Digital Currency Fall 2015

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Contents

Introduction

The concept of money dates back to the beginning of civilization. Currency has gone through a multitude of changes, and has included a number of different mediums of exchange. In the early days of currency, livestalk, food, beads, and eventually precious medals were all used as means of carrying out transactions with others. Despite the various changes in the objects used, the core functions of money have stayed constant: a medium of exchange and a store of value. [1]

As the objects of currencies evolved, so did the nature of money itself. Countries began following the United States when they went off the gold standard in 1971 and all currencies became fiat money, deriving value from governments as opposed to commodities. [2] With the significant control over economic activity lying with central banks, the concept of a digital form of currency began to surface, as well as decentralization.

Digital Currency

Digital currency is defined as “an Internet-based medium of exchange distinct from physical (such as banknotes or coins) that exhibits properties similar to physical currencies, but allows for instantaneous transactions and borderless transfer-of-ownership.” [3]. An important aspect of digital currency is the fact it has value in the real world, and can be used to purchase actual goods and services [4]. Examples of digital currencies include store gift cards, points reward cards, and cash back credit cards.

Many sources use digital currency, virtual currency, and crypto currency interchangeably. This is inaccurate, as both virtual and crypto currencies are types of digital currency [5]. It is useful to look at the definitions and comparisons of these terms in order to understand their true uses and meanings.

Digital Trend

There has been a growing trend towards a cashless society that has pushed innovation in digital payment solutions. It has been shown that one in ten Americans no longer carry cash on a daily basis. [6] Approximately eight in ten people carry less than $50 cash in their wallets on a regular basis, with the majority of people preferring to pay with plastic or on mobile technology. [7] This shift in consumer preferences creates a multitude of opportunities for businesses to capitalize on capturing these preferences and offering advanced payment solutions.

Consumers are also worried about the protection of personal information and privacy of online accounts and transactions. Credit card and banking information can be easily compromised by organized crime groups, or simply smart hackers, causing people to become weary in sharing such delicate information online for transaction purposes. People prefer anonymity and security, fuelling the movement towards technological innovations outlined throughout this page. For example, Bitcoin was created entirely on this premise; Security, anonymity, and transferring the power back from institutions to individuals. Shown through shifting consumers preferences, Bitcoin developers identified a business need, and formulated an extremely brilliant and advanced system that has the power to "be more transformative than anything we've seen before." [8]

Virtual Currency

In 2012, the European Central bank defined virtual currency as "a type of unregulated, digital money, which is issued and usually controlled by its developers, and used and accepted among the members of a specific virtual community." [9] In 2013, the US Department of Treasury shortened the definition to "a medium of exchange that operates like a currency in some environments, but does not have all the attributes of real currency."[10] As outlined in both definitions, virtual currency falls under the category of digital currency, but cannot be used to buy goods or services in the real world. More specifically, virtual currency is an internet-based currency that can only be used within a virtual world, such as video games and social media platforms. Their primary purpose is to provide value for purchasing "items in the framework of a virtual world" and are used for entertainment purposes.[11] Additionally, the value of virtual currency is not standardized, and is solely controlled by developers. A distinguishing characteristic of virtual currency is its one-way flow of cash from player to developer.

Cryptocurrency

Crytocurrency is another type of digital currency, but with added security features through the use of cryptography. It's a "medium of exchange like normal currencies such as USD, but designed for the purpose of exchanging digital information through a process made possible by certain principles of cryptography." [12] The first cryptocurrency released was Bitcoin, which will be explained further in the "Applications" section. In order to secure transactions and to control the currency created, cryptography is used to encrypt the digital tender, thus hiding it and increasing privacy.

History

Digital currency has been around for a number of years, with the rise and fall of various companies and platforms, as outlined below.

