By Karina Rollins
Digital Currency. A digital currency is virtual money used on the Internet that does not exist in physical form.
Cryptocurrency. Cryptocurrencies are types of digital currency based on cryptography—they are encrypted, and readable only for authorized users. Their sole purpose is to make or receive payments. Cryptocurrencies are privately issued money unconnected to a government or bank.
Bitcoin.The first and best-known cyrptocurrency is bitcoin, created in 2008 by Satoshi Nakamoto. That name is a pseudonym, and no one seems to know just who this person—technically one of the richest people in the word—really is. Nakamoto first made the concept of bitcoin public in a now-famous white paper.
Altcoin. The term means “alternative coin”—meaning a cryptocurrency other than bitcoin—that refers to various alternative cryptocurrencies that were launched after bitcoin.
Blockchain. Blockchain is often equated with bitcoin, but the two are not the same thing. Bitcoin transactions are stored in a so-called ledger (database) on a peer-to-peer (P2P) network that is open-source, public, and operates without a central authority or bank. Blockchain is the technology—an ever-growing list of sequentially linked records—used to maintain the database. Each transaction record is a block in the chain.
Token. A (cyrpto) token is a unit that represents an asset or a utility on a blockchain. Very often, it is money, such as bitcoin, which exists as a payment token. But tokens can serve many other purposes—for instance, a utility token that represents X number of customer loyalty points on a blockchain used by a large retailer. There is also a security token, and it can get confusing—especially for regulators.
Switzerland has pioneered—and is currently the only country in the world to have—a classification system for three types of crypto tokens. In February 2018, the Swiss Financial Market Supervisory Authority (FINMA) published guidelines that categorized tokens into three main types (though hybrid forms are possible).
Payment tokens—synonymous with cryptocurrencies.
Utility tokens—provide digital access to a product or service.
Asset/security tokens—represent participation in undertakings such as physical companies, earnings streams, or an entitlement to dividends. (FINMA regards asset tokens as securities, which means that trading in such tokens is subject to securities law.)
The Rise of Cryptocurrencies
As economists at the Hoover Institution explain, “Thanks to fascinating advances in cryptography and computer science,” cryptocurrencies are resistant to counterfeiting, over-issuing, and double spending (spending the same digital token twice), which is prevented by the sequential blockchain.
Cryptocurrencies are issued by computer networks based on predetermined criteria, such as so-called proof of work. Bitcoin uses hashes, which consist of long strings of numbers.
Yes, you can actually buy stuff with bitcoin. More than 100,000 merchants around the world accept it as a form of payment for online purchases, including Microsoft and Expedia. Some establishments, such as Golden Gates Hotel & Casino in Las Vegas, even accept bitcoin at their hotels and restaurants.
While bitcoin has become famous—and the company in 2017 had a market capitalization above $42 billion (just below that of the Ford Motor Company)—there are six other cryptocurrency companies with market capitalizations above $1 billion, and another 37 with capitalizations between $100 million and $999.99 million. (In March 2018, there were a total of 1,658 cryptocurrencies in existence.)
The six cryptocurrency companies (also called platforms) above $1 billion are Ethereum (the second-largest in the world), Ripple, Litecoin, Ethereum Classic, NEM, and Dash. (Most rely on blockchain technology, Ripple does not.)
Not all cryptocurrencies serve the same function. Bitcoin is intended as a means of payment for goods and services. Ripple is a payment-settling, currency-exchange, and remittance system intended for use by banks and payment networks.
It can be confusing: For instance, the cryptocurrency offered by Bitcoin (the platform) is “bitcoin.” (Some publications capitalize the word for both usages.) The cryptocurrency offered by the platform Ethereum is the digital token “ether,” though the two are now used interchangeably to refer to the cryptocurrency.
In Switzerland. Cryptocurrencies have made a splash around the world, not least so in Switzerland. In July 2018, FINMA officially recognized the cryptocurrency MetaHashCoin (MHC) as “money of general utility with payment functions.” SIX, Switzerland’s stock exchange, plans to open an exchange for digital assets in 2019, which will be the first crypto exchange opened by a traditional stock exchange.
While many in the finance world maintain that blockchain currencies are a bubble, others see long-term promise, such as those who attended the 2018 Crypto Valley Conference on Blockchain Technology in Zug, Switzerland. Blockchain optimists include Swiss economics minister Johann Schneider-Amman, who spoke at the conference, and had earlier stated that Switzerland is becoming a “crypto nation.”
While Switzerland may not yet be a crypto nation, it does have a Crypto Valley—the town of Zug, just south of Zurich, which is a worldwide hub for blockchain companies and entrepreneurs who use bitcoin and other cryptocurrencies.
The Swiss finance minister has pushed Swiss banks to offer accounts and banking services to blockchain start-up companies. While most banks are still reluctant to offer “crypto” accounts, at least one has already done so. Smaller European banks, including two private Swiss banks, had already begun to break ranks with the banking sector by giving their clients access to cryptocurrencies and advising them on initial coin offerings (ICOs). (See here for the difference between ICOs and IPOs.).
