The fundamentals of cryptocurrencies

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Cryptocurrencies-All#about#cryptocurrencies#

September-2014-–-page-1/15-!

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CH&Cie-Market-Study-

Cryptocurrencies-The#fundamentals#of#cryptocurrencies!!

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September-9th,-2014-

Patrick-BUCQUET,-Chief-Inspiration-Officer-

[email protected]!/!+1!347!419!7709!

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Contents'What-are-bitcoin,-litecoin,-peercoin,-etc.?-.........................................................................................................-3!

What-is-a-cryptocurrency?-................................................................................................................................-3!

Basic!definition!.................................................................................................................................................!3!

Is!cryptocurrency!a!real!currency?!Or!is!it!a!commodity?!................................................................................!4!

Regulations!in!major!countries!.........................................................................................................................!5!

How!does!cryptocurrency!work?!......................................................................................................................!6!

4!Key!concepts!in!cryptocurrency!.....................................................................................................................!6!

Overview!of!the!major!cryptocurrencies!today!................................................................................................!7!

Major-events-and-recent-developments-of-cryptocurrencies-.............................................................................-8!

Advantages-and-disadvantages-of-cryptocurrencies-today-................................................................................-9!

Using!cryptocurrencies!has!many!advantages!over!the!other!existing!alternatives!........................................!9!

However!there!are!also!disadvantages!of!using!cryptocurrencies!over!the!other!existing!alternatives!........!10!

The-future-of-cryptocurrency-W-opportunities-against-challenges-.....................................................................-11!

On-volatility:-Bitcoin-as-an-investment-for-the-public-market!......................................................................!11!

Bitcoin!Exchange!Traded!Fund!(ETF)!by!the!Winklevoss!twins!.......................................................................!11!

Bitcoin!Investment!Fund!by!SecondMarket!...................................................................................................!11!

On-acceptance:-Bitcoin-as-mobile-money-in-transfers-and-payments!.........................................................!11!

Focusing!on!P2P!transfers!in!developing!markets!..........................................................................................!12!

Bitcoin!wallet!in!Kenya!by!Kipochi!..................................................................................................................!12!

Rebit.ph!in!the!Philippines!by!Satoshi!Citadel!Industries!...............................................................................!12!

Focusing!on!P2B!payments!.............................................................................................................................!13!

On-legality:-Bitcoin-as-a-solution-to-eradicating-web-based-illicit-activities!................................................!13!

On-security:-Heightened-security-platform-with-insured-bitcoin-storage-service!........................................!13!

On-regulation:-Positive-impacts-beyond-regulatory-barriers!.......................................................................!14!

ConclusionW-The-future-of-bitcoin-and-cryptocurrencies-..................................................................................-14!

Glossary-.........................................................................................................................................................-14!

About-CH&Cie-.................................................................................................................................................-15!

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What-are-bitcoin,-litecoin,-peercoin,-etc.?- - - - -Following!the!initial!launch!in!2009!by!pseudonymous!developer!Satoshi!Nakamoto,!bitcoin!

has!been!in!the!media!limelight!for!both!good!and!bad!reasons.!Its!meteoric!global!adoption!

has!also!inspired!the!introduction!of!other!alternative!coins!including!litecoin,!peercoin,!

namecoin!and!the!list!goes!on!with!over!275!cryptocurrencies!trading!online!to!date.!!So!

what!are!these!“coins”?!Industry!associates!and!researches!have!endeavoured!to!

collectively!agree!on!the!terminology!to!

describe!these!“coins”!as!cryptocurrencies.!!

As!the!majority!of!the!cryptocurrencies!are!

payment!systems!that!work!peer_to_peer!

without!a!central!repository!or!single!

administrator,!they!are!therefore!also!known!as!

decentralised!digital!currencies.!Technically,!

cryptocurrencies!are!digital!currencies!but!not!

all!digital!currencies!are!actually!

cryptocurrencies.!Other!digital!currencies!

include!e_gold!and!Rand!and!they!are!not!to!be!confused!with!cryptocurrencies.!!

What-is-a-cryptocurrency?-Basic!definition! !Cryptocurrency!is!named!as!such!because!of!its!relation!to!cryptography!and!currency.!

Cryptography!is!the!study!of!the!methods!of!encrypting!information!to!send!out!a!message!

securely!and!privately,!and!currency!is!commonly!referred!to!generally!accepted!money!

used!as!a!medium!of!exchange!for!goods!and!services.-

Cryptocurrency!is!hence!a!form!of!digital!currency!that!relies!on!distributed!networks!and!

shared!transaction!ledgers!to!become!secure,!anonymous!or!pseudonymous,!traceable!and!

potentially!stable.!Bitcoin!is!the!first!and!most!popular!cryptocurrency!and!other!

cryptocurrencies!are!often!termed!as!alternative!currencies!or!altcurrencies.!!

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Bitcoin,!Litecoin,!Peercoin,!etc.!are!known!as!cryptocurrencies!and!unlike!other!digital!currencies!such!as!e_gold,!they!rely!on!distributed!networks!and!shared!transaction!ledgers!through!cryptography!to!become!secure,!anonymous,!traceable!and!potentially!stable.!

