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Cryptocurrency: The go-to guide

Bre Hamilton  Public Records Product Specialist, Thomson Reuters

Bre Hamilton  Public Records Product Specialist, Thomson Reuters

Regardless of any one person’s opinion on the matter, cryptocurrency has taken off globally. Of the most common cryptos on the market, Bitcoin has a market capitalization of $599.6 billion, followed by Ethereum at $224.3 billion, and then Dogecoin at $23.6 billion. To put that in some perspective, that’s more market cap than Visa or Samsung.

The explosive growth of cryptocurrency is evident by more than just its share of market cap. The demand for digital currency was high enough for it to be addressed in the Anti-Money Laundering Act of 2020 (AMLA 2020). Among other things, the AMLA 2020 requires certain entities associated with cryptocurrency to now meet BSA registration and compliance standards.

This go-to guide is designed to provide a foundation to build your crypto knowledge upon.

Defining cryptocurrency

The definition of what cryptocurrency is and how it’s used changes as its popularity grows and different entrepreneurs create new offerings. In simplest terms, it is a decentralized digital currency intended to be used in buying or selling goods and services. This can range from online stores that have their unique form of currency for buying goods on that site (called tokens) to nonfungible tokens (NFTs) that are essentially virtual art.

FinCENs new digital currency advisor, Michele Korver views crypto as just another form of payment, just like any other form of federal currency. Bitcoin, Ethereum, and Dogecoin, the most common types of crypto, are generally treated more as an asset in a “stock market” where investors are buying and selling currency as the value changes.

The other level of cryptocurrency that is hot on everyone’s radar is stablecoin, such as USDCoin, Tether, and Paxos. This type of crypto is mostly pegged to assets like federal currency or other non-volatile federal assets (i.e., gold), making it less volatile than cryptos like Bitcoin.

Separate from stablecoin and other cryptocurrencies are unique virtual assets known as nonfungible tokens, or NFTs, that are traded on blockchain networks. More akin to a unique, not easily exchangeable asset like a physical art collection than they are to a currency, NFTs are unique digital objects. They are essentially virtual art and appreciate and depreciate depending on the demand for the “art” piece. NFTs are the new art collector’s paradise of the future much like the decentralized finance (Defi) system of blockchain is the transactional system of the future.

Cryptocurrency management

All crypto is managed on a decentralized database called blockchain. Blockchain (also known as distributed ledger technology) organizes data in sequenced “blocks” that build upon each other as assets that are exchanged and effectively track the current owner of the asset as well as their entire digital footprint.

As the digital asset is created, it establishes its first block with the ownership data, a nonce (a 32-bit randomly-generated whole number) connected to a cryptographic hash (256-bit number). These pieces of data are transparent nodes that ensure the transfer of owners is a smooth process. When an asset is transferred to a new owner, a new block is added and chained to the previous block with a new nonce and hash. This effectively creates a source of truth on ownership of the specific token.

Mining is the act of using computing power to calculate the answers to complex math problems to find a “golden nonce,” or the nonce that generates the accepted hash. Once this is found, the miner’s block is added to the chain, and the miner is financially rewarded. In addition to mining, there is also re-mining. Re-mining is the process of editing a block that needs to be changed, which is incredibly difficult as once one block is changed all the blocks that follow will also need to be changed (as the hashes build upon each other). This fact is what makes blockchain technology so secure.

The creation of blockchain databases allowed us to track a chain of ownership and exchanges across time, making the invention of cryptocurrency possible. The decentralization of this technology relies on the fact that no company or organization has ownership over the blockchain system. The access to the chain is through nodes. This technology is not only important for cryptocurrency but can also be significant in decentralizing the storage of many different digital assets, including documents, cybersecurity transactions (identity management), and other items shared among multiple individuals. It even may make possible the decentralization of federal currencies (especially with the introduction of stablecoin).

The future of transaction management lies within the further decentralizing of the financial system globally through distributed ledger technology. It is for this reason that the U.S. and other countries are considering further regulations on cryptocurrency. As it stands today, it is highly unregulated, but shortly we may see a different story coming from legislators as crypto becomes mainstream.

Cryptocurrency innovation

As part of the cryptocurrency revolution, many different technology startups have soared during this innovative time. Some of the most noteworthy companies are those that have entered the cryptocurrency servicing industry.

The first type of business is cryptocurrency exchanges. Much like stock exchange tools, cryptocurrency exchange tools came into the market so individuals can invest their federal dollars into different types of cryptocurrency. The interaction between these two types of currencies has caused debate over the legitimacy of these transactions among those enforcing anti-money laundering efforts, but due to the procedures taken on by these crypto exchange’s tensions have lowered.

Companies like Coinbase, Binance.US, Robinhood, and the most recent entrant, PayPal/Venmo have taken identity verification tasks into their own hands and relieved some of the stress on regulated banks. In addition to exchanges, some companies are taking the issue of liquidating owners’ tokens and creating a solution for easy access through cryptocurrency ATMs. These services, like Coinsource, also are taking security and fraud seriously by conducting know your customer checks on every one of their service clients.

This industry is not only innovating but is stimulating the economy in the creation of new businesses. The cryptocurrency industry is so powerful at this point that it only has upwards to go. Thomson Reuters Joseph Raczynski predicts that “Bitcoin will overtake the U.S. Dollar by 2050 at a value of $150,000.” This forecast is extremely viable as the financial market continues to move toward a digital landscape and peer-to-peer technology is becoming the new normal. Powerful technology combined with smart moves can make this prediction a reality, maybe even sooner rather than later.

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