The first digital currency company surfaced in 1996 as E-Gold. The company was launched two years prior to Pay-pal, but didn’t actually take off until 2000. By 2004, they had over 1 million accounts and 5 million by 2009. By 2009, all transactions were suspended due to legal issues stemming from the large user base and ability for organized criminal groups to obtain user user information and compromise accounts.[13]

In 2006, Liberty Reserve surfaced as an attempt to create a centralized anonymous money transfer business. Users could create an account and transfer money to anyone without verification. However, once again, the company fell victim to extensive criminal activity and the platform was eventually shut down by regulatory authorities.[14]

In 2007, Perfect Money was established as another digital currency platform that works with multiple currencies. A common theme within digital currency platforms is that when one dies, the next experiences an exponential growth in user base. This was the case with Perfect Money when Liberty Reserve shut down. It’s still around, but is not available to all areas of the world. [15]

The latest digital currency, Bitcoin, was introduced in 2009 by Satoshi Nakamoto. It seemed to have learned from all the failures of the previous attempts, as they are a decentralized digital currency platform, meaning it operates without a central authority or middleman. Bitcoin uses crytpography, which is used to secure transactions and to control the creation of new coins. Its creation is built upon a foundation of anonymity, security, and an idea to completely replace state-backed currencies. Bitcoin's value is derived from its scarcity, and users can obtain Bitcoins through running "mining" programs. However, such mining practices become increasingly difficult as time goes on, with a set amount of 21 million Bitcoins allowed in circulation.

E-Commerce Payment Systems

Online Banking

These are main Canadian banks which support online banking system
Online Banking is referred to as financial activities done through a financial institution's online system via internet browser or mobile application. Other names of online banking are net banking, e-baking, virtual banking, and internet banking.

Online banking is one of the earliest electronics payment systems developed and is widely used across the world. It is easy to use and convenient, with customers simply needing internet access and registration with a local financial institution. With each institution offering its own system, usually the system can be accessed at any where and at any time as long as a customer has access to the Internet. Provided with a secure website or a mobile application, a customer can perform transactional tasks such as money transfer between accounts, paying to third parties, credit card applications, and non-transactional tasks such as viewing account balances, recent transactions, and submitting cheque orders.

Advantages

Using online banking as e-commerce payment system has several advantages.

Permanent Access

As long as a customer has an account with a financial institution, such as a local bank, the customer will have permanent access to the online banking system. Such access can be removed when:

  • a customer cancels and removes his account from the bank
  • a financial institution implementing access freezes to a customer's account
  • a financial institution cancels services (ex. in a case of bankruptcy)

Low Transaction Cost

Money transfers occurring within the institution has minimal costs, or none at all. Big banks, such as TD Canada Trust, offer zero cost transfer if a wire payment is requested within the same bank.

Access Locations

As mentioned above, a customer can access the system at any time anywhere. Some banks process tasks in a batch during off hours, thus pausing any transactional tasks for a period of time (usually 30 minutes to an hour). This functional pause of the system prevents system overload. However, other banks with newer systems requires shorter time of pause or not at all.

PayPal

PayPal Logo
PayPal is an electronic payment service system that is used worldwide. Working as a type of escrow service, PayPal is a mediator between buyers and sellers in which buyers pay PayPal, and PayPal forwards payments to sellers. Unlike credit cards or wire payments, PayPal prevents the exposure of credit card numbers or banking account numbers. Also, buyers and sellers are able to use different currencies as PayPal offers currency exchange. Anyone above the age of 18 may use the PayPal system by creating a PayPal account or registering a credit card and a debit card. Mainly serviced in the USA, PayPal offers a global service as well.

There are three types of PayPal accounts.

  • Personal: Mainly for buyers. Once the account is verified, there is no limit in making a payment. However, there is a limitation of $500 in receiving payments, and credit card payments are not accepted.
  • Premier: Users with a premier account can accept payment with a fee. If selling items on eBay, a seller can link PayPal as a payment method so that buyers can pay to PayPal via eBay. Also, users can receive payment via email address.
  • Business: Users are allowed to use business names instead of personal names. Recommended for active sellers.

Advantages

Popularity

A chart showing the increased popularity of PayPal usage
Founded in 1998, PayPal has been very popular online payment system. Currently there are 173 million users registered world wide, with $8.03 billion of revenue a year. PayPal is one of the mostly used online payment system in the world.[16]

eBay

In 2002, PayPal became a subsidiary of eBay.[17] With more than 70% of all eBay users making payments via PayPal, it has snow-balled its way to become very powerful e-commerce business. In July 2015, it became an independent corporate body.