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Is!cryptocurrency!a!real!currency?!Or!is!it!a!commodity?! !Cryptocurrency,!though!in!name!shares!great!resemblance!with!currency,!is!very!dissimilar!to!a!real!currency.!

Most!major!cryptocurrencies,!except!for!peercoin,!have!limited!supply!(e.g.,!Bitcoin!has!a!total!of!21!million!

bitcoins),!therefore!prices!will!need!to!vary!according!to!the!shifts!in!demand.!For!fiat!currencies,!this!works!the!

other!way!round!whereby!supply!can!be!adjusted!to!maintain!stability!of!the!value!of!the!currencies.!!

So!with!limited!supply,!is!cryptocurrency!a!commodity!like!gold!which!is!a!good!store!of!value!and!remains!stable!

over!time?!To!understand!how!similar!or!different!cryptocurrency!is!from!real!fiat!currency!and!commodity,!

table!1!is!drawn!up!to!compare!Bitcoin!with!USD!and!gold!based!on!their!respective!attributes.!!

----Attributes-

------- - ------ -------- -- -Limited!supply! Yes,!21!million,!

decentralised!

No,!supply!is!adjusted!to!

maintain!stability!of!the!

value,!centralised!

Yes,!a!finite!resource!

Ease!of!storage! Yes,!private!keys!are!used! Yes,!physical/e_cash!in!

savings!account!

Yes,!non_radioactive!and!

dense!element!

Portability! Yes,!very!minimal!

transportation!cost!

Yes,!minimal!transportation!

cost!

No,!high!transportation!costs!

Stability!and!

predictability!

No!(at!present),!“reactive”!!

based!on!software!used!and!

demand!is!not!predictable!

Yes,!it!is!known!as!a!hard!

currency!

Yes,!least!reactive!solid!

element!with!predictability!

on!demand!

Substitutability!! Yes,!it!can!be!substituted!by!

other!cryptocurrencies!such!

as!!Litecoin!or!Ripple,!

although!they!are!not!yet!

serious!threats!

No,!widely!accepted!

globally!

No,!silver!and!platinum,!the!

closest!elements,!are!unable!

to!substitute!the!value!of!

gold!

Acceptance! Weak,!but!rising!use!in!

payments!and!investment!

High,!widely!accepted!

globally!

High,!industrial,!medical!and!

technological!uses!Table!1:!Comparison!of!bitcoin,!USD!and!gold!

As!illustrated!in!table!1,!Bitcoin!shares!greater!similarities!with!gold!than!USD!but!because!of!its!unstable!value!

and!limited!alternative!uses,!its!status!as!a!commodity!still!remains!debatable.!

As!Bitcoin!and!altcurrencies!are!generally!still!in!their!early!stages!of!development,!the!status!of!Bitcoin!as!a!

currency!or!a!commodity!is!therefore!highly!subject!to!the!regulator’s!definition.!For!example,!Germany!has!

defined!them!as!“private!money!and!a!financial!instrument”!and!on!the!other!hand,!the!People's!Bank!of!China!

has!stated!that!bitcoin!"is!fundamentally!not!a!currency".!As!the!definition!of!bitcoin!is!not!yet!universal,!

cryptocurrencies!are!still!largely!distinguished!from!real!currency!in!the!media.!!

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Regulations!in!major!countries!With!varied!accepted!definition!of!what!a!cryptocurrency!is!across!regions!and!countries,!the!regulatory!and!legal!status!of!bitcoin!is!also!different,!with!the!majority!having!legalised!the!usage,!and!a!few!restricting!the!usage!and!implementing!partial!or!full!prohibition!of!bitcoin.!!

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To!highlight,!besides!Iceland,!which!has!prohibited!engagement!in!foreign!exchange!trading!with!electronic!currency,!and!Bolivia,!which!has!explicitly!banned!the!bitcoin!for!fear!of!permitting!enterprises!to!evade!taxes,!China!(excluding!Hong!Kong),!Taiwan,!India!and!Indonesia!have!also!implemented!restricted!measures!to!prevent!money!laundering!and!limit!speculation!of!bitcoins.!On!the!other!hand,!the!other!major!countries!have!developed!warm!attitudes!towards!the!use!of!bitcoin!by!legalising!the!usage!of!bitcoin,!though!with!increasing!number!of!propositions!to!tighten!regulations.!For!instance,!in!August!2014,!New!York!State’s!Department!of!Financial!Services!has!recently!proposed!regulatory!framework!for!virtual!currency,!which!may!require!any!businesses!in!New!York!that!store!or!exchange!virtual!currencies!to!first!obtain!a!license!from!the!state.!Also,!licensed!virtual!currency!firms!may!need!to!hold!the!same!amount!of!virtual!currency!they!owe!to!customers!without!selling!or!loaning!it!out,!which!is!somewhat!similar!to!the!liquidity!principles!behind!the!Third!Basel!Accord!(Basel!III).!In!Australia,!the!tax!legislation!has!taken!steps!to!consider!bitcoin!as!legal!tender.!

