The Question of Regularization and Stability of Cryptocurrencies 

Economics has always stood on the foundation of exchange in varying forms, ranging from the barter system to the common paper and plastic currency, regulated by the use of cash and digital mediums of exchange. While the primitive barter system dominated the underdeveloped economy for a long time, the use of metallic coins as the first form of currency revolutionized the way global transactions were made. The introduction of paper currency and the latest plastic money (debit and credit cards) were another step toward a modern economy.

Yet, centralized by government agencies, these mediums of exchange posed several problems, including the security of money and the slow nature of certain transactions. And then came the revolutionary concept of ‘Cryptocurrency.’

In simple terms, cryptocurrency is an electronically used and stored medium of exchange that is decentralized and free from any form of central control by a central organization or entity. This way, currency values are decided purely by transactions and exchanges between owners and by no other factor. Though it doesn’t have any intrinsic value or physical form, cryptocurrency offers a secure means of money, as it is digitally secured using cryptographic sequences and techniques. Further discussion can be found in later sections of this report. In other words, cryptocurrency is safe, secure, fast, and global. The best-known cryptocurrency today is none other than the globally renowned Bitcoin.

As much as we may think of cryptocurrency as ‘the ideal currency,’ it does have its drawbacks, the major one being its regulation and stability. Exploitative capitalism of cryptocurrency, leading to a few ‘miners’ (individuals involved in the cryptocurrency market) controlling the currency’s price, is another major issue related to the stability of Bitcoin and its fellow cryptocurrencies. Pump and Dump Initial Coin Offering (ICO) schemes are another challenge to the growing cryptocurrency market. Price manipulation and lack of price uniformity are other challenges this revolutionary idea faces. Hence, though we cannot deny the growing prominence of this revolutionary brainchild in today’s tech-savvy world, its regulation and stability, as well as the challenges it faces, are some aspects that we also need to seriously consider for it to be effective, transparent, fair, safe and secure in true sense.

Definition of Key Terms

Cryptography

The art of writing, designing, and deciphering codes so that only those for whom the information is intended can read, analyze and process it. It is widely used in cyber networks to ensure information security and safety and prevent its potential misuse.

Cryptographic Key

Pieces of digital information are used to make mathematical guesses about various texts. In simpler terms, they are forms of codes that try to solve mathematical cryptographic sequences and ‘crack’ security codes. Only a person with the ‘key’ for a corresponding cryptographic sequence can initiate the action that the sequence secures.

Block Chain

In the simplest of words, it refers to a document of data on the exchange of a particular digital entity, such as a cryptocurrency like Bitcoin, between those involved in the exchange network. It is a form of a ‘record document’ for the transactions between individuals in the network.

Miners

Individuals involved in the Cryptographic exchange network compete to solve cytological (mathematical) cryptographic problems (codes) and get rewarded with cryptocurrency in return.

Cryptocurrency

A decentralized digital currency with no organizational regulation to decide supply and demand. Potential benefits include safety, security, and stronger ownership of personal wealth. However, a handful of influential personnel’s regulation and inhibition of strong control remains challenging.

Peer-to-Peer (P2P) Network

Refers to transactions between two personnel on a public platform, but the transaction is private between two individuals. A common feature seen on several cryptocurrency networks and platforms, particularly in the Bitcoin Network.

Background Information

Satoshi Nakamoto is the common name used for the people/person who developed the first cryptocurrency in existence- Bitcoin. Bitcoin was not only the first cryptocurrency in existence but also the first P2P Blockchain network. Officially initiated on 9 January 2009, the Bitcoin network has grown tremendously, and today its value stands at almost $6,350/bitcoin. Such a massive increase in the value of Bitcoin is credited to its popular use amongst tech-savvy individuals, owing to its fast, secure and private nature. But what was the actual intention of this invention, and how was it secured so well? Let’s analyze that now (1).

The Creation of Bitcoin- Cryptocurrency takes birth.

The purpose of inventing Bitcoin was to create a new, improved cash system that could better check the illicit activity of ‘double spending’- Using the same amount of money to buy different things when you can only pick one. So, if you had $10, purchased a milk carton for $10, and a chocolate bar for $10, you would be double-spending. Such a practice was based on ‘manipulating’ the cash/credit system, something which Nakamoto typically wanted to curb (1).

