Cryptocurrency

Cryptocurrency  is a type of digital currency , the accounting of internal units of account of which is ensured by a decentralized payment system (there is no internal or external administrator or any analogue), operating in a fully automatic mode. The cryptocurrency itself does not have any special material or electronic form - it is simply a number indicating the number of data units of account, which is recorded in the corresponding position of the information packet of the data transfer protocol and is often not even encrypted, like all other information about transactions between system addresses.

The term cryptocurrency was established after the publication of an article about the Bitcoin system “Crypto currency”, published in 2011 in Forbes magazine . At the same time , the creator of Bitcoin and many other authors used the term “ electronic cash ”.

Cryptographic methods are involved in the mechanisms for generating an address and checking authority to operate with it ( digital signature based on a public key system , the order is available exclusively to the owner of the secret key corresponding to a given address), as well as the formation of a transaction package and its relationship with other packages (sequential hashing , which makes it impossible to change information about the amount of cryptocurrency). At the same time, the system does not have any information about the owners of the addresses or about the fact that the address was created (the address can be generated completely autonomously, without even connecting to the network and without reporting anything to the network in the future) - that is, there is no mechanism to verify that the recipient's address really exists or that the access key to it has not been lost. The absence of information about the owner is the basis (but is not limited to this) of anonymity of transaction participants. In terms of their economic conditions and consequences, cryptocurrency payments are more similar to cash payments than to non-cash payment options, although cryptocurrencies are being developed primarily for remote purchases (for example, over the Internet).

Payment (transfer of cryptocurrency between addresses) occurs without intermediaries and is irreversible - there is no mechanism for canceling a confirmed transaction, including cases when the payment was sent to an erroneous or non-existent address, or when the transaction was made by third parties who became aware of the private key. No one can block (arrest) cryptocurrency either at a specific address or in general, even temporarily; it is always at the disposal of the owner of the private key to this address. True, multi-signature technology allows you to voluntarily involve a third party (arbiter) and implement “reversible transactions” that can occur against the will of one of the parties. More complex conditions ( smart contracts ) are implemented using special scripting languages. The problem of double spending inherent in electronic payments is solved by using technologies such as blockchain, directed acyclic graph, consensus registry (ledger) and others. Transaction information is usually not encrypted and is available in clear text without registration in the system

The rules for the formation of a new amount of cryptocurrency (emission) are initially established by the protocol. Usually they are of a lottery nature, with the probability of winning influenced by various factors - the speed of solving the established problem ( mining ) or the size of ownership of the established resource ( forging ). In some cases, part or all of the declared volume of cryptocurrency is initially formed and distributed by the organizers by subscription ( ICO ). Usually only one technology is used, but some cryptocurrencies use combinations of them. About the economic essence and , a specific product, an electronic asset, may have restrictions on circulation (for example, a ban on transactions with them for banking institutions). legal status of cryptocurrencies . In different countries, cryptocurrencies are considered as a means of payment.

Review

With the development of electronic systems, ideas have repeatedly arisen to create an electronic analogue of cash for remote payment. But the stumbling block was the potential for double spending the same funds. When paying in cash, double spending never occurs due to the fact that the payment is accompanied by the transfer of money and the buyer cannot pay it again to another seller - after all, he no longer has this money. But electronic systems inherently have the ability to copy state, which allows you to make complete copies of the system and then make several payments from the same starting state, that is, spend the same funds in different directions. The problem was solved only with the help of trusted intermediaries who keep records of payments and guarantee payments only within the limits of the availability of funds. This is exactly how all non-cash payment systems work - traditionally, banks or other payment system operators act as intermediaries .

Cryptocurrency technology was initially aimed at the absence of a trusted node - one whose actions are guaranteed to be true and who can confirm the correctness of other people's operations (see the problem of the Byzantine generals ). This problem was first solved in the Bitcoin system by artificially making it more difficult to make changes to the transaction history register. To store information, transactions are combined into blocks, from which a continuous chain ( blockchain ) is formed. Continuity is ensured not so much by numbering, but by including a hash sum in the current blockthe previous block, which does not allow you to change the information in the block without changing the hashes in all subsequent blocks. All hashes meet certain requirements; generating hashes that meet these requirements is either time-consuming or very expensive. Only the longest chain is considered true. In different cryptocurrencies, the right to form the next block is received by someone who has completed 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 a basis, which easy to verify, but difficult to execute or fake.