Most banks remain anti-crypto. Axel Weber, chairman of UBS, Switzerland’s largest bank, has stated that UBS will not be offering its customers bitcoin or any other cryptocurrency. Weber warned that cryptocurrencies “are often not transparent, and therefore, open to being abused.” (Weber does believe that central banks should be more open to creating digital versions of their own currencies—which he clearly distinguishes from encrypted currencies.)
While Switzerland, Singapore, and Britain are considered cryptocurrency-friendly, China has banned “crypto exchanges” as well as ICOs. Switzerland does face growing ICO competition in offshore havens, such as the Cayman Islands and the British Virgin Islands, but remains a global ICO hot spot. Switzerland’s stiffest competition is coming from neighboring Liechtenstein.
Cryptocurrencies have become popular enough in Switzerland that a former investment banker has created Swiss Crypto Vault—large-scale “crypto investors” can now join investors in traditional valuables, such as gold and art, in protecting their assets in Swiss alpine vaults.
Official Policy. Bitcoin exchanges are legal, and must register with FINMA. Swiss regulators have a reputation of being the most welcoming in the world toward cryptocurrencies.
In the United States. Yet again, the two countries have something in common: Switzerland and the U.S. dominate the global ICO market.
NASDAQ’s CEO believes that future offerings will include cryptocurrencies, and that the blockchain technology will play a key role in the U.S. economy. Eight percent of Americans have invested in cryptocurrencies so far.
A crypto exchange called Bittrex opened in Seattle in 2018 that lets investors buy bitcoins with U.S. dollars (instead of first having to convert dollars to bitcoin to make the purchase).
As for everyday practical uses, Starbucks may soon accept bitcoin as payment at its stores. (Starbucks would accept bitcoin indirectly, through a bitcoin-to-dollar conversion platform called Bakkt.)
Official Policy. Bitcoin exchanges are legal depending on the state. U.S. regulatory authorities have different definitions of bitcoin and other cryptocurrencies, which makes the situation more complicated than in Switzerland. The Securities and Exchange Commission tends to see digital currencies as securities—and is looking to regulate them as such. The Commodity Futures Trading Commission says that bitcoin is a commodity, and is seen as more crypto-friendly. The IRS rejects the notion of cryptocurrencies as currency, defining them as taxable property. Treasury Secretary Steve Mnuchin is focused on prohibiting cryptocurrency use by criminals and terrorists.
The Promises and Perils of a Crypto World
As the International Monetary Fund (IMF) points out, “cryptocurrencies and their underlying technologies” could have several benefits for, and beyond, the financial sector:
Cheaper international money transfers, including for remittances.
More efficient financial markets; self-executing and self-enforcing “smart contracts” could reduce the need for intermediaries.
Secure storage of medical records; health care companies are already exploring options.
Protecting property rights and promoting investment in developing countries; in Ghana, for instance, a platform called Bitland might be able to alleviate the many property disputes by securely recording land sales.
Yet, as the IMF’s Christine Lagarde points out, the same reason why cryptocurrencies “are so appealing is also what makes them dangerous. These digital offerings are typically built in a decentralized way and without the need for a central bank.” The potential results are:
A major new vehicle for money laundering and terrorist financing—a concern shared by U.S. Treasury Secretary Mnuchin. The U.S. has already led an international operation that shut down AlphaBay, the largest criminal marketplace online. Before AlphaBay was closed down in July 2017, more than $1 billion in crypto-assets had been exchanged for illegal drugs, weapons, hacking tools, and toxic chemicals around the world.
Financial instability; the trading prices of crypto currencies are extremely volatile, and their connections to the financial world are ill-defined.
Hacking and crypto mining; despite the relative security of cryptocurrencies, they are not foolproof. In January 2018, unknown hackers stole more than $500 million worth of cryptocurrency from the Japanese exchange Coincheck. The Iranian regime has been spreading ransomware, apparently in retaliation for U.S. sanctions, which steals bitcoins.
Given that these examples are a small selection, and seen by many analysts as just the tip of the iceberg, it is understandable that some worry about the effect of cryptocurrencies on global stability. The international, Basel-based Financial Stability Board says that virtual currencies do not pose a threat to global stability—yet. The board has stated the need for “vigilant monitoring” of bitcoin and other cryptocurrencies. IMF head Lagarde even proposes a global regulatory framework.
The Switzerland-based Bank for International Settlements (BIS)—which represents dozens of central banks around the world—stated that the mere processing of countless crypto transactions “could bring the internet to a halt” and that “cryptocurrency technology comes with poor efficiency and vast energy use.” BIS’s bottom line: “Overall, the decentralized technology of cryptocurrencies, however sophisticated, is a poor substitute for the solid institutional backing of money.”
What lies ahead? Clearly, it’s too early to tell. Prudence is warranted by all concerned. Things are changing fast. But don’t write off the dollar and franc just yet.
A Guide to the World of Blockchain, The New York Times
America Needs a Blockchain Strategy ASAP, Foreign Policy
How Does Bitcoin Work?,The Economist
How Many People Use Bitcoin in 2018?, Bitcoin Market Journal
Guide to Top Cryptocurrency Exchanges, Forbes
Why Bitcoin Scares Banks and Governments,The Guardian
Blockchain and U.S. State Governments: An Initial Assessment, Brookings Institution
How Tiny Liechtenstein Aims to Become a Big Player in Blockchain, Venture Beat