Understanding Cryptoassets, Cryptocurrencies, and Tokens
Understanding this breakdown of cryptoassets helps you to better understand the entire universe of cryptocurrencies and shows you that cryptocurrencies themselves are just one part of the story. Lastly in this video, we will also briefly talk about hybrids, which combine features of both, cryptocurrencies and tokens. Alright, but let’s now dive into it.
Before we look at cryptocurrencies themselves, let’s speak about the term cryptoassets for a moment. The cryptomarket has changed significantly over the last few years. Two of the most notable developments are the massive growth of the number of so-called private tokens issued on existing platforms in order to raise funds, and the emergence of so-called stable coins. These trends have caused various regulatory authorities, standard-setting bodies and industry professionals to shift their focus and expand their vocabulary from the term cryptocurrencies to the broader term of cryptoassets.
So long story short, a cryptoasset can simply be described as a type of private asset that depends primarily on cryptography and DLT or similar technology as part of their perceived or inherent value. This includes to consecutive types of cryptoassets, namely virtual currencies and tokens.
It’s finally time to talk about cryptocurrencies themselves. Cryptocurrencies or coins, such as Bitcoin and Litecoin, are those cryptoassets that are designed or intended to perform the roles of currency, which means to function as a medium of exchange, a store of value and a unit of account. They are intended to constitute a peer-to-peer alternative to government-issued legal tender.
Cryptocurrencies can be characterised in numerous different ways and we will look at two of them. In particular, we will look at private versus sovereign coins and stable or backed versus non-stable coins.
Private versus Sovereign Coins
Let us first talk about private versus sovereign coins. The emergence and growing popularity of cryptocurrencies and their underlying technology have inspired various central banks to investigate whether it would make sense for them to issue their own digital currencies, for wholesale purposes, or as a complement for physical banknotes and coins. These digital currencies are commonly referred to as central bank digital currencies, or CBDC. Simply put, a CBDC is a digital asset or a digitalised instrument issued by a central bank for the purpose of payment and settlement, in either retail or wholesale transactions. Since it is issued by a central bank – and hence is a central bank liability – it could be described as a sovereign coin.
In contrary, non-central bank digital currencies that are decentralized can be described as private coins.
Stable Coins versus Non-Stable Coins
Now let’s talk about stable coins versus non-stable coins. The first wave of cryptocurrencies, which began with Bitcoin and hundreds of subsequent Bitcoin clones, are de-facto considered by their users as something of value. They do not represent any underlying asset, claim or liability, making them prone to high price volatility. They are what could be called traditional non-backed cryptocurrencies.
The highly volatile nature of traditional non-backed cryptocurrencies makes it very hard for them to truly perform the roles of currency and to become more widely adopted as such.
A number of cryptocurrency advocates have recognised that the severe price volatility of the first wave of cryptocurrencies is indeed a major hurdle for their acceptance as a means of payment and store of value. They have tried to address the issue at hand by introducing so-called stablecoins.
Simply put, a stablecoin is a variant or subcategory of cryptocurrencies typically pegged or linked to the price of another asset or a pool of assets, designed to maintain a stable value. Like traditional non-backed cryptocurrencies, stablecoins are intended to perform the roles of currency.
Traditional non-backed cryptocurrencies are generally decentralised and do not have an identifiable issuer or at least not an institution that can easily be held accountable by or towards the coin’s users. Stablecoins on the other hand, typically represent a claim on a specific issuer or on underlying assets or funds, or some other right or interest. They are, in other words, backed by something and not just perceived to be something of value. Examples of stablecoins that are already in circulation are Tether, Multi-collateral DAI and Gemini Dollar, among several others.
And then, there are Token. Tokens, on the other hand, are those cryptoassets that offer their holders certain economic or consumption rights. Broadly speaking, they are digital representations of interests or rights to access certain assets, products, or services. Tokens are typically issued on an existing platform or blockchain to either raise capital for new entrepreneurial projects, or to fund start-ups or the development of new innovative services.
Just like there is currently more than one category of cryptocurrencies, there is also more than one category of tokens. Tokens can take on different forms with diverse features. Since their conception, different approaches have been developed to classify and define them. Generally speaking, most regulatory authorities tend to distinguish so-called investment or security tokens from so-called utility tokens.
Investment tokens are generally issued for the purpose of capital raising, for example through an initial coin offering, and show similarities to traditional debt and equity instruments.