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Full/!partial!prohibition! Legalised!usage!Restricted!legal!usage!

Figure!1:!Legal!status!of!bitcoin!by!country!Source:!"Legal!status!of!bitcoin"!by!Habarithor!_!Own!work!

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How!does!cryptocurrency!work?!Cryptocurrency!involves!a!solution!to!what!is!known!as!the!doubleWspending-problem.!Any!payment!that!is!not!

cash!handed!over!in!person,!such!as!entries!in!a!bank!account,!may!be!duplicated,!allowing!people!to!spend!the!

same!money!twice.!A!trusted!third!party,!such!as!a!payment!system!run!by!Visa,!MasterCard!or!a!Bank’s!

payment!system!confirms!identities!and!ownership!preventing!double_spending.!

The!problem!is!solved!by!creating!a!public!ledger!that!establishes!ownership!by!anonymously!recording!who!

owns!what!bitcoins.!A!volunteer!network!of!computers!validates!every!single!transaction!on!the!network!by!

performing!computations!that!prove!they!have!done!the!work,!and!receive!new!bitcoins!in!return,!eliminating!

the!need!for!a!third!party.!

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4!Key!concepts!in!cryptocurrency!

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Address-• It!works!like!a!wallet!• It!is!a!string!of!lejers!and!numbers,!such!as!1HULMwZEPkjEPeCh43B!• Each!address!tracks!its!own!balance!of!Bitcoins!• Users!can!have!as!many!addresses!as!they!want!to!stay!anonymous!

PeerWtoWPeer-(P2P)-• A!group!of!computers!is!connected!to!enable!the!sharing!of!resources!and!informalon!by!users!• No!central!localon!for!the!network!• Bitcoin!uses!a!P2P!network!to!connect!users!for!transaclng!and!“Mining”!

Blockchain-• It!works!like!a!ledger!and!is!shared!by!everyone!• All!Bitcoin!transaclons,!without!exceplon,!are!recorded!here!• Once!it!is!recorded,!it!cannot!be!reversed!(to!prevent!the!double_spending!problem)!• Everyone!will!have!the!same!blockchain!

Mining/Miners-• Bitcoin!miners!use!powerful!computers!to!track!and!compile!pending!Bitcoin!transaclons!(i.e.!create!the!Blockchain)!• Miners!need!to!communicate!the!verified!transaclons!to!the!enlre!Bitcoin!P2P!network!!• They!earn!bitcoin!through!"Mining”!

! Bitcoin!is!a!“payment!rail,”!like!Visa,!Western!Union!or!the!bank_debiting!system__!

unlike!those!systems,!bitcoin!is!also!the!currency.!

! Bitcoin!is!“a!bearer!instrument”!in!that!there!is!no!need!to!know!if!a!user!has!the!

money!__!it!exists!by!virtue!of!the!instrument.!!

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Overview!of!the!major!cryptocurrencies!today!Even!with!the!introduction!of!a!plethora!of!

cryptocurrencies!of!late,!Bitcoin,!with!its!first!mover!

advantage,!remains!bested!by!virtually!no!others!

with!the!highest!market!capitalization!of!US$8,099!

million,!followed!by!Litecoin,!which!was!launched!in!

2011,!with!US$257!million.!!

Table!3!below!illustrates!the!differences!and!

similarities!of!the!various!major!cryptocurrencies.!

Notably,!Litecoin!and!Peercoin!are!technically!nearly!

identical!to!Bitcoin,!but!Litecoin!has!a!higher!

maximum!number!of!coins!and!reduced!block!

generation!time,!while!Peercoin!does!not!have!an!

enforced!limit!on!the!number!of!possible!coins.!!

Ripple!functions!not!only!as!a!payment!system!like!the!others,!it!also!performs!as!a!currency!exchange!and!

remittance!network!for!other!fiat!currencies!and!cryptocurrencies.!Lastly,!Darkcoin!is!the!only!closed!source!

cryptocurrency!that!uses!its!proprietary!DarkSend!to!add!privacy!to!transactions!to!allow!for!100%!anonymity.!

Cryptocurrency,-year-launched-

Function(s)- Unit-of-currency-

Hashing-Algorithm-

Coins-released-(mn)-

Open/Closed-source,-Type-of-ledger-

Transaction-time-

Bitcoin,!2009! !!Payment!system!!

bitcoin!(BTC)!

SHA_256! ~13.20!of!21! !!Open,!Public!!

10!mins/!blockchain!

Litecoin,!2011! litecoin!(LTC)!

SCRYPT!!

~31.55!of!84! 2.5!mins/!blockchain!

Peercoin,!2012! peercoin!(PPC)!

SHA_256!!

~21.67!of!∞! 10!mins/!blockchain!

Ripple,!2013! Payment!system,!currency!exchange!&!remittance!network!

ripple!(XRP)!

ECDSA!!

