Cryptocurrency

Blockchain: Blockchain is a type of technology used in many digital currencies as a bank ledger. Unlike a normal bank ledger, copies of that ledger are distributed digitally, among computers all over the world, automatically updating with every transaction.

Currency: A currency is a widely accepted system of money in circulation, usually designated by a nation or group of nations. Currency is commonly found in the form of paper and coins, but can also be digital (as this primer explores).

Fiat money: Government-issued currency, such as the USD. Sometimes referred to as Fiat currency.

Hashing: The process through which cryptocurrency transactions are verified. When one person pays another using Bitcoin, for example, computers on the blockchain automatically check that the transaction is accurate.

Hash: The mathematical problem computers must solve to add transactions to the blockchain.

Initial Coin Offering (ICO): The process by which a new cryptocurrency or digital “token” invites investment.

Mining: The process by which a computer solves a hash. The first computer to solve the hash permanently stores the transaction as a block on the blockchain. When a computer successfully adds a block to the blockchain, it is rewarded with a coin. Arriving at the right answer for a hash before another miner relates to how fast a computer can produce hashes. In the early years of bitcoin, for example, mining could be performed effectively using open-source software on standard desktop computers. More recently, only special-purpose machines known as application-specific integrated circuit (ASIC) miners can mine bitcoin cost-effectively, because they are optimized for the task. Mining pools (groups of miners) and companies now control most bitcoin mining activity.

The value of a certain cryptocurrency is heavily dependent on the faith of its investors, its integration into financial markets, public interest in using it, and its performance compared to other cryptocurrencies. Bitcoin, founded in 2008, was the first and only cryptocurrency until 2011 when “altcoins” began to appear. Estimates for the number of cryptocurrencies vary, but as of August 2018, there were about 1,600 different types of cryptocurrencies.

• Bitcoin
  It has the largest user base and a market capitalization in the hundreds of billions. While Bitcoin initially attracted financial institutions like Goldman Sachs, the collapse of Bitcoin’s value (along with other cryptocurrencies) in 2018 has since increased skepticism towards its long-term viability.
• Ethereum
  Ethereum is a decentralized software platform that enables Smart Contracts and Decentralized Applications (DApps) to be built and automated without interference from a third party (like Bitcoin: they both run on Blockchain technology). Ethereum launched in 2015 and is currently the second largest cryptocurrency based on market capitalization after Bitcoin.
• Ripple (XRP)
  Ripple is a real-time payment-processing network that offers both instant and low-cost international payments, to compete with other transaction systems such as SWIFT or VISA. It is the third largest cryptocurrency.
• Tether (USDT)
  Tether is one of the first and most popular of a group of “stablecoins” — cryptocurrencies that peg their market value to a currency or other external reference point to reduce volatility.
• Libra
  Libra is Facebook’s cryptocurrency due to be released in late 2020 or later. The company faced regulatory backlash: US and European regulators and legislators raised competition concerns, seeing as Facebook is one of the most powerful companies in the world. There were also fears that Libra would disrupt financial markets in smaller countries.Facebook has since rebranded its associated digital wallet as “Novi”, a standalone app. When Novi launches, it will include access to several stablecoins — each of them backed by a single fiat currency, such as USD, EUR, GBP or SGD. Facebook’s entry into cryptocurrency is expected to significantly alter the industry. Only a limited set of countries will be able to access it when it is launched.
• Monero
  Monero is the largest of what are known as privacy coins. Unlike Bitcoin, Monero transactions and account balances are not public by default.
• Zcash
  Another anonymity-preserving cryptocurrency, Zcash, is operated under a foundation of the same name. It is branded as a mission-based, privacy-centric cryptocurrency that enables users “to protect their privacy on their own terms”, regarding privacy as essential to human dignity and to the healthy functioning of civil society.

Cryptocurrencies are more accessible to a broader range of users than regular cash currency transactions are; they are not subject to government regulation and they don’t have high processing fees. Cross-border transactions in particular benefit from the features of cryptocurrencies; international banking fees and poor exchange rates can be extremely costly (See the BitPesa case study , below). In some cases, the value of cryptocurrencies may even be more stable than the local currency. Cryptocurrencies that require participants to log in (on “permissioned” systems) necessitate that an organization controls participation in its system. In some cases, certain users also help run the system in other ways, like operating servers. When this is the case, it is important to understand who those users are, how they are selected, and how their ability to use the system could be taken away if they turn out to be bad actors.

Additionally, Initial Coin Offerings (ICOs) lower the entry barrier to investing, cutting venture capitalists and investment banks out of the investing process. While similar to Initial Public Offering (IPO)s, ICOs differ significantly in that they allow companies to interact directly with individual investors. This also poses a risk to investors, as the safeguards offered by investment banks for traditional IPOs do not apply. (See Lack of Governance and Regulatory Uncertainty ). The lack of regulatory bodies has also spurred the growth of scam ICOs. When an ICO or cryptocurrency does not have a legitimate strategy for generating value, they are typically a scam ICO.

The decentralized, peer-to-peer nature of cryptocurrencies may be of great comfort to those seeking anonymity, such as human rights defenders working in closed spaces or people simply seeking an equivalent to “cash” for online purchases (see the Cryptocurrencies in Volatile Markets case study , below). Cryptocurrencies can be useful for someone who wishes to donate anonymously to a foundation or organization, when that donation could put them at risk if their identity were known.

Since the data that supports the currency is distributed over a large network of computers, it is more difficult for a bad actor to locate and target a transaction or system operation. But a currency’s ability to protect anonymity largely depends on the specific goal of the cryptocurrency. Zcash, for example, was specifically developed to hide transaction amounts and user addresses from public view. Cryptocurrencies with a large number of participants are also resistant to more benign, routine, system outages because some data stores in the network can operate if others are breached.