A well-known example of an investment token is Bankera’s BNK token, which grants its holder a right to a weekly commission to be paid out in the cryptocurrency Ether.
Utility tokens are those tokens that grant their holders access to a specific application, product or service often provided through a blockchain-type infrastructure. They typically only provide access to a product or service developed by the token issuer and are not accepted as a means of payment for other products or services.
Some examples of utility tokens include Golem and Filecoin, which both facilitate access to a specific service: Golem grants access to computing power and Filecoin to data storage.
Like investment tokens, utility tokens are also issued to collect financial resources, usually to fund the development of the issuer’s application, product or service. However, unlike investment tokens, their main purpose is not to generate future cash flows for investors, but to grant access to the issuer’s application, product or service, and at the same time create a user base.
Besides cryptocurrencies and tokes, there are also hybrids. While it is theoretically feasible to draw a clear dividing line between cryptocurrencies and tokens, and, diving deeper into the latter category, investment and utility tokens, in practice it is not always easy to fit a cryptoasset into one or the other category.
This is because cryptoassets can exhibit features of more than one category. Cryptoassets that embody such a combination are commonly referred to as hybrids and raise particular regulatory challenges. An example of a hybrid token, more specifically an investment-utility hybrid, is Crypterium, which is used to pay transaction fees when using the services provided by the issuer, gives right to discounts for future services, and gives a right to revenues.
The birthday of Cryptoassets: Initial Coin Offerings
In the beginning, the term ICO was primarily used to refer to a crowdsale organised upon the launch of a new cryptocurrency by a known or identifiable issuer. The coin’s inventors usually pre-mined a number of coins and offered them to the public through a crowdsale to pay for development costs. This was the case for Ethereum’s ether and Cardano’s Ada, amongst others.
Today, the term ICO is commonly used by regulatory authorities and cryptocurrency professionals to refer to a process in which businesses, usually start-ups, or individuals issue tokens to the public to raise funds for their projects, in exchange for fiat money or other cryptoassets.
The term ICO, in this evolved meaning, is sometimes substituted for the term ITO, or initial token offering, or simply token sale.
For the purpose of simplification, you can compare ICOs to IPOs. If you haven’t heard this term yet, an IPO is simply an initial public offering and refers to the process of offering shares of a private corporation to the public in a new stock issuance.
Both of these three-letter acronyms, ICO and IPO, are aimed at raising money from the general public. There are, however, a number of differences between the two, aside from the instruments issued. Firstly, whereas a successful IPO generally requires the issuing companies to have a certain track-record, a successful ICO can be initiated at any stage. Secondly, IPOs typically involve a costly and time-consuming process. ICOs, on the other hand, can be launched through the issuer’s website in a short period of time and generally do not require multiple actions from traditional intermediaries.
An ICO is typically preceded by a so-called white-paper, which is made available on the issuer’s website and in which the issuer describes his project, the tokens that will be issued, and the technology as well as the protocols underlying them.
The issuer will subsequently announce his project to the general public along with the date of the ICO through social media. In order to subscribe to, hold and – at a later stage – trade tokens, investors will need to acquire a “digital wallet”. Such wallet is also required to store and exchange other cryptoassets.
As indicated above, the words “initial coin offering” are currently used in a dual context to refer both to coins by the means of cryptocurrencies and tokens issued by an identifiable issuer.
4 Things that You can Do with Cryptocurrencies
In the past, trying to find a merchant that accepts cryptocurrency was extremely difficult, if not impossible. These days, however, the situation is completely different. In this video, we will briefly speak about the things that you can do practically with cryptocurrencies. This includes buying goods, investing in cryptocurrencies, mining cryptocurrencies, and accepting cryptocurrencies as a form of payment. From a financial crime perspective, this is particularly important, because it will help you to build an understanding around some of the more common schemes around it, including money laundering and terrorist financing. Alright, but let’s now dive into it.
1. Buy Goods with Cryptocurrencies
First of all, you can Buy goods with cryptocurrencies. There are a lot of merchants – both online and offline – that accept cryptocurrencies as the form of payment. They range from massive online retailers like Overstock and Newegg to small local shops, bars and restaurants. Cryptocurrencies, and Bitcoin in particular, can be used to pay for hotels, flights, jewellery, apps, computer parts and even a college degree.