100,000!of!100,000!

Open,!Public!consensus!

2!to!5!secs/consensus!ledger!

Darkcoin,!2014! Payment!system!

darkcoin!(DRK)!

X11! ~4.60!of!22! Closed_DarkSend,!Public!

NA!

Table!3:!Overview!of!the!major!cryptocurrencies!as!of!29th!August!2014!

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Figure!2:!Comparison!of!major!cryptocurrencies!based!on!launch!year!and!market!cap!as!of!21st!July!2014,!Statista!Chart!

8099!

257! 30! 42! 31!0!

2000!

4000!

6000!

8000!

10000!

Bitcoin,!2009!

Litecoin,!2011!

Peercoin,!2012!

Ripple,!2013!

Darkcoin,!2014!

Market!Cap!(US$!mn)!

Bitcoin!with!the!uppercase!“B”!is!the!underlying!peer_to_peer!network!supporting!the!unit!of!that!network,!bitcoin,!with!the!lowercase!“b”.!

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Major'events'and'recent'developments'of'cryptocurrencies'The!development!of!cryptocurrencies!has!been!incredibly!fast!since!its!launch!in!2009!as!highlighted!below.!

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• Introduction!of!Bitcoin!system!that!launches!with!21!million!bitcoins,!to!end!in!2040.!•First!Bitcoin!transaction!by!a!Floridan!man!who!sent!10,000!bitcoins!for!a!pizza!to!a!volunteer!in!the!U.K.!•184!billion!bitcoins!were!generated!due!to!a!system!loophole.!• Inter_government!Financial!Action!Task!Force!warned!against!the!use!of!digital!currency!for!illegal!means.!

Launch'of'Bitcoin

2009/10

•Namecoin!was!created,!followed!by!Litecoin!and!then!Peercoin.!•Bitcoin!Foundation!was!established.!•Wikileaks!and!WordPress!began!to!accept!bitcoins.!•BitPay!reported!having!over!1,000!merchants!accepting!bitcoin.!The!Bitcoin!debit!card!was!announced.!•First!Bitcoin!bank!opened.!•Bitcoin!bubble!witnessed!the!fluctuation!in!bitcoin!prices,!$30!to!$10!then!to!$3.!!•Mt.!Gox!had!bitcoins!stolen,!Bitomat!lost!over!17,000!bitcoins,!and!Bitfloor!exchange!was!hacked!with!24,000!bitcoins!stolen.!•Bitcoins!were!accepted!for!drugs!on!Silk!Road.!!

Altcurrencies,,and,ups,and$downs$of$bitcoin

2011/12

•Numerous!alternative!currencies!(altcurrencies)!such!as!Ripple,!Dogecoin,!Mastercoin!etc.!were!introduced.!•Wider!acceptance!points!for!bitcoins:!Pizza!Hut,!Domino’s,!OkCupid,!Foodler,!The!University!of!Nicosia,!Zynga,!overstock.com,!The!D!Las!Vegas!Casino!Hotel!and!Golden!Gate!Hotel!&!Casino!and!in!real!estate!for!properties.!•Venture!capital!investment!in!Bitcoin!startups!reached!$3!million.!!•Kenya!introduced!M_Pesa!linked!Bitcoin!wallet.!•World's!first!Bitcoin!ATM!was!launched!in!Vancouver,!BC,!Canada.!

Opportunities

•US!announced!regulatory!position!on!cryptocurrencies.!•System!vulnerability!was!in!question!when!two!incompatible!Bitcoin!softwares!clashed,!causing!its!price!to!dip!by!23%.!Insufficient!capacity!resulted!in!great!fluctuations!in!prices!($266!to!$76!then!$160).!•FBI!seized!approximately!26,000!bitcoins!from!website!Silk!Road.!China!banned!financial!companies!from!bitcoin!transactions.!

Challenges

2013

•More!altcurrencies!such!as!Auroracoin,!Vertcoin!and!etc.!were!introduced.!•Price!of!bitcoin!spiked!to!$1000!at!its!highest.!Collapse!of!Mt!Gox,!the!largest!bitcoin!exchange,!after!losing!around!850,000!bitcoins.!•Rise!of!startups!(e.g.!BitGo)!and!associations!focusing!on!providing!security!solutions!to!cryptocurrencies!wallet.!•VC!Tim!Draper!bought!$18m!of!bitcoins!auctioned!by!the!US!government!following!the!shutdown!of!the!Silk!Road!marketplace.!

Status&of&cryptocurrencies

2014

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Advantages-and-disadvantages-of-cryptocurrencies-today-Using!cryptocurrencies!has!many!advantages!over!the!other!existing!alternatives!Faster! 10-minutes-vs.-a-few-days-

Transactions!between!two!individuals!using!different!Mobile!Network!Operators!or!banking!services!can!happen!instantaneously!if!they!are!“zero_confirmation”!transactions,!or!in!10!minutes!if!a!merchant!requires!the!transaction!to!be!confirmed!by!the!block!chain.!This!is!significantly!shorter!as!compared!to!inter_bank!transfers!that!could!take!up!to!a!few!days!to!be!completed.!-

Cheaper! 1%-or-free-vs.-3%-or-more-While!credit/debit!cards!can!also!be!fast_paying!tools,!the!charges!are!typically!3%!compared!to!decentralised!cryptocurrencies!which!have!minimal!charges!of!about!1%!or!in!some!cases,!free.!!-

Greater-privacy-protection-!