Multinational Services

Currently, PayPal services are offered over 190 nations, with 26 currencies available to be used. Whichever country a user is in, as long as the PayPal service is offered, the user can make a payment to PayPal. Currency exchange and payment to a seller will be conducted by PayPal once a buyer pays to PayPal.

Apple Pay

iPhone 6 with the wallet application turned on

Apple's anticipated electronic payment system was introduced in 2013. The idea stemmed from the movement of cashless purchasing and the rapid advancements in technology. Furthermore, Apple thought to integrate registered credit cards with iTunes Stores in offline environments. The idea was reinforced by the fact that the fingerprint authentication will be secure enough to prevent any security threats. Apple Pay was first introduced in 2014 along with the iPhone 6 and Apple Watch. Apply Pay uses NFC(Near Field Communications), which was first embedded in these newly introduced devices. The first region to offer Apple Pay services was the United States, and plans to expand the service is currently in works.

Technology[18]

Apple Pay works using the Wallet application installed on Apple devices. Initial use of Apple Pay requires the input of the CVC(CVC/CVV/Security Code) of a credit card registered in the iTunes Store in order to register the card as a default payment card. Users can add more cards by taking a picture of the card a user wishes to register. They system will take the numbers as digital text or by inputting the credit card information manually. The registration process automatically validates the status of the card by sending information to the card company.

In online environments, developers can set Apple Pay as "other payments" in in-App Purchase using Apple Pay API. Users that choose Apple Pay as a payment method for in-App purchase will be required to use the touch ID authentication window, which uses fingerprint recognition to process the purchase.

In offline environments, Apple Pay can be used only at Apple Pay affiliates with an active NFC receiver. By placing the iPhone near the NFC receiver, the Wallet application will launch with the Touch ID authentication request interface.The completion of the fingerprint recognition will process the purchase.

Apple devices that do not support NFC (such as iPhone 5, 5S, and 5C) can use Apple Pay only in offline environment via Apple Watch.

Communication is done using the NFC based short length wireless communication. However, there are some differences that Apple Pay has compared to others when it comes to handling personal information.

  • No card number or CVC is stored within the device
  • What is transferred to the NFC receiver is one-time, temporary dynamic code is established
  • No collection of transactions by App

No developers have access to the Wallet application of Touch ID information, which are stored in a secure element after being encrypted. This secure element is not normal storage and cannot be backed up by iCloud services in order to maximize the security of personal information.

Security

Apply pay, among various other mobile payment systems, has been recognized as a safer alternative to traditional credit cards. [19] As no card information is not stored directly on devices, Apple Pay is secure from transaction information exposures. Any payments done via smartphones must done with the Touch ID authentication. When using an Apple Watch, Apple Pay can only be deployed when the watch is worn, receiving payment information from the paired smartphone. Apple Watch then erases all necessary payment information upon removal from the wearer. If any device is lost or stolen, a user can remotely erase all the information by using Find My iPhone feature on iCloud. From that moment, those devices will be unable to use Apple Pay. However, because those devices do not store card information, there is no need to re-issue a new card.

Currently, there aren't any known security breaches through the use of malware, or system vulnerabilities exposing Apply Pay users. [20] However, is it possible that such malware is being developed, with hackers searching for ways to exploit any operating system weaknesses to obtain personal payment information.

Samsung Pay

Samsung Pay is the world's first financial technology payment solution supporting both magnetic secure transmission and near field communication (NFC). After Samsung took over Loop Pay, a former American venture company, it introduced Samsung Pay along with Galaxy S6 and Galaxy S6 Edge on March, 2015. There are financial technology payment solutions in action already, but many are based on NFC technology, which is in its early stage of adoption rate as well as no market standard existence. The technology that Loop Pay has developed enables a device to create a magnetic field to activate the conventional magnetic payment system, which can be used on any card machine that is already widely used all over the world. Additionally, Samsung has combined NFC technology such that a user can choose between NFC and MST to use as a payment method.

