The Question of Regularization and Stability of Cryptocurrencies
Economics has always stood on the foundation of exchange in varying forms, ranging from good for good system of exchange (barter system), to the common paper and plastic currency, regulated by the use of cash and digital mediums of exchange respectively. While the primitive barter system dominated the underdeveloped economy for a long period of time, the use of metallic coins as the first form of currency revolutionised the way in which global transactions were made. The introduction of paper currency and the latest plastic money (debit and credit cards) were another step towards a modern economy. Yet, these mediums of exchange, being centralised by government agencies, posed several problems including 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 which is decentralised i.e. free from any form of central control by a central organisation or entity. In this way, currency values are decided purely by transaction 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, major one being its regulation and stability. Exploitative capitalism of cryptocurrency, leading to a few ‘miners’ (individuals involved in the cryptocurrency market) controlling the price of the currency 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 which we also need to seriously consider for it to be effective, transparent, fair, safe and secure in true sense.
- 1 Definition of Key Terms
- 2 Background Information
- 3 The Creation of Bitcoin- Cryptocurrency takes birth
- 4 Concept of The Bitcoin network- Working with Cryptography
- 5 Security in the Bitcoin Network- Wallets and Keys
- 6 The Other side of the Coin….
- 7 Major Countries and Organisations Involved
- 8 Previous Attempts to solve the Issue and Possible Solutions
- 9 Bibliography
Definition of Key Terms
The art of writing, designing and deciphering codes so that only those for whom the information is intended can read, analyse and process it. It is widely used in cyber networks to ensure security and safety of information and to prevent its potential misuse.
Pieces of digital information that 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 sequence secures.
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 who are involved in the exchange network. It is a form of a ‘record document’ for the transactions between individuals in the network.
Individuals involved in the Cryptographic exchange network who compete to solve cytological (mathematical) cryptographic problems(codes) and get rewarded with cryptocurrency in return.
A decentralised digital currency with no organisational regulation to decide supply and demand. Potential benefits include safety, security and stronger ownership of personal wealth. However, regulation and inhibition of strong control by handful of influential personnel remains a challenge.
Stands for Peer- to- Peer Network. Refers to transactions between two personnel on a public platform, but the transaction itself is private between two individuals. A common feature seen on several cryptocurrency networks and platforms, particularly in the Bitcoin Network.
Satoshi Nakamoto is the common name used for the people/person who developed the first cryptocurrency in existence- the Bitcoin. The Bitcoin was not only the first Cryptocurrency in existence; it was also the first P2P Blockchain network as well. Officially initiated on 9 January 2009, the Bitcoin network has since grown at a tremendous rate, and today its value stands at almost $6,350/bitcoin. Such a massive increase in the value of the 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 analyse that now.
The Creation of Bitcoin- Cryptocurrency takes birth
The purpose of inventing Bitcoin was to create a new, improved cash system which could keep a better check on 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, and you purchased a milk carton of $10, as well as a chocolate bar of $10, you would be double spending. Such a practice was based on ‘manipulating’ the cash/credit system, something which Nakamoto typically wanted to curb.
The advent of Bitcoin introduced the alternative of a decentralised cash system, without any ‘physical’ money with intrinsic value. This system was not under any organisational control which made it free to be controlled by trade between those involved in the network. As the trade of the entity would increase, so would its value, and that’s exactly would drove Bitcoin to the position it stands at today. From a wider perspective, Bitcoin wasn’t just a new cash system, it was the world’s first ‘Cryptocurrency’. It had no physical significance, and yet its trade was carefully secured by advanced use of Cryptography and cytological sequences.
Concept of The Bitcoin network- Working with Cryptography
Bitcoin worked as a Peer-to-Peer Blockchain network, with each Miner having his/her own blockchain, which kept record of Bitcoin exchanges between Miners. Private transactions took place on a public forum i.e. The Bitcoin network. Once these transactions were successful, they were publicly
broadcasted, after which they were authenticated and then taken down by each of the Miners in their respective blockchains. But how were these Bitcoins formed in the first place?
Bitcoins can be formed in only one way- by solving a cytological problem in the Cryptographic Bitcoin network. The one who solves the cytological problem the fastest is rewarded with newly formed Bitcoins. Miners therefore compete to solve a cytological problem (mathematical sequence) by finding a suitable HASH Function. HASH functions are specialised cryptographic entities that are used to crack a mathematical cryptographic sequence.
Security in the Bitcoin Network- Wallets and Keys
Each Miner in the Bitcoin network has his/her own 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 own significance and individual role to play.
- PRIVATE KEY – It is used to sign and authenticate various messages and data. It is used by the individual himself/herself to authenticate a transaction he/she has 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.
- PUBLIC KEY- It is a common key in the public domain of the network which is used by the other members of the network 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 block chains.
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 clearly indicate where the fault lies.