No-more-sacrifices-of-personal-particulars-for-purchases-Unlike!credit/debit!cards,!users!need!not!disclose!important!details!to!initiate!a!transaction.!When!sending!cryptocurrencies,!the!transaction!can!be!completed!by!combining!the!public!and!private!keys!together.!The!public!key!can!be!assessed!by!anyone!and!the!private!key!is!personal,!and!cannot!be!stolen,!unlike!credit/debit!card!details.!!

More-secure-!

Less-susceptible-to-credit-card-fraud-for-buyers-Since!Bitcoin!is!a!digital!bearer!instrument,!the!recipient!of!a!payment!does!not!get!any!information!from!the!sender!that!can!be!used!to!steal!money!from!the!sender!in!the!future,!either!by!that!merchant!or!by!a!criminal!who!steals!that!information!from!the!merchant.!Much!like!email,!which!is!traceable,!Bitcoin!is!pseudonymous,!not!anonymous.!Furthermore,!every!transaction!in!the!Bitcoin!network!is!tracked!and!logged!forever!in!the!Bitcoin!block!chain,!or!permanent!record,!available!for!all!to!see.!As!a!result,!Bitcoin!is!considerably!easier!for!law!enforcement!to!trace!than!cash,!gold!or!diamonds.!-Less-susceptible-to-chargeback-fraud-for-merchants-As!transactions!are!not!reversible,!it!reduces!the!risk!of!chargeback!fraud.!

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Cryptocurrencies!can!be!faster,!cheaper,!more!private!and!more!secure!than!other!common!alternatives!in!payments!services.!

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However!there!are!also!disadvantages!of!using!cryptocurrencies!over!the!other!existing!alternatives!Volatility! Unstable-value-makes-it-less-practical-as-money-

High!volatility!and!unpredictability!on!price!movements!due!to!external!factors!including!vulnerabilities!in!the!security!platform!render!it!less!useful!as!a!medium!of!exchange.!

!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!! !Source:!CitiFX,!Blockchain.com,!Bloomberg,!BitMex!

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Acceptance-!

Demand-for-daily-use-is-still-relatively-weak-Limited!acceptance!points!and!awareness!across!the!globe!make!real!currencies!much!better!alternatives!due!to!their!wider!acceptance!of!use!and!demand.!!

Legal-issues-!

Use-of-cryptocurrencies-for-illegal-means!The!pseudonymous!nature!creates!unintended!protection!for!illicit!and!illegal!activities.!-

Security-issues!-

Users-have-to-face-risks-with-merchants-and-cyberWattacks-As!transactions!are!not!reversible,!buyers!have!to!put!their!complete!trust!with!the!merchant,!who!in!this!case!is!the!protected!party!in!the!transaction.!Given!its!digital!nature,!cryptocurrencies!are!also!subject!to!cyber_attacks!–!several!exchanges!including!Mt!Gox,!TradeHill!Bitcoin!and!Bitcoinica!exchange!have!faced!similar!challenges,!leading!to!their!downfall.!!-

Regulations-!

Legal-restrictions-hinder-growth-and-increasing-regulations-may-increase-cost-of-use-Cryptocurrencies!have!restricted!use!in!countries!including!China,!Japan,!India,!Indonesia,!etc.!Increasing!regulations!will!also!likely!increase!cost!of!use!in!the!future.!!

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0%!20%!40%!60%!80%!100%!

Gold!spot! NASDAQ!Composite!

BRL/JPY! Bitcoin!Market!Price!

Realised!volallity!over!250!days!from!!Aug!13!to!April!14!

However,!the!great!volatility,!limited!acceptance,!and!legal,!security!and!regulatory!issues!might!impede!the!usage!of!cryptocurrencies!in!daily!lives.!

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The-future-of-cryptocurrency-W-opportunities-against-challenges--The!cryptocurrency!landscape!is!experiencing!a!transformation!as!its!challenges!evolve!in!time!with!its!rapid!development.!Most!recently,!the!challenges!of!Bitcoin!on!volatility,!acceptance,!and!security,!legal!and!regulatory!issues!have!given!rise!to!new!opportunities.!!

On-volatility:-Bitcoin-as-an-investment-for-the-public-market-The!volatile!nature!of!bitcoin!can!now!be!partially!resolved!with!the!soon_to_be!introduced!bitcoin!exchange!traded!fund!and!public!bitcoin!investment!fund!which!may!potentially!escalate!the!circulation!of!bitcoin!in!the!global!markets,!enhancing!its!stability.!!

Bitcoin!Exchange!Traded!Fund!(ETF)!by!the!Winklevoss!twins!