The absence of any internal or external administrator for cryptocurrencies leads to the fact that banks, tax, judicial and other public or private authorities cannot influence the transactions of any participants in the payment system. The transfer of cryptocurrencies is irreversible - no one can cancel, block, challenge or force (without a private key ) a transaction. However, parties to a transaction can voluntarily temporarily mutually block their cryptocurrencies as collateral or invite an additional arbitrator and establish that the consent of all (or at least a specified number) of parties is required to complete the transaction.

As a rule, in cryptocurrencies, developers initially stipulate the upper limit of the total emission volume. However, some cryptocurrencies, such as PPCoin, Novacoin, Sifcoin and others, do not have a fixed upper limit on the total emission volume and both emission and de-emission 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 information about the owners of the addresses. However, the identity of the owner can be established if additional information associated with this address becomes known (for example, during transactions through exchange services). For additional anonymization, it is recommended to use different addresses for working with different clients. There are also separate services (“mixers”) that, by passing through payments from many clients, disguise real payers. ZeroCash offers the opportunity to replace pseudonymity with anonymity.

History

Cryptography for confidential payments began in 1990 in the DigiCash system of David Chaum , whose company went bankrupt in 1998. This payment system was centralized.

The term “cryptocurrency” first began to be used after the advent of the Bitcoin payment system , which was developed in 2009 by a person or group of people under the pseudonym Satoshi Nakamoto (the identity has not yet been established). The term “cryptocurrency” became widespread after the publication of an article by Andy Greenberg entitled “Crypto Currency” in Forbes on April 20, 2011.

Later forks appeared: 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, has no upper limit on the emission volume), 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 code of the Bitcoin system. Since July 2013, other platforms began to appear, into which various infrastructure was integrated - exchange services, stores, instant messengers, etc. Such crypto platforms include: Bitshares, Mastercoin, Nxt and others.

Altcoins

Altcoins are all cryptocurrencies that appeared after Bitcoin.

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) or use blockchain technology in other areas (Namecoin was developed to build alternative root DNS servers).

Many altcoins are very similar in nature to Bitcoin, have similar characteristics and can be run using the same hardware as Bitcoin, but some cryptocurrencies have significant differences. Ethereum, through the use of “smart contracts”, has become a crypto-platform. The independence from Bitcoin is even more visible in Ripple, which is actually a centralized system. A number of cryptocurrencies, such as Dash, have emphasized increased anonymity.

Sometimes a new cryptocurrency appears as a branch (fork) from another cryptocurrency due to changes in parameters that make the data of the old and new systems incompatible. This usually happens when some participants switch to a new protocol, while others adhere to the old one. Moreover, both cryptocurrencies can have a common transaction history - which accumulated before the moment of their separation.

Acquisition and exchange

There are various ways to purchase cryptocurrencies. New (issued) quantities are usually distributed according to initially established procedures specific to each cryptocurrency (mining, forging, ICO). Mining and forging are aimed at building a blockchain: the creators of new blocks are rewarded with a certain amount of emitted cryptocurrency and there is usually no other way to put it into circulation. An ICO is a way to attract funding through the sale of batches of a new cryptocurrency that were initially generated and received by the ICO organizer.

After the initial distribution of the new issue, others can receive cryptocurrency from those who already own it - in exchange for regular money, either for goods or services provided, or 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 platforms.

Legal regime

The legal regime for cryptocurrencies varies greatly from country to country and remains unclear 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 banned bitcoin transactions for Chinese financial institutions in early 2014, but did not prohibit citizens from trading in cryptocurrencies.

In Russia, cryptocurrencies as such are not subject to a 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. However, the circulation of cryptocurrency is subject to Law 159, 172 of the Criminal Code of the Russian Federation.

Government agencies, departments and courts in different countries classify cryptocurrencies differently. On March 25, 2014, the US Internal Revenue Service (IRS) ruled that Bitcoin would be treated as property for tax purposes rather than as a currency. This means that Bitcoin will be subject to capital gains tax . One of the benefits of this solution is that it clarifies the status of Bitcoin. Investors no longer have to worry about whether Bitcoin investments or profits are illegal or how to report them to the IRS. A paper published by researchers from Oxford and Warwick showed that Bitcoin has characteristics closer to the precious metals market than to the traditional currency market, consistent with the IRS ruling.