Technology

NFC payment is very similar to other payment systems such as Apple Pay.

Magnetic Secure Transmission(MST) payment works in a similar to those conventional magnetic cards. Magnetic cards convert the information of the card(card number, expiry date, etc.) into magnetic field, then transfers that information to card payment system, which is followed by a payment request and payment approval from the card company. Samsung Pay uses this technology with additional authentication process such as fingerprint recognition, creating temporary virtual card information which is then converted into magnetic field.

Samsung Pay's magnetic field signal is created every second, with total 18 seconds of repeated re-creation. While the signal is being created, putting the camera near the card reader machine will activate the MST because the magnetic field signal module is located right under the camera.

Security

Loop Pay had a security issue where the magnetic field could be copied and can be re-used elsewhere. However, Samsung Pay has solved the problem by creating temporary virtual card information, which will be destroyed if the transaction is cancelled. The temporary card information is only valid for 90 seconds after its creation, and is terminated immediately after a transaction. Because of this, Samsung Pay is not offered for all card companies. Additionally, cancelling a transaction is a bit complicated because of the temporary virtual card information. As each transaction has different information, Samsung Pay needs to enable "cancellation mode" to recall the transaction and information needed because typical payment cancellation requires the credit card number used in the original payment.

Bitcoin

Bitcoin is the world's first virtual currency introduced by Satoshi Nakamoto on January 3rd, 2009. Unlike other currencies used now, fast and safe peer-to-peer transactions without any intervention can be performed. There is a limitation of production of Bitcoin just like golds: the total amount to be mined is 21 million Bitcoins. On November 2013, the total amount of mined Bitcoin was estimated to be 12 million Bitcoins, and 9 millions of Bitcoins is anticipated to be mined within about a century.
Bitcoin Logo

Currently(December 6, 2015), 1BTC is traded as $391.63.[1] Due to high volatility of price, the price of 1BTC was dropped to about $275 on January 2015. When Bitcoins was priced very highly in 2013, 1BTC was worth more than $1000.

The total amount of 21 million BTC is not enough to be used as the world's currency as the world's population is over 7 billion. What Satoshi Nakamoto did was to enable the bitcoin to be divided into smaller decimals. The smallest value that the bitcoin is divided into is one hundred-millionth(0.00000001) bitcoin, so called as 1 satoshi.[2] If more amount of bitcoin is needed, the bitcoin trade protocol can be altered to divide the bitcoin into more smaller values.

Mining

One of the most important features that the bitcoin has is that it works without any central organization. Bitcoins are generated by solving encrypted mathematical problems using computers. Such action is called mining and the difficulty of problems increases as more computers join to more problems. The harder the difficult it gets, the security is reinforced as well.

Bitcoin mining is an action responsible for the supply and transaction assurance just like central banks of nations. However, the difference comes in where the mining is conducted P2P via the network, which is uncontrollable.

The mining process is done by following these steps[3]:

  1. Pressing sending button will spread the ledger to nearby nodes(users) through the network.
  2. Each mining node verifies the ledger, and these are collected to create a block.
  3. The mining node adds a random number to the block created, and calculates SHA-256 encrypted function.
  4. If the encryption result passes certain difficulty level, a block creation will be successful, spreading the result so nearby nodes. At this moment, the rewards are given to the node that was successful in creating the block.
  5. When a new block is successfully created, each node verifies and approves if all information included in the block is correct.

The amount of rewarded bitcoin is halved in about every 4 years, where the total amount of bitcoin will be 21 million. Because the estimated end point of mining is after 2100, the bitcoin production can be seen as infinite at the year of 2015. This indicates that faster entrance to the bitcoin market will result in higher profit.

As the world's attention to the bitcoin got greater, the difficulty of the encrypted problems are so high that personal computers are not able to solve a single problem these days. Due to this, a concept of mining pool is developed, where miners team up to solve a problem. Special chips and computers are developed for faster mining process and big capitals are getting into the bitcoin market, increasing the difficulty even higher. However, because the amount of bitcoins mined should not be changed dramatically, the level of difficulty of mining increases proportionally to the whole bitcoin network's ability to mine. Thus the amount of bitcoin mined during a certain duration is consistent, and having better mining hardwares will only result in increasing the one's share of what's mined.