Bitcoin!Investment!Fund!by!SecondMarket!

A!bitcoin!ETF!would!allow!investors!to!participate!in!the!daily!price!movement!of!an!index!called!the!Winkdex,!named!after!the!Winklevoss!twins!who!initiated!the!formation!of!ETF.!!According!to!the!SEC!filing,!the!ETF!is!"designed!for!investors!seeking!a!cost_effective!and!convenient!means!to!gain!exposure!to!bitcoins!with!minimal!credit!risk."!!The!Winklevoss!Bitcoin!Trust!is!designed!to!hold!bitcoins!and!issue!baskets!of!shares!in!exchange!for!deposits!and!vice!versa.!!The!bitcoins!held!by!the!trust!will!be!stored!in!a!digital!wallet!and!the!custodian!will!be!responsible!for!the!safekeeping!of!these!assets.!!Source:!Nasdaq!

With!impending!competition!from!ETF,!SecondMarket!is!planning!to!open!up!its!private!bitcoin!investment!fund!to!ordinary!investors!by!the!fourth!quarter!of!2014.!!SecondMarket!launched!its!Bitcoin!Investment!Trust!(BIT)!last!September,!but!it!was!reserved!for!private!investors!with!$1m!in!assets!and!incomes!above!$200,000.!!The!trust!buys!and!sells!bitcoins!and!allows!investors!to!place!bets!on!the!value!of!bitcoin!without!owning!any!coins!directly.!The!company!currently!has!$54m!in!assets!under!management.!!Source:!Coindesk!

-On-acceptance:-Bitcoin-as-mobile-money-in-transfers-and-payments-With!prevailing!transaction!costs!ranging!from!2.5%!for!retail!and!e_commerce!to!9%!for!remittance!services,!bitcoin,!which!on!average!incurs!a!standardised!transaction!fee!of!1%!on!most!service!platforms,!it!appears!that!by!leveraging!the!advantages!of!bitcoin!in!transaction!savings,!a!clearer!solution!for!the!issue!on!acceptance!and!security!has!emerged.!This!upward!trend!is!evidently!shown!in!the!recent!news!on!the!auction!of!bitcoins,!introduction!of!bitcoin!wallets!in!emerging!markets!for!the!underbanked,!and!the!increasing!number!of!merchants!accepting!bitcoins.!

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Focusing!on!P2P!transfers!in!developing!markets!In!July!2014,!Vaurum,!a!California_based!startup!that!enables!companies!including!banks!and!brokerages!to!trade!and!store!bitcoins!on!behalf!of!customers,!successfully!bid!for!30,000!bitcoins,!which!was!part!of!a!larger!pool!of!virtual!currency!seized!from!the!Silk!Road!website!at!a!U.S.!government!auction.!These!30,000!bitcoins!will!serve!as!a!source!of!liquidity!for!the!startup!in!providing!access!to!bitcoins!in!developing!economies.!!

The!idea!of!using!bitcoins!as!mobile!money!in!developing!economies!is!not!entirely!new.!There!have!been!instances!in!several!states!including!the!pioneer!in!mobile!money,!Kenya!and!the!Philippines,!the!second!largest!recipient!for!remittances!in!Asia,!with!a!total!of!US$23!billion!transferred!in!2013.!

Bitcoin!wallet!in!Kenya!by!Kipochi! Rebit.ph!in!the!Philippines!by!Satoshi!Citadel!Industries!

Kipochi!Ltd!has!launched!a!groundbreaking!solution!in!July!2013!that!allows!people!to!send/receive!Bitcoin!and!convert!it!to!and!from!an!M_Pesa!balance.!!This!enables!Kenyans!to!receive!money!transfers!from!the!diaspora!in!an!easier,!faster!and!cheaper!way,!compared!to!using!banks!and!money!transferring!services!such!as!Western!Union!and!MoneyGram.!Source:!Kipochi!

Rebit.ph!was!launched!in!July!2014!as!an!easier,!faster!and!cheaper!alternative!for!the!12!million!Filipinos!working!abroad!to!remit!their!money!back!home.!!As!compared!to!the!other!existing!remittance!services!that!charge!10%!or!more!in!fees!and!exchange!rates!if!the!sent!amount!is!less!than!$125!USD,!Rebit.ph!allows!users!to!send!small!amounts!of!money,!even!$50!or!$25,!at!much!more!reasonable!fees.!Source:!Reddit!

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Table!5:!Comparison!between!bitcoin!and!e_money!Source:!CGAP!&!SwitchYard!Media!

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Accessibility- Largely!limited!to!internet!connection! Access!to!electronic!devices!such!as!mobile!phones,!and!an!agent!network!

Value- Determined!by!supply!and!demand,!and!credibility!of!the!system!

Determined!by!the!amount!of!fiat!currency!exchanged!into!electronic!form!

Customer-ID- Anonymous! Financial!Action!Task!Force!standards!apply!for!customer!identifications!

Production- Mathematically!generated!(mined)!by!peer!network!

