What Is Cryptocurrency?

There is plenty of misunderstanding about the definition of cryptocurrency. Wikipedia’s well-researched entry on the topic defines “cryptocurrency” as follows (with their links included):

[Cryptocurrency is] a digital asset designed to work as a medium of exchange that uses cryptography to secure its transactions, to control the creation of additional units, and to verify the transfer of assets. Cryptocurrencies are a type of digital currencies, alternative currencies and virtual currencies. Cryptocurrencies use decentralized control as opposed to centralized electronic money and central banking systems. The decentralized control of each cryptocurrency works through a blockchain, which is a public transaction database, functioning as a distributed ledger. Bitcoin, created in 2009, was the first decentralized cryptocurrency. Since then, numerous other cryptocurrencies have been created.

Why create or use a cryptocurrency?

The answer is simple: freedom. (Freedom from centralized powers, to be exact.)

They’re used outside existing centralized banking and government structures, and this is why it’s attractive to users. They’re also mostly exchanged over the internet, which adds to the flexibility.

Coin Telegraph points out the intriguing characteristic of cryptocurrency:

While these alternative, decentralized modes of exchange are in the early stages of development, they have the unique potential to challenge existing systems of currency and payments. As of December 2017 total market capitalization of cryptocurrencies is bigger than 600 billion USD and record high daily volume is larger than 500 billion USD.As of January 2018, there were over 1384 and growing digital currencies in existence.

Many people buy cryptocurrency as they would an investment, with the hopes of profiting from its fluctuation in price. It’s also commonly used as a way to spend money as more and more businesses accept Bitcoin and others for payment.

Concerns About Cryptocurrencies and Legality Issues

Also noted by Coin Telegraph, but in a separate report, the world is still trying to wrap its head around the concept of Bitcoin and the security and legal implications of cryptocurrency. It’s also not surprising that governing agencies and central powers are worried and not particularly happy about a “rogue” financial community that they can’t control.

As Coin Telegraph observes: this also extends to exchanges and protection of people’s funds. US-based exchanges have to be regulated, but there are plenty of offshore platforms that don’t. (And some onshore platforms have blatantly broken the laws of the US.) The cryptocurrency history has been filled with instances of exchanges shutting down and running away with people’s funds.

The most famous of such cases is the closure of the notorious exchange Mt.Gox. At the beginning of 2014, formerly the most prominent Bitcoin exchange in existence filed for bankruptcy due to technological problems and the apparent theft or loss of 744,000 of its users Bitcoins. That number made up about six percent of 12.4 mln Bitcoins in circulation at the time.

Bitcoin’s ability to be used semi-anonymously is another cause for concern. Even though every single transaction is recorded in the Blockchain, it is very easy for users to stay almost completely anonymous, as those records only contain the public keys and the amount of funds transferred.

Most of these concerns were voiced after a dark web market Silk Road gained mainstream-media attention, as Bitcoins were the only form of payment accepted there. The market was since shut down by the FBI, but the authorities are still worried about Bitcoin’s appeal among the traders of illegal goods and services. Moreover, it is feared that Bitcoin’s semi-anonymity and decentralized nature can be exploited in money laundering and tax evasion schemes.

In 2013, Bitcoin was classified as a convertible decentralized virtual currency by the US Treasury Department’s Financial Crimes Enforcement Network (FinCEN). They have also issued a guidance, in which they stated that those who obtain units of virtual currency and use it to purchase goods are not considered money transmitters and are operating within the law.

So basically it comes down to this: buying well-natured goods and services with Bitcoins is completely legal. The cryptocurrency is accepted as a form of payment on several major and minor online marketplaces and service providers, including Overstock, Shopify and OKCupid. Moreover, there are shops and restaurants all over the US where you can pay with Bitcoins.

Investing

According to the same guidance, investing in Bitcoin is also within the legal territory.  Many regulated US-based exchanges have to comply with the Anti-Money Laundering and Know Your Customer policies. Because of that, those who wish to trade and invest in Bitcoin have to verify their ID and connect an existing bank account.

Although, the US Securities and Exchange Commission (SEC) has warned potential investors that both fraudsters and promoters of high-risk investment schemes may target Bitcoin users.

Of course, readers might feel a bit overwhelmed trying to process the concept of cryptocurrency and all that it implies. We recommend that interested parties seek out guidance from your attorney and financial advisor prior to becoming financially engaged, or invested, in cryptocurrencies.