Using Bitcoin

Users will need to create a bitcoin wallet in order to trade bitcoins. Each wallet will have its unique address. These unique addresses always start with 1, followed by 33 digits of combinations of alphabets and numbers. No personal information is needed in creating a wallet. If a user loses a password to the account, then he is forever disconnected with the account, along with the bitcoin stored within the wallet.

As all transactions are stored in P2P protocols, the first time a user starts the bitcoin program takes a lot of time to initialize the setting. There is a small fee involved in each transaction, but is not required to pay. These fees are used to increase the priority level of transaction approval by other miners. Some clients make the fee a mandatory process for all transactions.

Advantages

Decentralized

Bitcoin's lack of a central governing body categorizes it as a decentralized currency. Traditional banking systems are centralized in that governments control the value of currency through the printing of fiat money. Bitcoin works on a Peer-to-Peer network, with a set number of available Bitcoins. People are able to freely transfer money to others or buy goods or services that accept Bitcoin as a currency. The traditional banking system has always been the standard, however, Bitcoin and its underlying technology may prove to challenge the status quo and play a substantial role in setting a new standard to banking as we know it.

Zero Transaction Cost

One of Bitcoin's most attractive benefits is the lack of transaction costs between clients [4] There is no transaction cost for a digital currency. Traditionally, transaction costs have been a major barrier for many business operations. Visa and MasterCard charge retailers a high percentage of transactions completed, causing revenues to decrease. This is especially detrimental to small businesses who may have narrow profit margins. They can't afford extra costs. But with Bitcoins, they don’t have to pay the bulk of money to Visa or Mastercard, which have a positive impact on their business and allow them to save transaction costs.

Everytime and Everywhere

Because all we need is the Internet and Bitcoin software, people are able to transfer money or purchase goods or services anytime and anywhere in the world. The limitation of time and space is reduced, so the working time and address of banks are no longer big problems. It can be very convenient for the people who come across emergencies, and will help build up the efficiency of the economy.

Anonymity

Due to the growing trend in privacy and anonymity, one of Bitcoin's most desirable features lies within its confidentiality. All purchases made by the user are unpublished, unless the user chooses to publish them, and are not associated with any personal information. [5] Similar to cash-only purchases, expenditures cannot be tracked back to the user. Furthermore, the address that's generated to make Bitcoin purchases is altered for each transaction completed.

World's Neutral Currency

Currently, the US Dollar is the world's currency and is the way in which the US Government controls the economy. If Bitcoin become the world's neutral currency, it allow developing countries to advance and would bring on a worldwide revolution of the monetary market. A new economic system will occur, and a more creative and dynamic world trade pattern could develop.

Disadvantages

Volatility of Value

A graph showing the price change of bitcoins in 2015
The price of Bitcoins frequently fluctuates, meaning the value of bitcoin is constantly changing.[6] This characteristic is due to the set number of Bitcoins available to the public, and the increasing demand. Once more businesses accept Bitcoin as a currency, it is believed that the volatility will settle, however, until then, its constant fluctuation of value acts as a barrier for widespread use.

Not Widely Used

Bitcoin is still in its infancy stages, with further development of uses and applications still in progress, along with further education to the public. Many people do not understand Bitcoin and it's potential for widespread use. Very few businesses accept Bitcoins as payment, severely limiting those who use Bitcoin on what products and services they're able to purchase with this currency. Because of the overall unknown nature of Bitcoin, people are unsure about adopting such a new and foreign concept that challenges the traditional banking environment. It seems absurd that value can literally be stored within their hard drive, and not in a bank account. Furthermore, If someone wanted to completely abandon traditional currency and survive solely on Bitcoins, it's nearly an impossible mission to complete, with very limited options available for purchase. The small numbers of Bitcoin users greatly hinder the need and value of it, and hamper its further development.[7].