The Other side of the Coin….
Though Cryptocurrencies such as Bitcoin have their advantages, the challenges they face and drawbacks they have also need to be taken under serious consideration. 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, and this makes Cryptocurrencies very risky to be used 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 are able to swing the odds in their favour, leaving Miners with medium or small cryptocurrency holdings helpless and exploited.
Another challenge that the Cryptocurrency market faces is the occurrence of ‘Pump and Dump Initial Coin Offering( ICO ) schemes. In ICOs, market investors buy certain number of tokens for money, which they use in the cryptocurrency market, with expectations of profit. However, sometimes websites providing ICO Schemes turn out to be 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 which has persisted right from the start.
Lack of Price Uniformity is yet another drawback pertaining to Cryptocurrencies. The value of the same Cryptocurrency may vary on different exchange platforms, and this make price charting of the Cryptocurrency quite difficult. This further adds to the volatility of the currency in 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 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 favour.
Hence, in spite of the several advantages and deals it proposes, Cryptocurrency use has its risks. The Cryptocurrency network may be the future without denial, but for it to be revolutionary in true sense, the drawbacks and challenges it poses must be seriously addressed and resolved by proper consensus and economic tactics.
Major Countries and Organisations Involved
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, therefore 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 start-ups such as Paxful, a P2P bitcoin trade service. Being home to one of the highest number of internet users in the world, Estonia can surely be the place where a cryptocurrency such as Bitcoin would be welcomed.
The United States of America
Right from the beginning, the USA has been at the forefront to witness 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 of exponential trade volumes and blockchain start ups, particularly in Silicon Valley. Being a global economic superpower, smaller nations often take advice from the USA regarding policies and framework for the regulation of cryptocurrency networks active in their respective territories.
Nepal is one of the few countries that declares Bitcoin and other Cryptocurrencies to be illegal. On 30th June 2017, Nepalese Officials formally declared Bitcoin and cryptocurrencies to be illegal and holding cryptocurrencies was put down as a criminal offence. Individuals involved in Bitcoin exchange have been arrested on several occasions in the country, major one of which took place in October 2017, when 7 individuals accused of being in involved in Bitcoin exchange operations were arrested by Nepal’s Central Investigation Bureau (CIB).
Bolivia is another country strongly hostile to the use of Bitcoin and other Cryptocurrencies. Bolivia banned the use of Bitcoin and other cryptocurrencies such as namecoin, peercoin, Quark etc. in 2014. The ban was put in place to protect the Bolivano( the national currency of Bolivia), and with the intention of securing 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 the use of decentralised 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 stabilise 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 decentralised 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 towards 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.
To really stabilise the regularise cryptocurrencies, strong emphasis needs to be placed on the root causes of the volatility and loopholes of security that may persist in their use. Firstly, the volatility of Cryptocurrencies and subsequent price manipulation by Whales. Obviously, the activity of whales hence needs to be controlled. For this, Buy and Sell Walls need 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 make sure 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 to governments themselves. Cybercriminal activities are also an issue of concern which need to be addressed. For this, adequate precautionary measures needs to be taken by traders and platform operators, 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.
Overall, its clear that though cryptocurrency has its advantage, has its benefits and has its positive outlook. Yet, for it to be the medium of exchange in the coming future, it needs to target its shortcomings effectively and needs to win the trust of nations worldwide, in conformity with their respective budgetary, trade and banking regulations.
- Nelson, Andrew. “Cryptocurrency Regulation in 2018: Where the World Stands Right Now.” Bitcoin Magazine, Bitcoin Magazine, www.bitcoinmagazine.com/articles/cryptocurrency-regulation-2018-where-world-stands-right-now/.
- scishow. “Bitcoin: How Cryptocurrencies Work.” YouTube, YouTube, 21 Dec. 2016, www.youtube.com/watch?v=kubGCSj5y3k.
- Mills, Brad, et al. “What Is Cryptocurrency: Everything You Need To Know [Ultimate Guide].” Blockgeeks, 1 Jan. 1968, www.blockgeeks.com/guides/what-is-cryptocurrency/.
- . “Major Problems in the Cryptocurrency Market – Hacker Noon.” Hacker Noon, Hacker Noon, 25 Jan. 2018, www.hackernoon.com/major-problems-in-the-cryptocurrency-market-c9c9ff53b266.
- “6 Cryptocurrency Problems and Fixes – Hacker Noon.” Hacker Noon, Hacker Noon, 13 Jan. 2018, www.hackernoon.com/6-cryptocurrency-problems-and-fixes-e937d1111beb.
- “Countries Where the Cryptocurrencies Are Banned: Busted for Bitcoin.” Bitnewstoday, www.bitnewstoday.com/market/bitcoin/countries-where-the-cryptocurrencies-are-banned-busted-for-bitcoin/.