Question

1. What is cryptocurrency? Explain how cryptocurrency differs from crypto-asset

2. How does distributed ledger technology (DLT) work? What is blockchain?

3.(a) What are the three purposes of money? Does cryptocurrency fulfill these purposes?
(b) What is fiat currency? Is Bitcoin a fiat currency?

Answer 1

Answer1.

A icrypto icurrency iis ia idigital ior ivirtual icurrency ithat iis isecured iby icryptography, iwhich imakes iit inearly iimpossible ito icounterfeit ior idouble-spend. iMany icrypto icurrencies iare idecentralized inetworks ibased ion iblock ichain itechnology ia idistributed iledger ienforced iby ia idisparate inetwork iof icomputers. iA idefining ifeature iof icrypto icurrencies iis ithat ithey iare igenerally inot iissued iby iany icentral iauthority, irendering ithem itheoretically iimmune ito igovernment iinterference ior imanipulation.

1. A icrypto icurrency iis ia inew iform iof idigital iasset ibased ion ia inetwork ithat iis idistributed iacross ia ilarge inumber iof icomputers. iThis idecentralized istructure iallows ithem ito iexist ioutside ithe icontrol iof igovernments iand icentral iauthorities.

2. The iword i“crypto icurrency” iis iderived ifrom ithe iencryption itechniques iwhich iare iused ito isecure ithe inetwork.

3. Block ichains, iwhich iare iorganizational imethods ifor iensuring ithe iintegrity iof itransactional idata, iis ian iessential icomponent iof imany icrypto icurrencies.

4. Many iexperts ibelieve ithat iblock ichain iand irelated itechnology iwill idisrupt imany iindustries, iincluding ifinance iand ilaw. i

5. Crypto icurrencies iface icriticism ifor ia inumber iof ireasons, iincluding itheir iuse ifor iillegal iactivities, iexchange irate ivolatility, iand ivulnerabilities iof ithe iinfrastructure iunderlying ithem. iHowever, ithey ialso ihave ibeen ipraised ifor itheir iportability, idivisibility, iinflation iresistance, iand itransparency.

A icrypto iasset iand ia icrypto icurrency ihave ithe isame idefinition iaccounting-wise. iEither iit iemphasizes ion ithe icryptographic iasset ior ithe icryptographic icurrency. iIn iboth icases, ithose iare idigital iassets, inot iphysical iones, iand ithey istand ion ithe iasset ipart iof ithe ibalance isheet. iIt’s isometimes ichallenging ito iclearly idefine iin iwhich icategory iof iassets ithey istand.

Among idigital icurrencies, iwe icount icrypto icurrencies iand ivirtual icurrencies. iSome icharacteristics imake ia icurrency imore icryptographic ivs. ia ivirtual ione:

1. Decentralization, ipreventing ithe icontrol iby ia icentralized ithird iparty, ithus icensorship-resistant.

2. Unregulated ior inot iyet iregulated. i(the iknow iyour icustomer iand ianti-money ilaundering irules iare inot ialways iapplied).

3. The icode iguarantees ifunctionalities/characteristics ion ia ipublic iledger i(block ichain). iExamples iare imining, istaking, igovernance, iand iimmutability.

Answer i2.

A idistributed iledger iis ia idatabase ithat iis iconsensually ishared iand isynchronized iacross imultiple isites, iinstitutions, ior igeographies, iaccessible iby imultiple ipeople. iIt iallows itransactions ito ihave ipublic i"witnesses". iThe iparticipant iat ieach inode iof ithe inetwork ican iaccess ithe irecordings ishared iacross ithat inetwork iand ican iown ian iidentical icopy iof iit. iAny ichanges ior iadditions imade ito ithe iledger iare ireflected iand icopied ito iall iparticipants iin ia imatter iof iseconds ior iminutes.

1. A idistributed iledger iis ia idatabase ithat iis isynchronized iand iaccessible iacross idifferent isites iand igeographies iby imultiple iparticipants.

2. The ineed ifor ia icentral iauthority ito ikeep ia icheck iagainst imanipulation iis ieliminated iby ithe iuse iof ia idistributed iledger.

3. Underlying idistributed iledgers iis ithe isame itechnology ithat iis iused iby iblock ichain, iwhich ibit icoin iuses ias iits idistributed iledger.

