Cryptocurrency, which means “hidden money”, is an electronic form of money that uses encryption to secure transactions. It was invented by Satoshi Nakamoto in 2008 and since then has been used as an alternative to conventional forms of money. The main advantages of cryptocurrency are:
1. It does not require any third party to validate or confirm transactions.
2. It is completely decentralized. This means there is no central bank to manage it.
3. Transactions can be verified by anyone with access to the internet.
4. Cryptocurrency is completely anonymous.
These characteristics make cryptocurrency very attractive for illegal activities such as drug trafficking, terrorism financing, tax evasion, money laundering, etc. Therefore, it is important for governments to regulate the use of cryptocurrency. However, regulations are difficult to implement due to its decentralized nature. There are three main approaches to regulation:
1. Block chain technology
The block chain is a public ledger that records all cryptocurrency transactions. This ledger is shared between all users of the network and is updated every time a transaction occurs. All transactions are recorded in blocks. Each block contains a hash (a string of characters) that links it to previous blocks.
In order to record transactions, each block needs to be linked to the previous block using a hash. For example, when Alice sends Bob 10 BTC, the block containing this transaction will have a link to the previous block containing the 10 BTC transaction. The link is created using a cryptographic hash function. Once this link is established, the next block will contain the hash of the first block, which will in turn contain the hash of the second block, and so on. This chain of blocks becomes the block chain.
Each block also contains a timestamp that shows the date and time of the block’s creation. As more transactions are added to the block chain, the number of blocks increases and the block chain becomes longer. A shorter block chain means more transactions per block and faster confirmation of transactions.
2. Centralized system
A centralized system is a system where all the transactions are managed by a single entity. In other words, it is a system where the user must trust the entity to perform their transactions.
3. Decentralized system
A decentralized system is a system where there is no single entity to manage all transactions. Instead, each transaction is managed by multiple entities. This means that a user must trust all the entities involved in the transaction.
Regulation of cryptocurrencies can be achieved through three approaches:
1. Legal approach
This approach requires the creation of legal definitions for cryptocurrency. These definitions should include the legal definition of a currency, the legal definition of a transaction, the legal definition of a payment, the legal definition of a cryptocurrency exchange, etc.
2. Economic approach
This approach involves the imposition of taxes, capital controls, and other economic restrictions on the use of cryptocurrency.
3. Technical approach
This approach involves building new technologies that will allow governments to monitor and control cryptocurrency transactions. This approach is the most difficult to implement because it requires the cooperation of several parties.