Hard to Regulate

Bitcoin is nearly impossible to regulate, as it has been designed as a decentralized, cryptocurrency from the very beginning of its inception. [8] People are able to make Internet purchases without the use of a bank account, making their transactions virtually untraceable. As a result, criminal behaviour becomes substantially easier to pull off, and can't be stopped due to the inability to regulate the currency.[9] Numerous crimes have been attached to the use of Bitcoins, ranging from illegal drugs, weapons, and other illegal paraphernalia. Because there is no central storage of funds, law enforcement groups are unable to freeze accounts associated with criminal behaviour. This problem lies within the entire purpose and design of Bitcoin infrastructure, and would be virtually impossible to change. The system has been designed around anonymity by a privacy-obsessed figure that wanted to shift the power from institutions to individuals. [10]

The Ponzi scheme may occur in bitcoin market, too. Government will have a hard time dealing with various and constant bitcoin problems.[11].

Implications

Security[12].

Because bitcoin is a digital currency, a lot of security problems will arise, such as Unauthorized Spending, Double Spending, Race Attack, History Modification, Selfish Mining and so on. People will refuse to use a kind of currency that has a series of severe security problems, so the bitcoin programmers have been working word to deal with the bugs one by one.

Unauthorized Spending

Unauthorized spending simply means that bitcoins in one account can be stolen by another account. For example, if A sends a bitcoin to B, B becomes the owner of the bitcoin. But there is another person C who observes the transaction between A and B, so he may use some tricks to spend the bitcoin A just sent. This problem has been solved by private keys. Everybody has his own private key on his account. If somebody wants to use your bitcoins, he must know your private key.

Double Spending and Race Attack

A double spending problem means that a bitcoin can be used many times simultaneously. This problem will destroy the law of markets to a great extent, and eventually bitcoin will have no value. The key to solve this problem is the public ledger, the block chain. The ledger is shown to all bitcoin users which naturally gives every user the power to monitor every single transaction. It ensures that all transferred bitcoins haven’t been previously spent.[13].

History Modification

Although the public ledger solves the double spending problem, it can be modified by someone else for illegal purposes. For example, if A wants to buy a thing worth 100 bitcoins from B, the entry that A paid B 100 bitcoins will be written on the public ledger. But if A doesn’t want to pay that much, she can revise the entry to A paid B 10 bitcoins which saves her 90 bitcoins. Historical modification makes the block chain no longer convincing. Nowadays bitcoin programmers have come up with a very complicated and specific arithmetic to solve this problem.

Selfish Mining

The bitcoin system regulates that the miners will get some bitcoins as rewards, but there will always be someone who doesn't want to invest in mining or devote their intelligence while still have the desire to earn bitcoins. So they might steal the reward, which can hugely damage the passion for the miners. What's worse, the phenomenon is newly introduced, so actually there is no perfect method to deal with it at present.

Deanonymization of Clients

Although people don’t put their real names on the accounts, criminals will strive to figure out who you are through your transactions with other people or business. Once the identities are revealed, it will be very dangerous for the whole society. It's high time that programmers designed a bitcoin operation system that can rigorously keep people's private information safe.

Future of Digital Currency

As a new part of the currency system, the invention of digital currency fits the development of this internet society. It has several advantages which distinguish it from traditional currency. As it becomes more popular over time, it's sure that it will change our life in many ways.

Possible Situations

More Mature and Systematic

Though it's been years since the first invention of digital currency, it's still in the very early stage of its development. It doesn't have many applications now so people can't use it whenever they like. And there's not so many laws and regulations about it so people may wonder if the property rights can be guaranteed in any ways. However as time goes by, the system of laws and regulations about digital currency would gradually be set so people can use digital currency without much worries. The more detailed laws and regulations would be the proper use of digital currency and punishment about digital currency crime etc.

Market Distribution

Ctypto-Currency Market Capitalizations from coinmarketcap.com on 2nd December 2015

For now there're hundreds of digital currency in the market and the market share changes every minute as the users of digital currency is not huge yet. However when the system and regulations about digital currency becomes mature enough and the use of digital currency is widespread, people tend to trust and use certain types as mainstream digital currency. It's likely that there will be one or two digital currencies that share the most of the market just like other markets in the world. For now the Bitcoin is most likely to be the No.1 in the digital currency market as it has most users and influence now with more than 5 billion market cap, followed by Litecoin and Ripple[14].