The advent of Bitcoin introduced the alternative of a decentralized cash system without any ‘physical’ money with intrinsic value. This system was not under any organizational control, which made it free to be controlled by trade between those involved in the network. As the trade of the entity increases, so would its value, It would cause Bitcoin to reach its current value. Bitcoin was the first cryptocurrency, which is shorthand for “digital currency,” and it revolutionized the financial system in more ways than one. Although it had no tangible value, its exchange was protected using cutting-edge Cryptography and cytological sequencing. (2).

Security in the Bitcoin Network Wallets and Keys

Each Miner in the Bitcoin network has a Bitcoin account, which is called a ‘wallet.’ Each Wallet is linked to two keys- a private key and a public key. Each key has its significance and individual role to play.

1. A private key is used to sign and authenticate various messages and data. It is used by the individual themself to authenticate a transaction they have made before it is released in the public domain of the network. The signature of the private key is unique and essential to confirm the authenticity of the transaction in question.
2. A public key is a common key in the public domain of the network, which the other network members use to verify the signature from the private key. Once it has been verified, all miners can enter the record of the transaction in their respective blockchains.

It is important to understand that the idea of keys is based on the concept of ‘Confirmation,’ a concept critical to all cryptocurrencies. When a transaction is confirmed using the public key, it is no longer forgeable and becomes irreversible, and only miners can verify transactions. Hence, cryptocurrency networks are kept under check by those involved in the network themselves in the absence of a regulatory authority. In case of any dispute, all blockchains can be matched, and any drastic shift in a specific blockchain would indicate where the fault lies (3).

The Other side of the Coin

Though cryptocurrencies such as Bitcoin have their advantages, the challenges they face and drawbacks also need to be taken seriously. The major problem cryptocurrencies face is price manipulation. Cryptocurrencies are excessively volatile. The rate at which the prices and exchange rates of cryptocurrencies rise and fall in the absence of a central regulating authority is high, making cryptocurrencies very risky to use as primary mediums of exchange. The major contributor to the high volatility of cryptocurrencies is the activity of the ‘capitalists’ of the cryptocurrency market, commonly called the ‘Whales.’ They are simply miners with large cryptocurrency holdings. Using ‘Buy and Sell Walls’ and manipulating prices in the bargain, they can swing the odds in their favor, leaving miners with medium or small cryptocurrency holdings helpless and exploited (1).

Another challenge that the cryptocurrency market faces is the occurrence of ‘pump and dump.’  initial coin offering (ICO) schemes. In ICOs, market investors buy a certain number of tokens for money, which they use in the cryptocurrency market, with expectations of profit. However, sometimes websites providing ICO schemes become scams and disappear as soon as the investment is made, leaving no profit for the investor at all. This example implies the case of cyber crime by hackers and fraud individuals in the cryptocurrency network, another problem that has persisted right from the start.

The lack of price uniformity is yet another drawback of cryptocurrencies. The value of the same cryptocurrency may vary on different exchange platforms, making price charting of the cryptocurrency quite difficult. This further adds to the volatility of the currency in the digital space.

And lastly, we have the misconception of HODL (Holding on to your cryptocurrency). This is based on the idea that holding on to your cryptocurrency assets without getting into the exchange would increase the chances of profit and decrease the chances of loss. This is false and, on the contrary, can be highly counterproductive owing to the increased activity of whales and greater liberty for them to manipulate prices and sway the network in their favor. Hence, despite the several advantages and deals it proposes, cryptocurrency use has risks. The cryptocurrency network may be the future without denial. Still, for it to be revolutionary in the true sense, its drawbacks and challenges must be seriously addressed and resolved by proper consensus and economic tactics (4).

Major Countries and Organizations Involved

Estonia

The small European nation of Estonia is the most Bitcoin-friendly country around the globe, with a government always willing to incorporate technological advancements in improving governance strategies. The Estonian government has often shown its willingness to implement blockchain and similar innovations for its healthcare and banking services, allowing its citizens to experience the life of ‘E- Residents’. It even uses a blockchain-based e-voting system, something unique for a nation of small geographic and population size. Today, Estonia hosts several Bitcoin ATMs around the country and is home to startups such as Paxful, a P2P bitcoin trade service. Being home to one of the world’s highest numbers of internet users, Estonia can surely be where a cryptocurrency such as Bitcoin would be welcomed (5).

The United States of America

Right from the beginning, the USA has been at the forefront of witnessing the growth and widespread of cryptocurrencies throughout the world. Home to the highest number of cryptocurrency users and Bitcoin ATMs in the world, it boasts exponential trade volumes and blockchain startups, particularly in Silicon Valley. As a global economic superpower, smaller nations often take advice from the USA regarding policies and frameworks for regulating cryptocurrency networks active in their respective territories.