4. A idistributed iledger ican ibe idescribed ias ia iledger iof iany itransactions ior icontracts imaintained iin idecentralized iform iacross idifferent ilocations iand ipeople.

5. Cyber-attacks iand ifinancial ifraud iare ireduced iby ithe iuse iof idistributed iledgers.

Block ichain iis ione itype iof ia idistributed iledger. iDistributed iledgers iuse iindependent icomputers i(referred ito ias inodes) ito irecord, ishare iand isynchronize itransactions iin itheir irespective ielectronic iledgers i(instead iof ikeeping idata icentralized ias iin ia itraditional iledger). iBlock ichain iorganizes idata iinto iblocks, iwhich iare ichained itogether iin ian iappend ionly imode.

i i i i i i i i i i i i i i i i i i i i i i i i i i i i i i i i i i i i i i iBlock ichain/ iDLT iare ithe ibuilding iblock iof i“internet iof ivalue,” iand ienable irecording iof iinteractions iand itransfer i“value” ipeer-to-peer, iwithout ia ineed ifor ia icentrally icoordinating ientity. i“Value” irefers ito iany irecord iof iownership iof iasset i-- ifor iexample, imoney, isecurities, iland ititles i-- iand ialso iownership iof ispecific iinformation ilike iidentity, ihealth iinformation iand iother ipersonal idata.

Distributed iledger itechnology i(DLT) icould ifundamentally ichange ithe ifinancial isector, imaking iit imore iefficient, iresilient iand ireliable.

a. This icould iaddress ipersistent ichallenges iin ithe ifinancial isector iand ichange iroles iof ifinancial isector istakeholders. iDLT ihas ithe ipotential ito itransform ivarious iother isectors ias iwell, ilike imanufacturing, igovernment ifinancial imanagement isystems iand iclean ienergy.

b. Since ithis itechnology iis istill inascent, ithe iWorld iBank iGroup idoesn’t ihave igeneral irecommendations iabout iits iuse ifor iinternational idevelopment. i iWe iare iin idialogue iwith istandard-setting ibodies, igovernments, icentral ibanks iand iother istakeholders ito imonitor, iresearch iand ipilot iapplications ibased ion iblockchain iand iDLT.

c. However, iwaiting ifor i“perfect” iDLT isolutions icould imean imissing ian iopportunity ito ihelp ishape iit. iTo iunderstand ihow iDLT ican iaddress ichallenges iin ithe ifinancial isector irequires iboth iresearch iand ireal-life iapplications iand ipilots.

d. It ialso irequires iresolving iconsumer iprotection iissues, ifinancial iintegrity iconcerns, ispeed iof itransactions, ienvironmental ifootprint, ilegal, iregulatory iand itechnological iissues ithat iarise iwith ithe iadvent iof inew itechnology.

e. DLT iapplications iwill ilikely ibe iincremental, iand iwill ilikely ifirst ireplace iprocesses iand iactivities ithat iare istill imanual iand iinefficient. i(Such ias ireference idata imaintenance iin ipayment iand isettlement isystems, itrade ifinance, isyndicated iloans, iand itracking iprovenance iof iagricultural iproducts iand icommodities, itheir isubsequent isale ior iuse ias ifinancing icollateral.) i

f. Eventually, iDLT icould iincrease iefficiency iand ilower iremittance icosts, iand ipotentially iimprove iaccess ito ifinance ifor iunbanked ipopulations, iwho iare icurrently ioutside ithe itraditional ifinancial isystem.

Answer3.

Fiat imoney iis igovernment-issued icurrency ithat iis inot ibacked iby ia iphysical icommodity, isuch ias igold ior isilver, ibut irather iby ithe igovernment ithat iissued iit. iThe ivalue iof ifiat imoney iis iderived ifrom ithe irelationship ibetween isupply iand idemand iand ithe istability iof ithe iissuing igovernment, irather ithan ithe iworth iof ia icommodity ibacking iit ias iis ithe icase ifor icommodity imoney. iMost imodern ipaper icurrencies iare ifiat icurrencies, iincluding ithe iU.S. idollar, ithe ieuro, iand iother imajor iglobal

a. Fiat imoney iis ia igovernment-issued icurrency ithat iisn't ibacked iby ia icommodity isuch ias igold.

b. Fiat imoney igives icentral ibanks igreater icontrol iover ithe ieconomy ibecause ithey ican icontrol ihow imuch imoney iis iprinted.

c. Most imodern ipaper icurrencies, isuch ias ithe iU.S. idollar, iare ifiat icurrencies.

d. One idanger iof ifiat imoney iis ithat igovernments iwill iprint itoo imuch iof iit, iresulting iin ihyperinflation.