On October 22, 2015, the European Court of Justice ruled that transactions exchanging bitcoins for fiat money are exempt from VAT. Bitcoin transactions have been classified as payment transactions involving currencies, coins and banknotes, and are therefore not subject to VAT. The court recommended that all EU member countries exclude cryptocurrencies from the list of assets subject to taxation.

In March 2016, the Cabinet of Ministers of Japan approved a package of bills that, in particular, recognized Bitcoin as legal tender.

Fraud

On August 6, 2013, Magistrate Judge Amos Mazant of the Federal Court for the Eastern District of Texas ruled that since cryptocurrency (specifically Bitcoin) can be used as money (it can be used to purchase goods and services, pay for individual living expenses, and exchange for ordinary currencies), it is a currency or form of money. This ruling allowed the US Securities and Exchange Commission to have jurisdiction over cases of securities fraud involving cryptocurrency.

GBL, a Chinese Bitcoin trading platform, suddenly closed on October 26, 2013. Subscribers unable to log in lost up to $5 million in Bitcoin.

In February 2014, the cryptocurrency made headlines due to the world's largest Bitcoin exchange: Mt. Gox declared bankruptcy . The company said it lost nearly $473 million from its customers' bitcoins, likely due to the theft. This was equivalent to approximately 750,000 bitcoins, or about 7% of all bitcoins then in existence. Due to this crisis, among other news, the price of Bitcoin fell from a high of about $1,160 in December to less than $400 in February.

On March 31, 2015, two former DEA and Secret Service agents were charged with digital fraud  , money laundering and other crimes for allegedly stealing Bitcoin during the federal Silk Road investigation . underground illegal black market, shut down by federal prosecutors in 2013.

On December 1, 2015, the owner of the now-defunct GAW Miners website was charged with securities fraud following his development of a cryptocurrency known as Paycoin. He is accused of running a complex pyramid scheme under the guise of “cloud mining” with mining equipment located in a data center. He claimed that cloud miners, known as "hashlets", would mine cryptocurrency in the cloud "Zenportal", when in fact there were no miners. Zenportal had over 10,000 users who purchased hashlets totaling over US$19 million.

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

On November 21, 2017, the Internet company Tether, which supports a cryptocurrency with a claim to be a fiduciary money, was hacked, losing $31 million in the form of USDT from its main wallet. The company "flagged" the stolen currency, hoping to "lock" it into the hacker's wallet (rendering it unusable). Tether indicates that it is creating a new core for its main wallet in response to the attack to prevent the use of stolen coins.

According to the US Federal Trade Commission, in the first quarter of 2021 alone, 7 thousand people were affected by crypto fraud, the total amount of losses exceeded $80 million (average losses - $3.25 thousand).

Markets on the darknet

Cryptocurrency is also used in online black markets such as Silk Road. The original Silk Road closed in October 2013, and since then two more options have emerged; the current version is Silk Road 3.0. The successful Silk Road format is widely used in online dark markets, leading to the subsequent decentralization of the online black market. Within a year of the closure of the original Silk Road, the number of visible black markets increased from four to twelve, and the volume of drug listings increased from 18,000 to 32,000 entries.

Markets on the dark web face increasing challenges regarding legality. 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 increases pressure on law enforcement agencies around the world, creating obstacles to diverting drug trafficking from black markets.

Since most markets on the darknet run through Tor, they can be found with relative ease on public domains. This means that their addresses can be found, as well as customer reviews and open forums regarding drugs sold on the market, without incriminating the users. This anonymity allows users on both sides of dark markets to evade law enforcement. As a result, law enforcement agencies are pursuing a campaign to target individual drug markets and dealers to reduce supply. However, dealers and suppliers can stay one step ahead of law enforcement agencies who cannot keep up with the rapidly expanding and anonymous dark markets.

ICO

An ICO is an unregulated means by which funds are raised for a new venture in the form of cryptocurrency. ICOs are used by startups to bypass the strict and regulated capital raising processes required by venture capitalists or banks. In an ICO campaign, a percentage of a cryptocurrency is sold to early backers of the project in exchange for legal tender or other cryptocurrencies, often Bitcoin or Ethereum.

In mid-2017, the US Securities and Exchange Commission (SEC) published clarifications about ICOs and their risks and comparison with traditional investment methods. The Commission emphasized that this technology can be used to provide fair and legal investment opportunities, and proposed to regulate offerings in accordance with the US Securities Exchange Act of 1934, in particular, registering the offer and sale of tokens with the SEC.