Other digital currencies like Litecoin, Ripple, Ethereum and so on aren’t accepted as widely just yet. Things are changing for the better though, with Apple having authorized at least 10 different cryptocurrencies as a viable form of payment on App Store.
Of course, users of cryptocurrencies other than Bitcoin can always exchange their coins for Bitcoins. Moreover, there are Gift Card selling websites like Gift Off, which accepts around 20 different cryptocurrencies. Through gift cards, you can essentially buy anything with a cryptocurrency.
Finally, there are marketplaces like Bitify and OpenBazaar that only accept cryptocurrencies.
2. Invest in Cryptocurrencies
Secondly, you can invest in them. Many people believe that cryptocurrencies are the hottest investment opportunity currently available. Indeed, there are many stories of people becoming millionaires through their Bitcoin investments. Bitcoin is the most recognizable digital currency to date, and just last year one Bitcoin was valued at 800 US-Dollar. In February 2017, the price of one Bitcoin exceeded 19,000 US-Dollar and, according to Coin Market Cap, the all time high Bitcoin market capitalization was 334 billion US-Dollars in December 2017.
Ethereum, perhaps the second most valued cryptocurrency, has recorded the fastest rise a digital currency ever demonstrated. Since May 2016, its value increased by at least 2,700 percent. When it comes to all cryptocurrencies combined, their market cap soared by more than 10,000 percent since mid-2013.
However, it is worth noting that cryptocurrencies are high-risk investments. Their market value fluctuates like no other asset’s. Moreover, it is partly unregulated, there is always a risk of them getting outlawed in certain jurisdictions and any cryptocurrency exchange can potentially get hacked.
For many people that want to invest in cryptocurrencies, Bitcoin is obviously still the dominant choice. However, in 2017 its share in the crypto-market has quite dramatically fallen from 90 percent to just 40 percent. There are many options currently available, with some coins being privacy-focused, others being less open and decentralized than Bitcoin and some just outright copying it.
While it’s very easy to buy Bitcoins – there are numerous exchanges in existence that trade in Bitcoins – other cryptocurrencies aren’t as easy to acquire. Although, this situation is slowly improving with major exchanges like Kraken, BitFinex, BitStamp and many others starting to sell Litecoin, Ethereum, Monero, Ripple and so on. There are also a few other different ways of being coin, for instance, you can trade face-to-face with a seller or use a Bitcoin ATM.
Once you bought your cryptocurrency, you need a way to store it. All major exchanges offer wallet services. But, while it might seem convenient, it’s best if you store your assets in an offline wallet on your hard drive, or even invest in a hardware wallet. This is the most secure way of storing your coins and it gives you full control over your assets.
As with any other investment, you need to pay close attention to the cryptocurrencies’ market value and to any news related to them. Coinmarketcap is a one-stop solution for tracking the price, volume, circulation supply and market cap of most existing cryptocurrencies.
Depending on a jurisdiction you live in, once you’ve made a profit or a loss investing in cryptocurrencies, you might need to include it in your tax report. In terms of taxation, cryptocurrencies are treated very differently from country to country. In the US, the Internal Revenue Service ruled that Bitcoins and other digital currencies are to be taxed as property, not currency. For investors, this means that accrued long-term gains and losses from cryptocurrency trading are taxed at each investor’s applicable capital gains rate, which stands at a maximum of 15 percent.
3. Mine Cryptocurrencies
Thirdly, you can also mine cryptocurrencies. Miners are the single most important part of any cryptocurrency network, and much like trading, mining is an investment. Essentially, miners are providing a bookkeeping service for their respective communities. They contribute their computing power to solving complicated cryptographic puzzles, which is necessary to confirm a transaction and record it in a distributed public ledger called the Blockchain.
One of the interesting things about mining is that the difficulty of the puzzles is constantly increasing, correlating with the number of people trying to solve it. So, the more popular a certain cryptocurrency becomes, the more people try to mine it, the more difficult the process becomes.
A lot of people have made fortunes by mining Bitcoins. Back in the days, you could make substantial profits from mining using just your computer, or even a powerful enough laptop. These days, Bitcoin mining can only become profitable if you’re willing to invest in an industrial-grade mining hardware. This, of course, incurs huge electricity bills on top of the price of all the necessary equipment.
Currently, Litecoins, Dogecoins and Feathercoins are said to be the best cryptocurrencies in terms of being cost-effective for beginners. For instance, at the current value of Litecoins, you might earn anything from 50 cents to 10 dollars a day using only consumer-grade hardware.