Digitally!issued!against!receipt!of!equal!value!of!fiat!currency!of!central!authority!

Issuer- Community!of!developers,!called!“miners”! Legally!established!e_money!issuer!Regulator- None,!though!an!increasing!number!of!

regulators!have!stepped!in!Regulated!by!central!authority,!typically!a!central!bank!

Differences-between-bitcoin-and-eWmoney-The!comparison!chart!below!illustrates!the!fundamental!differences!and!it!is!evident!that!there!are!still!gaps!that!bitcoin!has!to!close!before!becoming!a!true!alternative!to!e_money.!-

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Focusing!on!P2B!payments!The!rising!popularity!of!bitcoin!as!the!medium!of!exchange!for!goods!and!services!between!end!users!and!merchants!is!illustrated!with!the!tremendous!increase!in!acceptance!of!use!with!Coinbase,!a!US_based!Bitcoin!exchange!established!in!mid_2012!which!has!been!noted!for!its!user_friendly!interface.!As!highlighted!in!figures!3!and!4!below,!the!number!of!Coinbase!wallet!users!tripled!and!the!number!of!merchants!partnered!with!Coinbase!increased!more!than!six!fold!within!5!months.!!

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Figure!3:!Number!of!Coinbase!wallet!users!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!Figure!4:!Number!of!merchants!partnered!with!Coinbase!Source:!Coinbase!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!Source:!Coinbase!

On-legality:-Bitcoin-as-a-solution-to-eradicating-web-based-illicit-activities-There!have!been!rising!concerns!on!how!bitcoin!can!provide!unintended!protection!for!illicit!activities!given!that!it!can!be!used!to!make!private!and!irreversible!payments.!However,!these!features!already!exist!with!cash!and!wire!transfer,!which!are!widely!used!and!well_established.!The!use!of!Bitcoin!will!undoubtedly!be!subjected!to!similar!regulations!that!are!already!in!place!inside!existing!financial!systems.!With!the!recent!seizure!and!auction!of!bitcoins!from!Silk!Road,!the!online!illicit!drug!marketplace,!it!has!affirmed!the!fact!that!the!Bitcoin!is!not-likely-to-prevent-criminal-investigations!from!being!conducted.!!

Contrary!to!common!belief,!Bitcoin!is!designed!to!make!money!more!secure!and!act!as!a!significant!protection!against!many!forms!of!financial!crime.!The!following!are!some!points!worth!noting:!

• Bitcoin!is!impossible!to!counterfeit.!

• Users!are!in!full!control!of!their!payments!and!cannot!receive!unapproved!charges!such!as!with!credit!card!fraud.!!

• Bitcoin!transactions!are!irreversible!and!immune!to!fraudulent!chargebacks.!

• Bitcoin!allows!money!to!be!secured!against!theft!and!loss!through!tried!and!tested!mechanisms!such!as!backups,!encryption,!and!multiple!signatures.!

On-security:-Heightened-security-platform-with-insured-bitcoin-storage-service-Protecting!financial!health!with!insurance!has!long!been!a!common!practice.!With!the!increasing!use!of!bitcoin!as!a!digital!currency,!insurance!has!now!come!into!play!with!Elliptic!Vault,!the!world’s!first!insured!bitcoin!storage!service,!launched!in!the!UK!by!Elliptic.!Elliptic!Vault!offers!protection!against!the!loss!or!theft!of!Bitcoin!holdings,!with!insurance!underwritten!by!Lloyd’s!of!London.!Thus,!an!individual!who!stores!bitcoins!with!Elliptic!Vault!will!have!his/her!bitcoins!protected!with!strong!encryption!and!secure!physical!locations!known!as!the!“deep!cold!storage”!and!in!the!event!of!loss,!the!liability!to!the!individual!will!be!the!market!value!of!bitcoins,!capped!by!the!liability!limit!determined!by!the!individual,!with!a!cost!of!2%!bitcoin!of!that!limit!per!annum.!

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On-regulation:-Positive-impacts-beyond-regulatory-barriers-The!increasing!efforts!by!regulators!to!set!rules!and!guidelines!on!the!adoption!of!cryptocurrencies!may!raise!concerns!among!the!general!public!regarding!its!usability,!security!and!reliability:!why!would!the!authorities!impose!rules!on!something!unless!it!is!susceptible!to!abuse?!For!existing!users!of!cryptocurrencies,!regulations!may!be!seen!as!unwelcome!events!that!set!boundaries!to!what!they!can!or!are!currently!doing!with!their!currencies,!and!may!hurt!their!pockets!as!a!result.!!

However,!we!believe!that!the!positive!spillover!effect!of!these!regulations!will!be!significantly!higher!than!its!perceived!negative!impacts.!This!is!mainly!due!to!the!fact!that!formal!regulations!and!guidelines!provide!a!well_defined!playing!field!for!the!users!of!cryptocurrencies.!With!clear!guidelines!and!“guarantees”!on!its!usage,!the!level!of!confidence!that!one!have!on!cryptocurrencies!may!increase,!and!both!consumers!as!well!as!merchants!may!find!themselves!more!comfortable!to!accept!cryptocurrencies!as!a!medium!for!payment,!thus!encouraging!its!adoption.!

