Commission (SEC) issued clarifications on ICOs and their risks and comparison with traditional investment methods ^[70] . The Commission emphasized that this technology can be used to provide fair and legitimate investment opportunities, and proposed to regulate placements in accordance with the 1934 Securities Exchange Act , in particular, register the offer and sale of tokens with the SEC ^[71] . On September 4, 2017, seven Chinese financial regulators officially banned all ICOs in the People's Republic of China, demanding that the proceeds from all past ICOs be reimbursed to investors, otherwise the offender will be “severely punished by law”. ^{[72] [73] [74]} This action by the Chinese regulators led to big sales and a depreciation of most cryptocurrencies. ^[74] Prior to this ban, ICOs raised the equivalent of nearly $ 400 million from approximately 100,000 investors. ^[75] However, a week later, a Chinese finance official announced on Chinese national television that the ban on ICOs was only temporary until the rules and standards governing ICOs appeared. ^[76] ICOs are also prohibited in South Korea ^[77] at the legislative level. ^[78] .In September 2017, the Australian Securities and Investments Commission (ASIC) published a guide on legal obligations for companies that organize ICOs.

• Cryptocurrencies are often compared to pyramid schemes and economic bubbles , such as, for example, a real estate bubble . ^{[79] [80]} of stated in 2017 that digital currencies are “nothing more than an unreasonable mania (or perhaps a pyramid scheme) based on the desire to add weight to something,” which has very little or nothing at all except what people will pay for it, ”and compared it with tulip mania (1637), the financial pyramid of the Company of the South Seas (1720) and the bubble of dotcoms (1999) ^[81] .
• In October 2017, BlackRock CEO Larry Fink stated that Bitcoin is the “money laundering index” ^[82] . Many other authors believe that digital money can become tools for anonymous online criminals ^[67] , money laundering through cryptocurrencies can be achieved through anonymous transactions ^[67] , since this method of exchange is difficult and (in some cases) impossible to track, it can simplify tax evasion for individuals ^[67] .
• Ksenia Yudaeva, First Deputy Chairman of the Central Bank of the Russian Federation, reported that:

  during the discussion at the G20 , it was noted that crypto assets as a means of settlement "are hundreds of times less effective than traditional payment systems" [83]

• Cryptocurrency bubble
• Ledger (magazine)

Comments

Footnotes

• Friedrich von Hayek , Denationalization of Money: An Analysis of the Theory and Practice of Concurrent Currencies. - London: Institute of Economic Affairs, 1976.
• Satoshi Nakamoto . Bitcoin: A Peer-to-Peer Electronic Cash System . - 2008. - 9 p.
• Kirill Sarkhanyants, Olga Shestopal, Roman Rozhkov A lot of money from nothing // Kommersant newspaper, No. 102 / P (5133), 06/17/2013
• Cryptocurrencies // Mercatus Center, George Mason University (translated into Russian), July 1, 2014 ( English )

• The World of Coin Brothers What is the difference between different cryptocurrencies: a review of Lenta.ru , December 18, 2013
• What is cryptocurrency ? F. Tomlinson February 6, 2013 (translation of Crypto Currency / The Age of Stupidity, November 29, 2012 )
• Wary of Bitcoin? A guide to some other cryptocurrencies // Ars Technica, Wired, MAY 11, 2013