But how do miners make profits? The more computing power they manage to accumulate, the more chances they have of solving the cryptographic puzzles. Once a miner manages to solve the puzzle, they receive a reward as well as a transaction fee.
As a cryptocurrency attracts more interest, mining becomes harder and the amount of coins received as a reward decreases. For example, when Bitcoin was first created, the reward for successful mining was 50 BTC. Now, the reward stands at 12.5 Bitcoins. This happened because the Bitcoin network is designed so that there can only be a total of 21 million coins in circulation. As rewards are going to become smaller and smaller, every single Bitcoin mined will become exponentially more and more valuable.
All of those factors make mining cryptocurrencies an extremely competitive arms race that rewards early adopters. However, depending on where you live, profits made from mining can be subject to taxation and Money Transmitting regulations. In the US, the FinCEN has issued a guidance, according to which mining of cryptocurrencies and exchanging them for flat currencies may be considered money transmitting. This means that miners might need to comply with special laws and regulations dealing with this type of activities.
4. Accept Cryptocurrencies as Payment
Last but not least, you can accept cryptocurrencies as a form of payment. If you happen to own a business and if you’re looking for potential new customers, accepting cryptocurrencies as a form of payment may be a solution for you. The interest in cryptocurrencies has never been higher and it’s only going to increase. Along with the growing interest, also grows the number of crypto-ATMs located around the world. Coin ATM Radar currently lists almost 1,800 ATMs in 58 countries.
First of all, you need to let your customers know that your business accepts crypto coins. Simply putting a sign by your cash register should do the trick. The payments can then be accepted using hardware terminals, touch screen apps or simple wallet addresses through QR codes.
There are many different services that you can use to be able to accept payments in cryptocurrencies. For example, CoinPayments currently accepts over 75 different digital currencies, charging just 0.5 percent commission per transaction. Other popular services include Cryptonator, CoinGate and BitPay, with the latter only accepting Bitcoins.
In the US, Bitcoin and other cryptocurrencies have been recognized as a convertible virtual currency, which means accepting them as a form of payment is exactly the same as accepting cash, gold or gift cards.
For tax purposes, US-based businesses accepting cryptocurrencies need to record a reference of sales, amount received in a particular currency and the date of transaction. If sales taxes are payable, the amount due is calculated based on the average exchange rate at the time of sale.
A Brief History of Virtual Currencies and Cryptocurrencies
Virtual currencies and cryptocurrencies are not an entirely new concept, with multiple virtual currencies having come and gone over the past decade.
One of the first popular virtual currencies was E-Gold. E-Gold was first established in 1961 and allowed users to open an account with a value denominated in grams of gold or other precious metals and the ability to make instant transfers of value to other E-Gold accounts.
It was reported that in 2005 E-Gold had 2.5 million account holders, performing daily transactions with a typical value of 6.3 million US-Dollar. In 2007, E-Gold was indicted by a grand jury in the US, accusing the company of money-laundering, conspiracy and operating an unlicensed money transmitting business, ultimately leading to the shutdown of E-Gold by the US courts. E-Gold also spawned a range of imitators such as e-Bullion.com, Pecunix.com and others.
1998, WebMoney was established and continues to experience significant growth, with over 40 million users at the time of shooting this course. The WebMoney system is based on providing its users with the ability to control individual property rights for valuables, or assets, which are stored by other participants of the system, which are known as Guarantors.
And then we have Liberty Reserve. Liberty Reserve was established in 2006 and operated until 2013 and allowed users to register and transfer money to other users with only a name, email address and date of birth. No efforts were made to verify the identities of its users. In 2013 the US Department of Justice charged Liberty Reserve with operating an unregistered money transmitter business and money-laundering for facilitating the movement of more than $6 billion in illicit proceeds.
Now with regards to cryptocurrencies, there have been many attempts at creating a digital currency during the 90s tech boom, with systems like Flooz, Beenz and DigiCash emerging on the market but inevitably failing. There were many different reasons for their failures, such as fraud, financial problems and even frictions between companies’ employees and their bosses.