Nepal

Nepal is one of the few countries that declare Bitcoin and other cryptocurrencies illegal. On 30 June 2017, Nepalese Officials formally declared Bitcoin and cryptocurrencies to be illegal, and holding cryptocurrencies was a criminal offense. Individuals involved in Bitcoin exchange have been arrested on several occasions in the country; the major one occurred in October 2017, when the Central Investigation Bureau of Nepal detained seven people on suspicion of being involved in Bitcoin exchange operations. (5).

Bolivia

Bolivia is another country strongly hostile to using Bitcoin and other cryptocurrencies. Bolivia banned the use of Bitcoin and other cryptocurrencies, such as Namecoin, Peercoin, and Quark, in 2014. The ban was put in place to protect the Boliviano, the national currency of Bolivia, and to secure the monetary assets of the citizens of the country from potential misuse and cheating while in the network. Unlike other South American nations, it has taken a strong stance against decentralized electronic currency and employed strict measures to curb its use.

Previous Attempts to Solve the Issue and Possible Solutions

No concrete attempts have been carried out to regulate or stabilize cryptocurrencies. The only measure governments have resorted to is banning their use altogether, primarily because of the threat they may pose and the challenges they face. Another insecurity that governments have is the threat decentralized electronic currency may pose to their national currencies, giving them competition and eventually bringing down their use amongst citizens. Bans, however, have frequently been inefficient in serving their purpose, and this case has not been any different. The implementation of bans has just strengthened the undercover cryptocurrency network, hence proving to be counterproductive (6).

To stabilize the regularized cryptocurrencies, strong emphasis must be placed on the root causes of the volatility and security loopholes that may persist in their use. Firstly, the volatility of cryptocurrencies and subsequent price manipulation by whales. The activity of whales hence needs to be controlled. For this, buy and sell walls have to be curbed, and that can be done by putting adequate limits on the values of transactions that can be allowed.

A proper check also needs to be kept on the nature of various ICO schemes to ensure that they do not dump innocent investors into losing all their money. This can be done by teaming up with some cyber security firms or maybe even cyber security forums affiliated with governments themselves. Cybercriminal activities are also an issue of concern that need to be addressed. For this, traders and platform operators have to take adequate preventive measures, keeping in mind that such measures do not hamper the overall trading network and do not cause a clash between security and ease of working (bottleneck effect). Price uniformity also needs to be addressed via some consensual regulations by various trading platforms and traders across various cryptocurrency networks, including Bitcoin (6).

Overall, it is clear that cryptocurrency has its advantage, benefits, and positive outlook. Yet, for it to be the medium of exchange in the coming future, it must target its shortcomings effectively and win the trust of nations worldwide in conformity with their respective budgetary, trade, and banking regulations.

References

1. Katalyse. Major Problems in the Cryptocurrency Market | Hacker Noon [Internet]. hackernoon.com. 2018. Available from: https://hackernoon.com/major-problems-in-the-cryptocurrency-market-c9c9ff53b266
2. Nelson A. Cryptocurrency Regulation in 2018: Where the World Stands Right Now [Internet]. Bitcoin Magazine – Bitcoin News, Articles, and Expert Insights. 2018 [cited 2022 Oct 23]. Available from: https://bitcoinmagazine.com/business/cryptocurrency-regulation-2018-where-world-stands-right-now
3. SciShow. Bitcoin: How Cryptocurrencies Work [Internet]. YouTube. 2016. Available from: https://www.youtube.com/watch?v=kubGCSj5y3k
4. Ashford K. What Is Cryptocurrency? [Internet]. Forbes Advisor. 2020. Available from: https://www.forbes.com/advisor/investing/cryptocurrency/what-is-cryptocurrency/
5. Business Insider India. Ten countries that banned cryptos, calling them threats, Ponzi schemes & more [Internet]. Business Insider. 2021 [cited 2022 Oct 23]. Available from: https://www.businessinsider.in/cryptocurrency/news/top-10-countries-where-cryptocurrency-is-banned/articleshow/93029397.cms
6. Munro A. The six challenges and solutions for cryptocurrency adoption | Finder [Internet]. finder.com.au. 2018. Available from: https://www.finder.com.au/the-six-challenges-and-solutions-for-cryptocurrency-adoption

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