More Applications

As digital currency becomes more popular, there will be more services and applications around it, like buying Starbucks or even a Tesla model, or self-enforcing contracts and secure systems for online voting and crowdfunding[15]. The most possible situation is the technology may be combined in mobile phones or cards so actually the users can use it like credit cards, debit cards or more. And as there's no intermediate using digital currency so overall it will take less time to process the transactions and save our time and energy.

More Users

It's quite obvious that digital will become more and more popular as it gradually builds trust with consumers and actually have more applications in life. It's estimated that bitcoin users to approach 5 million mark by 2019[16]. More people are likely to pay by digital currency for saving time, keeping track of the transactions and property safety in their daily life. As digital currency is more likely to save time and money, people are likely to prefer to use digital currency when it can be used like real currency. On the other hand, as the use of digital currency becomes more common, the use of traditional currencies would decline.

New Jobs

A bitcoin mine machines
There would be new jobs around a new industry, and the industry of digital currency isn't a exception. There would be more jobs around it like the bitcoin mining, digital currency services and making digital currency infrastructures. As digital currency is still in early stage of development, it's still possible to enter this market with a new kind of digital currency.


However, actually the mining industry is consolidating as an oligopoly[17]. 5 to 7 major mining pools control the main maining industry. So it remains wonder if bitcoin mining would be a great job opportunity, especially when there are less bitcoins as more are mined out as time goes by.

Reactions of the banks

As digital currency doesn't involve the banking systems nowadays, the reactions to it from banks are important. For banks, it might be a threat or an opportunity.At one hand, the increase in digital currency would decrease the revenue of the banks and do harm to the current currency system. On the other hand, there might be new services around digital currency for the banks to provide.[18]

So the situation would probably be like the banks hope that the development of digital currency could be slower, while they are trying to find some chances for them in it. And some banks also proposes national digital currency[19], which might maintain the development of the banks.

Future Implications

Though digital currency does have some advantages compared to traditional currency, there are still some worries about it. Digital currency can brings much convenience to our life, but that doesn't mean it's a perfect tool in the finance system. The flaws of digital currency can sometimes be serious, and it's important to find good answers to the problems it causes.

Digital Currency Crime

As the use of digital currency becomes more common in our daily life, the crime around digital currency would be more at the same time. As it needs knowledge about the internet and digital currency system, the overall cost of crime would be much higher than traditional way of currency crime like stealing or robbing money. However, it might be safer for the criminals as they might use this knowledge to hide themselves. On the other hand, the return of crimes would be much higher as once they hack into a system of digital currency, the property of everyone isn't safe any more and the total number of money can be countless. So it's highly important to set up some regulations around it. And luckily, there have already some organizations built to fight against these crimes like The Interpol Global Complex for Innovation (IGCI)[20] in Singapore.

Job Loss

The need for industries related to traditional currency would decline as people use digital currency more in the future, including banking and other traditional intermediary services in the future. Though there would be new jobs around digital currency, it's not sure if the new jobs can make up the loss of the traditional intermediary services as digital currency uses P2P system and don't need many staff in between.

Long Period To Set Up Regulations And Infrastructures

As the speed of development of digital currency is not high, the setting up of regulations and infrastructures can take a long time, which means people might have to wait for years before using digital currency without much limitations.

Decrease Tax Revenue

As the digital currency mainly uses Peer-to-peer (P2P) networks to process the transactions, little to no fees in processing, which means the users don't have to pay tax[21]. However, it can be a big problem for the countries as it will lead to the decline of tax revenue which is a big part of the total revenue. And the decline of tax revenue means the decline of country power. It can highly influence our life like the building of infrastructures and military power.