The History of Bitcoin
Then, in late 2008, the financial crisis was in full swing. In September of that year, Lehman Brothers Holdings, then the fourth-largest investment bank in the world, filed for Chapter 11 bankruptcy protection. As the world’s financial infrastructure was crumbling, the domain bitcoin.org was registered. Later in 2008, a person or group using the pseudonym Satoshi Nakamoto published a white paper on bitcoin to a cryptography mailing list, explaining how the cryptocurrency would work.
In early 2009, Nakamoto mined the first-ever bitcoin, known as the “genesis block.” Embedded in the programming of this first bitcoin was the text “The Times 03/Jan/2009 Chancellor on brink of second bailout for banks.” The text refers to a headline on that date from the British newspaper The Times, and is generally seen as proof of the date bitcoin was first mined. Others also believe it pointed to the crumbling financial infrastructure of the modern world, and the need for a new way forward. The first bitcoin transaction soon followed, when a bitcoin was sent from Nakamoto to Hal Finney, a cryptography expert and enthusiast.
To this day, Satoshi Nakamoto’s identity remains a mystery. Several people have claimed to be the mysterious programmer or, as often suspected, a group of programmers; numerous attempts have been made to identify the person or group, but none have been satisfactory enough to be viewed as conclusive. The only personal details that Nakamoto gave to others were claims to be living in Japan and to have been born April 5, 1975. Nakamoto encouraged other cryptographers to assist with the coding, but the creator stepped away from bitcoin in 2011 and has not been publicly seen or heard from since.
In May 2010, a Florida programmer named Laszlo Hanyecz offered 10,000 bitcoins in exchange for pizza. A British enthusiast took Hanyecz up on the offer and ordered two pizzas to be delivered from a pizza place near Hanyecz’s residence; the Briton paid for the pizza using a credit card, and Hanyecz reimbursed the purchase with 10,000 bitcoins. This is believed to be the first-time bitcoin was ever used to make a purchase, and May 22 is celebrated in the bitcoin community as Bitcoin Pizza Day. What makes the transaction even more memorable, however, is the incredible value the bitcoins used to purchase two pizzas have accrued.
While the pizza purchase is celebrated, in bitcoin’s early days very few places of business accepted bitcoin as payment. One area where bitcoin’s anonymous nature and digital movement were prized, however, was the black market. It quickly became apparent that bitcoin filled a huge need in the criminal underworld.
The Emergence of Silk Road
In 2011, an online dark-web marketplace dubbed Silk Road was founded by Ross Ulbricht, who ran the site using the pseudonym Dread Pirate Roberts. The use of Tor routers, so users could browse in anonymity, and untraceable bitcoin payments proved to be a potent combination to avoid detection and arrests by law enforcement. In founding the site, Dread Pirate Roberts claimed libertarian ideals, saying customers would be free to purchase anything without fear of violence or arrest. Later, he wrote that he wanted Silk Road “to grow into a force to be reckoned with that can challenge the powers that be and at last give people the option to choose freedom over tyranny.”
While his intentions might have been noble, the site freely allowed all sorts of illegal drugs to be bought and sold with impunity. In October 2014, almost 14,000 product listings on Silk Road were found to be illegal drugs, including cannabis, heroin, LSD, MDMA, and methamphetamine. Other illegal items like fake driver’s licenses could also be purchased, though categories like child pornography and weapons were banned from the site.
Before Ulbricht was found and arrested, Silk Road had over a million active user accounts and had accounted for 1.2 million transactions worth 9.5 million bitcoins. While the price of bitcoin fluctuated wildly during the time of the site’s operation, the total was estimated to be worth about $1.2 billion.
An intensive search was conducted by a joint task force that included agents from the FBI, Internal Revenue Service, Drug Enforcement Administration, and U.S. Marshals; they finally found Ulbricht to be the man behind the site, and arrested him at a San Francisco public library in October 2013. While Silk Road was shut down, cryptocurrencies remain popular in black markets, as they offer buyers and sellers a cloak of anonymity without the limitations of using large amounts of cash.
Before that, in April 2011 already, Namecoin was created as an attempt at forming a decentralized DNS, which would make internet censorship very difficult.
Soon after, in October 2011, Litecoin was released. It was the first successful cryptocurrency to use scrypt as its hash function instead of the Bitcoin hash function. Another notable cryptocurrency, Peercoin was the first to use a proof-of-work/proof-of-stake hybrid, which emerged shortly after.
Alright, now you know about the history of virtual currencies and about the history of cryptocurrencies and, in particular, of Bitcoin.