Since!2008,!the!financial!services!sector!has!experienced!significant!reforms!through!regulations!such!as!the!Dodd_Frank!and!Basel!III,!which!inevitably!increased!their!cost!of!adherence!to!the!new!regulations!while!also!shedding!of!once_profitable!business!lines.!However,!the!industry!is!not!devoid!of!opportunities.!Improved!visibility!on!guidelines!and!regulations!will!allow!financial!institutions!such!as!banks!and!insurance!companies!to!strategise!appropriate!business!and!marketing!opportunities!for!cryptocurrencies!efficiently!and!in!the!process!avoid!venturing!into!the!grey!areas!of!the!law.!In!addition,!the!communication!should!ideally!be!two_way,!i.e.,!banks!should!also!propose!to!their!regulators!how!cryptocurrencies!might!be!adopted.!For!example,!a!bank!could!explore!with!its!regulator!the!possibility!of!using!cryptocurrencies!as!assets!to!be!accounted!for!in!their!capital!or!reserve!requirements.!

We!propose!that!heightened!regulations!on!cryptocurrencies!should!not!be!viewed!by!financial!institutions!as!deterrence!to!its!adoption;!on!the!contrary,!these!present!valuable!opportunities!for!them!to!open!new!revenue!streams!amidst!a!highly!competitive!economy.!!

ConclusionW-The-future-of-bitcoin-and-cryptocurrencies-Lastly,!while!it!is!still!too!early!to!determine!if!bitcoin!will!be!an!eventual!success,!it!is!beyond!doubt!that!with!the!promising!P2P!ledger!networks!and!the!potential!in!greater!acceptance!level,!its!value!added!to!the!existing!banking,!finance!and!payments!infrastructure!cannot!be!undermined.!!

If!the!issue!on!value!volatility,!resulting!from!the!enforced!limit!on!the!maximum!number,!can!potentially!be!a!challenge!for!bitcoin!to!gain!widespread!adoption,!altcurrencies!such!as!Litecoin!and!Peercoin!might!actually!grow!in!importance!and!attain!a!breakthrough!in!the!cryptocurrencies!landscape.!With!more!and!more!innovations!and!players!paving!the!way,!this!new!technology!is!no!doubt!a!major!event!that!is!shaking!up!the!world!of!payments!and!might!ultimately!become!a!major!competitor!to!traditional!banking!networks.!Because!of!its!fast!and!widespread!acceptance,!security!issues!and!association!with!illicit!activity!have!recently!been!more!visible,!which!will!most!probably!lead!to!even!more!innovations!and!greater!intervention!of!regulators!around!the!world.!

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Glossary-Cryptocurrency- Cryptocurrency!is!a!form!of!digital!currency!that!relies!on!distributed!networks!and!

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shared!transaction!ledgers!to!become!secure,!anonymous!or!pseudonymous,!traceable!and!potentially!stable.!

Bitcoin-and-bitcoin- Bitcoin!with!the!uppercase!“B”!is!the!underlying!peer_to_peer!network!supporting!the!unit!of!that!network,!bitcoin,!with!the!lowercase!“b”.!

Altcurrencies- Alternative!currencies;!a!general!term!for!cryptocurrencies!other!than!bitcoin.!Chargeback-fraud- Chargeback!fraud!occurs!when!a!consumer!makes!an!online!shopping!purchase!with!

their!own!credit!card,!and!then!intentionally!requests!a!chargeback!from!the!issuing!bank!after!receiving!the!purchased!goods!or!services.!

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About-CH&Cie--

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Chappuis-Halder-&-Co!is!a!consulting!company!dedicated!to!financial!services!offering!local!business!solutions!advisory!for!its!clients.!We!rapidly!expanded!our!client!scope!both!geographically!and!sector!wise.!Our!firm!covers!3!types!of!clients:!Corporate!&!Investment!Banking,!Retail!&!Private!Banking!and!Insurance!and!is!organised!around!3!business!lines:!CH!Management,!CH!Solutions!and!CH!Analytics.!!

Our!consultants!deliver!strategic-and-operational-assignments-for-international-clients-in!North!America!(Montreal!and!New!York),!Europe!(Paris,!London!and!Geneva)!and!Asia!(Hong!Kong,!Singapore!and!Shenzhen).!!

Internationally,!we!work!for!Private!Banking,!Retail!Banking!and!CIB.!Our!assignments!are!mainly!focused!on:!

• Business!consulting!(strategy,!benchmark,!revenue!oriented)!

• Risk!&!Regulation!(SOX!LIGHT,!Basel!II)!• Operational!efficiency!(FX,!Management!Reporting,!cost!oriented)!

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Date post:	10-Jan-2017
Category:	Economy & Finance
Upload:	patrick-bucquet
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The fundamentals of cryptocurrencies

Economy & Finance