Cryptocurrency first entered the world in the form of Bitcoin in 2009. By February 2022, a total of 18.9 million bitcoins has been mined out of 21 million total bitcoins, so there are still many more to be put into circulation. With more and more cryptocurrencies appearing and the tokenomics craze growing exponentially, here is a brief history to understand it.

Emergence from cryptography

An American cryptographer named David Chaum discovered the concept of e-cash in 1983. He developed it into Digicash in 1995 as an early form of encrypted electronic payment that uses software to withdraw banknotes. In the years that followed, there were other attempts at creating online ledgers secured by encryption, such as B-Money and Bit Gold. A great deal of research in this area eventually led to the emergence of Bitcoin in 2009 from founder Satoshi Nakamoto. The Bitcoin software became available for mining, whereby new Bitcoins are created and transactions are recorded on the blockchain.

In the years that followed, we saw the emergence of namecoin, Litecoin and Peercoin – all similar coins that are categorised as cryptocurrencies. They’re traded via the internet, placing them outside of government agencies and banking systems. They’re also frequently converted into other assets or digital currencies.

Cryptocurrency is very secure by nature, but its inherent anonymity has made it an attractive target for criminals. In 2014, Mt.Gox (the world’s largest Bitcoin exchange) went offline and 850,000 Bitcoins were taken from their owners – at today’s prices, this would carry a value of approximately $4.4 billion.

How is a cryptocurrency defined?

Cryptocurrencies utilise a state-of-the-art mechanism known as blockchain for the verification of transactions. They are secured by cryptography, so they are virtually impossible to counterfeit in any way. It’s a decentralised technology free from government control and propelled by computers designed to record and oversee transactions. They are based on blockchain technology – a unique distributed ledger that is enforced by a disparate computer network. It offers unparalleled security.

You can use cryptocurrency to pay for products or services over the internet. Several firms have their tokens that can be exchanged, leading to the economic concept of ‘tokenomics’. They can be equated to casino chips or arcade tokens, wherein you use the actual currency to acquire the cryptocurrency which you can then spend to purchase your required products or services.

Cryptocurrencies enable secure online payments without any third-party intermediaries. The cryptography involved includes things like:

• • • Elliptical curve encryption
    • Public-private key pairs
    • Hashing functions

Cryptocurrencies can be either mined or purchased from a cryptocurrency exchange.

What is the value of cryptocurrency?

With 10,000+ varieties of cryptocurrencies currently available, the total value exceeds $2 trillion worldwide. Bitcoin remains at the top of that list, with an overall value of over $800 billion. Though popular, there are still relatively few eCommerce sites that allow purchases with cryptocurrencies – even Bitcoin is not often used for retail transactions. Nevertheless, the soaring value of cryptocurrencies makes them popular trading instruments.

Their popularity is down to several factors:

• • • Low transaction costs: the transactions charges associated with conventional payments is all but eliminated with cryptocurrencies, making it cost-effective for individuals and organisations.
    • No government regulation: the value of the currency is consistent all around the world as it is not subject to any specific authority. This also makes them an attractive asset for investment.
    • Profit potential: if you buy Bitcoin when the price is low, it is likely to rise again and present an excellent potential for profit.
    • Safety: if online transactions are a source of anxiety for you, cryptocurrencies are far more secure than conventional payment methods.

Analysts generally agree that the value of cryptocurrencies will continue to rise over time. This view is contested, but there is no denying that many wise investors have made fantastic profits by acquiring cryptocurrencies.

In addition to Bitcoin, today’s popular cryptocurrencies include:

• • • Ethereum
    • Cardano
    • Litecoin
    • Binance
    • XRP
    • Tether
    • Dogecoin
    • Ripple

So what is blockchain?

Blockchain technology is at the foundation of the appeal and functionality of cryptocurrencies. It is essentially a set of connected blocks making up an online ledger. Each of the blocks involved contains a series of transactions that have been verified, independently, by every member of the network. Whenever a new block is generated, it has to be verified by each node before it is confirmed, so it is virtually impossible to forge transactions histories.

Aside from forming the basis of how cryptocurrencies work, experts believe blockchain technology can serve a role in multiple industries like supply chains and processes like crowdfunding or online voting.

Are cryptocurrencies legal?

Fiat currencies are backed by governments or monetary authorities to give them authority as valid currencies. Cryptocurrencies have no such backing, so various jurisdictions have struggled to make a case for their legal status. They have also functioned largely outside existing financial infrastructure.

The legal status of cryptocurrencies is important to establish to determine their use in daily transactions. The Financial Action Task Force made a recommendation in 2019 that cryptocurrency wire transfers should involve the requirements of its Travel Rule, as this requires AML compliance.

At the time of writing, El Salvador is the only country in the world to recognise Bitcoin as legal tender for transactions. Around the rest of the world, different jurisdictions have different cryptocurrency regulations in place. For example in Japan, Bitcoin is defined as legal property. India was reported to be developing a framework for cryptocurrencies in late 2021, while China has banned all cryptocurrency exchanges and mining within its borders.

In the EU, cryptocurrencies are legal and must qualify as financial instruments. The Markets in Crypto-Assets (MiCA) regulation sets safeguards and establishes rules for vendors and companies that provide financial services involving cryptocurrencies. In the US, you can trade certain cryptocurrency futures, but the SEC has said that they are not securities.

Conclusion

Cryptocurrency is an investment area experiencing fast growth, outperforming many other popular investment options. That growing popularity, along with the low transactions costs and superb security features, is making cryptocurrency a popular option for business transactions as well.

If you are considering bringing cryptocurrency into your business, you should understand that this will involve purchasing a large number of coins. There are also many compliance matters relating to these coins, as regulations and laws around cryptocurrency continue to develop in different nations.

For expert legal advice on cryptocurrency, blockchain, NFTs and other related technologies contact Ruthberg LLC today and ask how we can help.