Fiat imoney ionly ihas ivalue ibecause ithe igovernment imaintains ithat ivalue, ior ibecause itwo iparties iin ia itransaction iagree ion iits ivalue. iHistorically, igovernments iwould imint icoins iout iof ia ivaluable iphysical icommodity, isuch ias igold ior isilver, ior iprint ipaper imoney ithat icould ibe iredeemed ifor ia iset iamount iof ia iphysical icommodity. iFiat imoney iis iinconvertible iand icannot ibe iredeemed. iThe iword i"fiat" icomes ifrom ithe iLatin iand iis ioften itranslated ias ithe idecree i"it ishall ibe" ior i"let iit ibe idone."

Bit icoin iis ia idigital icurrency icreated iin iJanuary i2009 ifollowing ithe ihousing imarket icrash. iIt ifollows ithe iideas iset iout iin ia iwhitepaper iby ithe imysterious iand ipseudonymous iSatoshi iNakamoto. iThe iidentity iof ithe iperson ior ipersons iwho icreated ithe itechnology iis istill ia imystery. iBit icoin ioffers ithe ipromise iof ilower itransaction ifees ithan itraditional ionline ipayment imechanisms iand iis ioperated iby ia idecentralized iauthority, iunlike igovernment-issued icurrencies.

There iare ino iphysical ibit icoins, ionly ibalances ikept ion ia ipublic iledger ithan ieveryone ihas itransparent iaccess ito, ithat i– ialong iwith iall iBit icoin itransactions i– iis iverified iby ia imassive iamount iof icomputing ipower. iBit icoins iare inot iissued ior ibacked iby iany ibanks ior igovernments, inor iare iindividual ibit icoins ivaluable ias ia icommodity. iDespite iit inot ibeing ilegal itender, iBit icoin icharts ihigh ion ipopularity, iand ihas itriggered ithe ilaunch iof ihundreds iof iother ivirtual icurrencies icollectively ireferred ito ias iAltcoins.

Bit icoins ican ibe iused ito ibuy imerchandise ianonymously. iIn iaddition, iinternational ipayments iare ieasy iand icheap ibecause ibit icoins iare inot itied ito iany icountry ior isubject ito iregulation. iSmall ibusinesses imay ilike ithem ibecause ithere iare ino icredit icard ifees. iSome ipeople ijust ibuy ibit icoins ias ian iinvestment, ihoping ithat ithey’ll igo iup iin ivalue.

Bit icoin iis ia icollection iof icomputers, ior inodes, ithat iall irun iBit icoin’s icode iand istore iits iblock ichain. iA iblock ichain ican ibe ithought iof ias ia icollection iof iblocks. iIn ieach iblock iis ia icollection iof itransactions. iBecause iall ithese icomputers irunning ithe iblock ichain ihave ithe isame ilist iof iblocks iand itransactions iand ican itransparently isee ithese inew iblocks ibeing ifilled iwith inew iBit icoin itransactions, ino ione ican icheat ithe isystem. iAnyone, iwhether ithey irun ia iBit icoin i"node" ior inot, ican isee ithese itransactions ioccurring ilive. iIn iorder ito iachieve ia inefarious iact, ia ibad iactor iwould ineed ito ioperate i51% iof ithe icomputing ipower ithat imakes iup iBit icoin.

Bit icoin iis ia itype iof icrypto icurrency. iBalances iof iBit icoin itokens iare ikept iusing ipublic iand iprivate i"keys," iwhich iare ilong istrings iof inumbers iand iletters ilinked ithrough ithe imathematical iencryption ialgorithm ithat iwas iused ito icreate ithem. iThe ipublic ikey i(comparable ito ia ibank iaccount inumber) iserves ias ithe iaddress iwhich iis ipublished ito ithe iworld iand ito iwhich iothers imay isend ibit icoins. iThe iprivate ikey i(comparable ito ian iATM iPIN) iis imeant ito ibe ia iguarded isecret iand ionly iused ito iauthorize iBit icoin itransmissions. iBit icoin ikeys ishould inot ibe iconfused iwith ia iBit icoin iwallet, iwhich iis ia iphysical ior idigital idevice iwhich ifac