It is the objective of this paper to elaborate on what Cryptocurrencies are and which potentials they bear. At first, an overview of the current Cryptocurrency market is given before the current financial system is explained, in order to understand the different nature of Cryptocurrencies. This is followed by the analysis of regulations of virtual coins in the United States, Europe, and China. Moreover, four main potentials of Cryptocurrencies will be examined before general risks will be explained. To end, a conclusion and an outlook of the Cryptocurrency environment is given.
Cryptocurrencies are a phenomenon which has recently conquered the financial market. While Digitization processes are continuously disrupting the sector, Cryptocurrencies are the latest evolvement. During their presence of the last ten years, they remained generally uncontrolled and unregulated by financial authorities. They do not have any company or government issuing them and rather serve as an independent, peer-to-peer medium of exchange. They are virtual tokens which are stored and distributed on a so-called Distributed Ledger, the Blockchain, on which every participant of the network obtains the latest version in an encrypted format.
The market of Cryptocurrencies has witnessed high fluctuations and the appearance of new currencies, reaching its ultimate peak at the beginning of 2018. Since traditional measures do not work and these coins, since they are privately created and do not have an underlying asset, it is hard for financial authorities to regulate or even predict the movement of Cryptocurrencies. However, various potentials exist, which may change the financial system by the regulated implementation and acceptance of virtual coins.
Table of Contents
1. Introduction
2. Cryptomarket Overview
3. Current Financial System
4. Cryptocurrencies and Regulations
4.1 Distributed Ledger Technologies
4.2 Cryptocurrencies
4.3 Regulation of Cryptocurrencies
5. Potentials of Cryptocurrencies
5.1 Initial Coin Offerings
5.2 Instant Payments via Blockchain
5.3 Central Bank Cryptocurrencies
5.4 Cryptocurrencies in Emerging Markets
6. Risks of Cryptocurrencies
6.1 Security and Transaction Risk
6.2 Forking Risk
6.3 Cyber-crime Risk
6.4 Market Risk
6.5 Credit Risk
7. Conclusion and Outlook
Objectives and Topics
This seminar paper aims to provide a comprehensive understanding of cryptocurrencies, exploring their fundamental nature, current market standing, and the regulatory challenges they face. The study examines both the potential benefits for the global financial system and the inherent risks associated with this unregulated technological phenomenon.
- Overview of the cryptocurrency market and the current global financial system
- Analysis of regulatory approaches in the United States, Europe, and China
- Examination of the potential for Initial Coin Offerings and blockchain-based instant payments
- Investigation into the application of cryptocurrencies in emerging markets
- Assessment of security, market, and cyber-crime risks related to virtual currencies
Excerpt from the Book
4.2 Instant Payments via Blockchain
Instant payments via Blockchain are yet another potential for Cryptocurrencies. The idea follows the implementation of a Blockchain system inside the existent payment systems. It is aimed to allow an acceleration of the payment process contemporaneous with a reduction of the operative chain of a payment transaction.
As of today, a financial transaction includes at least five parties. A sender who wants to transfer any amount of money acquires his bank to conduct the transfer. The bank processing the transaction and sending it forward to the Central Bank apparatus. Central Bank one and Central Bank two operate the transaction via real-time settlement before the operation is passed forward to the receiver’s bank. On the next business day, the receiver obtains the amount of money and ultimately finalizes the transaction. (cf. European Central Bank, 2018)
A Blockchain-like intermediary, controlled and governed by a Federal Reserve, could potentially shorten the operative chain. Since a Blockchain is decentralized and able to operate transactions within a few minutes, efficiency would be increased by this approach while the accounting of such transfer may follow the old chain. A transaction would be secured through encryption and tamper-proof. As a Federal Reserve would be the gatekeeper of such Blockchain, it would also be controlled and monitored to reduce any fraudulent activity during the transfer. It is to say that the service would be provided at the expense of the Federal Reserve. (cf. Brainard, 2018)
Summary of Chapters
1. Introduction: Presents the rise of cryptocurrencies as a disruptive financial phenomenon and outlines the paper's objective to examine their nature, potential, and risks.
2. Cryptomarket Overview: Discusses the market capitalization, volatility, and the current lack of regulatory frameworks for cryptocurrencies.
3. Current Financial System: Explains the structure of global banking and payment systems to highlight why the decentralized nature of cryptocurrencies presents regulatory difficulties.
4. Cryptocurrencies and Regulations: Analyzes Distributed Ledger Technologies, defines cryptocurrencies, and reviews various international regulatory stances.
5. Potentials of Cryptocurrencies: Explores innovative applications including Initial Coin Offerings, blockchain-based payments, central bank digital currencies, and their use in emerging economies.
6. Risks of Cryptocurrencies: Details the primary dangers, including security vulnerabilities, forking, cyber-crime, market volatility, and credit risk.
7. Conclusion and Outlook: Summarizes the disruptive impact of cryptocurrencies and suggests that future progress depends on the implementation of effective legislative and regulatory frameworks.
Keywords
Cryptocurrencies, Blockchain, Distributed Ledger Technology, Regulations, Initial Coin Offerings, ICO, Financial System, Market Volatility, Cyber-crime, Central Bank, Digital Payments, Emerging Markets, Financial Innovation, Asset-backed Security, Monetary Policy
Frequently Asked Questions
What is the primary focus of this paper?
The paper focuses on understanding what cryptocurrencies are, how they operate within the financial landscape, and the various regulatory and technical challenges they present.
What are the central thematic areas covered?
The core themes include the current global financial system, the mechanics of blockchain, international regulatory approaches, the potential benefits of crypto-technology, and the associated financial and security risks.
What is the ultimate research objective?
The objective is to elaborate on the nature of cryptocurrencies and examine their potential to transform financial systems while addressing the reasons for their current lack of regulation.
Which methodology is utilized in this study?
The study employs a literature-based analysis of the current state of the cryptocurrency market, examining financial reports, central bank policies, and existing legal perspectives to construct its findings.
What topics are discussed in the main body?
The main body covers a market overview, a comparison with traditional banking, an analysis of DLT and regulations, potential use cases like ICOs, and an in-depth risk assessment.
Which keywords best characterize the work?
Key terms include Cryptocurrencies, Blockchain, Regulation, Initial Coin Offerings, Market Volatility, and Distributed Ledger Technology.
How do Initial Coin Offerings (ICOs) differ from traditional IPOs?
Unlike traditional IPOs that issue shares of a company, ICOs involve the issuance of crypto-tokens that may grant utility or specific rights to investors within a digital ecosystem.
What specific role does the Petro play in Venezuela's economic strategy?
The Petro is an asset-backed cryptocurrency introduced by the Venezuelan government, backed by oil reserves, intended to serve as a parallel medium of exchange and a tool to bypass conventional monetary issues.
Why are cryptocurrencies considered to have a 'forking risk'?
Forking risk arises because cryptocurrencies can be divided into new, independent currencies, which may dilute the value of the original token and leave investors vulnerable to rapid depreciation.
What is the main argument regarding central bank-issued cryptocurrencies?
The paper argues that while central banks could leverage blockchain to increase efficiency and speed, they face significant hurdles, including high implementation costs, potential cyber-security vulnerabilities, and the risk of undermining commercial banks.
- Quote paper
- Jaby Felix Coronel (Author), 2019, Regulations, Potentials and Risks of Cryptocurrencies, Munich, GRIN Verlag, https://www.hausarbeiten.de/document/904828