Government Intervention

  1. The increase in underground economy and the decline of the tax revenue. As digital currency isn't controlled by the government, it might be used as a tool of underground economy which would do harm to the country. And due to the possible decline of tax revenue because of digital currency, it's likely that the government decides to take some regulations about digital currency, which means some advantages might be lost in the process. The government might adopt an official digital currency[22] which have some limitations when being used like paying tax and maximum amount of money for a single transaction. Regulations like these can solve the problem of decline of tax revenue in some way, however it's not good for the development of the digital currency and not good for our people.
  2. The loss of power of monetary control. Countries like the U.S. and China might use the power of their monetary to influence the international finance system. However, as digital currency doesn't belong to any countries, when it becomes popular, the power of these currencies would gradually decrease, which thus decrease the financial power of a country. And this might encourage countries to make some regulations about it.
  3. More money laundering and illegal trade. The digital currency would actually encourage illegal actions like money laundering and weapon trade, which would do great harm to the countries. So the countries would probably take some actions to deal with this problem.

Conclusion

The shifting in consumer payment habits and growing privacy concerns have forced major innovations in payment platforms, and in currency as a whole. Gaps in consumer preferences and the unavailability of solutions within the current market have been identified and addressed, as developers of Bitcoin, and applications such as Samsung and Apple Pay, have shown. The technology behind such advancements is brilliant and will forever disrupt the status quo. Take Bitcoin, for instance. Although it is argued about whether or not Bitcoin will fully replace centralized currency in the future, it is actually much greater than that. Even if Bitcoin, as an accepted means of payment, fails to make it to worldwide adoption, its "future applications are unimaginably broad," and the technology behind it is here to stay[23]Many developers are already taking advantage of Bitcoin's base operating system and using it as a platform for the creation of specialized apps aimed at the inclusion of the world's 2.5 billion "unbanked" people. And it doesn't simply stop at currency and payment platforms. Developers are also using existing Bitcoin's base operating system to create software-managed "smart contracts" that no longer require lawyers.

As with any monetary-based system, various issues arise such as security and criminal activity. However, it is often discussed that such negative aspects of digital currency are far outweighed by its benefits. Not only does digital currency technology have the potential to reduce overall financial costs, it could make the financial system more efficient through security enhancement and strengthened economic governance. [24] It is noted that the Internet has changed and decentralized much of the world economy. One of the only areas left is the centralized area of finance, and digital currency just may be the technology that will help the world of finance as we know it, change for the better.

References

  1. http://www.coindesk.com/price/
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  4. http://cs.stanford.edu/people/eroberts/cs201/projects/2010-11/DigitalCurrencies/advantages/index.html
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  17. Prisco Giulio. (2015 September 7). Exclusive Preview: ECUREX Research to Release Comprehensive Digital Currency Market Report . BitcoinMagazine. Retrieved from : https://bitcoinmagazine.com/articles/exclusive-preview-ecurex-research-release-comprehensive-digital-currency-market-report-1441655967
  18. Quittner Jeremy. (2012. January 13.) For Banks, Digital Currency Poses Threat — and Opportunity. American Banker. Retrieved From: http://www.americanbanker.com/issues/177_10/bitcoin-digital-currency-bank-risks-1045734-1.html?zkPrintable=1&nopagination=1
  19. Higgins Stan. (2015. September 18). Bank of England Economist Proposes National Digital Currency. CoinDesk. Retrieved From: http://www.coindesk.com/bank-of-england-economist-digital-currency/
  20. Nylander Johan. (2015 August 31). Interpol Creates Digital Currency To Fight Bitcoin Crimes. Forbes. Retrieved from : http://www.forbes.com/sites/jnylander/2015/08/31/interpol-creates-digital-currency-to-fight-bitcoin-crimes/
  21. Digital Currency and the Tax System. Abeck Accounting. Retrieved from : http://abeckacctg.com/articles.php?id=12636
  22. McMillan Robert. (2014. December 12) Instead of Fighting Bitcoin, the US Could Make Its Own Digital Currency. Weird. Retrieved from : http://www.wired.com/2014/12/t-coin/
  23. http://www.wsj.com/articles/the-revolutionary-power-of-digital-currency-1422035061
  24. http://www.wsj.com/articles/the-revolutionary-power-of-digital-currency-1422035061
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