On September 4, 2017, seven Chinese financial regulators officially banned all ICOs in the PRC , requiring that proceeds from all already completed ICOs be refunded to investors, otherwise the violator will be "severely punished according to the law"; this action on the part of Chinese regulators led to large sales and a depreciation of most cryptocurrencies, before this ban, ICOs attracted the equivalent of almost $400 million from approximately 100 thousand investors. However, a week later, a Chinese financial official said on Chinese national television that the ban on ICOs was only temporary until rules and standards governing ICOs were in place.

ICOs are also prohibited in South Korea at the legislative level.

In September 2017, the Australian Securities and Investments Commission (ASIC) published guidance on the legal responsibilities for companies that organize ICOs.

Criticism

• Cryptocurrencies are often compared to pyramid schemes and economic bubbles, such as the real estate bubble. Howard Marks of Oaktree Capital Management stated in 2017 that digital currencies are "nothing more than a baseless mania (or perhaps a pyramid scheme) based on the desire to give weight to something of which there is very little or nothing except what people will pay for it,” and compared it to the Tulip Mania (1637), the South Sea Company Ponzi scheme (1720), and the Dot-com Bubble (1999). There are also examples of obvious fraud in this area: parasitizing on the lack of awareness of the population about the features of cryptocurrencies, the OneCoin system was created , which was positioned as a cryptocurrency, but was initially a financial pyramid; all information was centralized only by the issuing company, and the latter could arbitrarily change any data, since there was no blockchain, it was only imitated by a regular SQL database.
• Robert Shiller, an American economist and winner of the Alfred Nobel Prize in Economics , believes that Bitcoin demonstrates similarities to an economic bubble. At the same time, any commerce using cryptocurrencies will suffer from their enormous instability.
• Paul Krugman, also a Nobel laureate in economics, is very skeptical about claims that the future of finance lies in crypto assets. He points out that cryptocurrencies have never found widespread use, except in the sphere of illegal activities. He also points out the similarities of the cryptocurrency market to the subprime mortgage bubble of 2007-2008.
• Former head of the Federal Reserve, Alan Greenspan, called bitcoin a bubble without inherent value.
• On March 14, 2014, businessman Warren Buffett in the television program “Squawk Box” called Bitcoin a “mirage” and advised to “stay away from it”.
• Australian economist John Quiggin, in the article “The Bitcoin Bubble and the Bad Hypothesis”, argues that “Bitcoin is the best example of a pure bubble.” Like any monetary asset, from gold to tobacco to US dollars, Bitcoin's value will remain as long as people are willing to accept it. But the willingness to take assets always depends on the value of the asset, which depends on its utility, and not solely on the willingness of other people to own it. Tobacco can be smoked, gold can be made into jewelry, and US dollars can be used to pay off obligations to the US government. But Bitcoin has no source of value. If bitcoins are no longer accepted for payment for goods and services, then their value is guaranteed to become zero. At the same time, bitcoins demonstrate inconsistency efficient market hypothesis , according to which the market value of an asset is determined by the current assessment of the value of the services or income stream that the asset will generate. Cryptocurrencies do not directly generate any income, which means their price should tend to zero.
• Experts from the investment bank Goldman Sachs, having compared the quotes of Bitcoin, Ethereum and shares of companies that announced the introduction of blockchain technology into their business, concluded that a huge bubble has formed around the crypto industry.
• In October 2017, BlackRock CEO Larry Fink said that Bitcoin is a “money laundering index”. Many other authors believe that digital money can become tools for anonymous Internet criminals; money laundering through cryptocurrencies can be achieved through anonymous transactions since this method of exchange is difficult (and in some cases, impossible) to track; it can make tax evasion easier for individuals.
• First Deputy Chairman of the Central Bank of the Russian Federation Ksenia Yudaeva said: “During the discussion at the G20 , it was noted that cryptoassets as a means of payment are “hundreds of times less effective than traditional payment systems”.
• In June 2022, Bill Gates stated that cryptocurrencies are “100% based on the greater fool theory ”.
• In December 2022, the head of the Reserve Bank of India, Shaktikanta Das, said that private cryptocurrencies could cause the next global financial crisis due to their purely speculative nature. He believes that the state should prohibit such private projects and not even begin to regulate them, since any regulation will allow speculative operations to grow, which will inevitably lead to a financial crisis.