While no central authority records cryptocurrency transactions, the public nature of the transactions does not prevent governments from recording them. Identity that can be associated with records on a blockchain is particularly a problem under totalitarian surveillance regimes. The central internet regulator in China, for example,  proposed regulations that would require local blockchain companies to register users with their real names and national identification card numbers. In order to trade or exchange a cryptocurrency into an established fiat currency, a new digital currency would need to incorporate Know Your Customer (KYC), Anti-Money Laundering (AML), and Combating the Financing of Terrorism (CFT) regulations into its process for signing up new users and validating their identities. These processes pose a high barrier to undocumented migrants and anyone else not holding a valid government ID.

As described in the case study below, the partially anarchical environment of cryptocurrencies can also foster criminal activity.

The lack of a central body greatly increases the risk of investing in a cryptocurrency. There is little to no recourse for users if the system is attacked digitally and their currency is stolen. In 2016, criminals hacked the Ethereum blockchain and stole $50 million worth of that currency, known as the DAO (Decentralized Autonomous Organization) Bailout. It resulted in a major division in the Ethereum community, leading to a total split in governance where some participants wanted to see the value of that $50 million returned to holders, and others wanted to continue treating that value as permanently lost.

The legal and regulatory frameworks for blockchain are developing at a slower pace than the technology. Each jurisdiction – whether within a country or a financial zone, such as the 26 European countries known as the Schengen area that have abolished passports and border controls – regulate cryptocurrencies differently, and there is yet to be a global financial standard for regulating them. The seven Arab nations bordering the Persian Gulf  (Gulf States) , for example, have enacted a number of different laws on cryptocurrencies: they face an outright ban in the United Arab Emirates while they are partially banned in Saudi Arabia and Qatar.  Other countries have developed tax laws, anti-money-laundering laws, and anti-terrorism laws to regulate cryptocurrencies. In many places, cryptocurrency is taxed as a property, instead of as a currency.

Cryptocurrency’s commitment to autonomy – that is, its separation from a fiat currency – has pitted it as an antagonist to many established regulatory bodies. Observers note that eliminating the ability of intermediaries (e.g., governments or banks) to claim transaction fees, for example, alters existing power balances and may trigger prohibitive regulations even as it temporarily decreases financial costs. Thus, there is always a risk that governments will develop policies unfavorable to financial technologies (fintech), rendering cryptocurrency and mobile money useless within its borders. The constantly evolving nature of laws around fintech proves difficult for any new digital currency.

The larger a blockchain grows, the more computational power it requires. In late 2019, the University of Cambridge estimated that Bitcoin uses .28% of the global electricity consumption. If Bitcoin were a country, it would be ranked the 41st most energy-consuming country, just ahead of Switzerland.

Blockchain technology underlaying cryptocurrencies requires access to the Internet, and areas with inadequate infrastructure or capacity would not be usable contexts for cryptocurrencies, although limited possibilities of using cryptocurrency without Internet access do exist. “This digital divide also extends to technological understanding between those who know how to ‘operate securely on the Internet, and those who do not’”, as noted by the DH Network. Cryptocurrency apps are not usable on lower-end devices, which requires users to use a smartphone or computer. The apps themselves involve a steep learning curve. Additionally, the slow speed of transactions — which can take minutes or up to an hour — are a significant disadvantage, especially when compared to the seconds-fast speed of standard Visa transactions.

To many humanitarian actors, the ideal role for cryptocurrencies would be to facilitate the provision of remittances to families. But in a number of cases, cryptocurrency has been shown to be used not as a remittance channel, but for people to send money to themselves. For example, in Kenya, many of the international money transfers conducted on the Nairobi-based bitcoin exchange, BitPesa, are from an individual’s foreign account to a Kenyan one, or vice versa. Many cite the use of BitPesa as a tool to save money on bank transfer fees and high foreign exchange rates. Young Kenyans sometimes use the site to access global trading markets that they otherwise would not be able to access in Kenya, where many trading sites are not available. Increasingly, BitPesa is highly useful for upper-middle-class entrepreneurs who are building international businesses through trade and online commerce. However, the largest telecommunications company in Kenya – Safaricom – recently banned the use of Bitcoin on its mobile-money-exchange system, mPesa. When companies hold a monopoly or a significant majority of the market that relates to mobile and internet connectivity, the use of cryptocurrencies may be significantly curbed.

Between August 2014 and November 2016, the number of Bitcoin users in Venezuela rose from 450 to 85,000. The financial crisis in the country has prompted many of its citizens to search for new options. Bitcoin has been used to purchase medicine (in short supply there), Amazon gift cards, and to send remittances. There are no laws regulating Bitcoin in Venezuela, which has emboldened people further. Countries with financial markets that have experienced similar rates of inflation to Venezuela- such as South Sudan, Zimbabwe, and Argentina – all have relatively active cryptocurrency markets.

Many new cryptocurrencies have attempted to monetize the social impacts of their users. SolarCoin rewards people for installing solar panels. Tree Coin gathers resources for planting trees in the developing world (as one way to fight climate change) and rewards local people for maintaining those trees. Impak Coin is “the first app to reward and simplify responsible consumption” by helping users find socially responsible businesses. The coin it offered is intended to be used to buy products and services from these businesses, and to support users in microlending and crowdlending. It was part of an ecosystem of technologies that included ratings based on the UN’s Sustainable Development Goals and the Impact Management Project. True to its principles, Impak has proposed to begin assessing its impact.