Is Bitcoin leaving you a bit confused? Light on detail about Litecoin? Never fear! Arthur Marusevich decrypts cryptocurrencies here.
“Virtual currencies, perhaps most notably Bitcoin, have captured the imagination of some, struck fear among others, and confused the heck out of the rest of us.”
What are virtual currencies?
To give you an idea, a virtual currency, as the name suggests, is a digital or electronic money that is almost the same as your traditional money in its electronic forms, such as in your online bank account or PayPal — except that the former is decentralised and unregulated. It is not issued by a central bank nor is it controlled by one.
The European Central Bank defines a 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."
Amongst a pool of virtual currencies floating around, the most popular of them all is the Bitcoin. However, unlike your imagination of Bitcoin being some sort of a gold coin (the unofficial logo circulated all over the internet that you may have seen), Bitcoin is simply a name for an online currency. It is the first cryptocurrency that was released into the market, in 2009, by a person or a group of people under the pseudonym Satoshi Nakamoto.
They are called "crypto" currencies because the technology uses cryptography to convert legible money and information into an uncrackable code, so that you can store in an online wallet. Basically, it’s a security measure.
How is cryptocurrency different from traditional currencies?
In Australia’s centralised monetary system, the supply of the Australian dollars (AUD) is controlled by the Reserve Bank of Australia (RBA). However, in a decentralised monetary system, such as the Bitcoin or the Litecoin, computerised algorithms determine the supply and value of a cryptocurrency.
As complicated as it sounds, it’s actually members of the general public, known as miners, who by using their computers to trade, oversee the balance of online ledgers, known as blockchain. They do this under a particular timestamping scheme. This scheme is the process of securely keeping track of the creation and modification of the cryptocurrency. In other words, those who buy the cryptocurrency are collectively responsible for the secure performance of that cryptocurrency — not a single organisation, such as the RBA.
How does cryptocurrency work?
The purchase and sale of a cryptocurrency take place on an online platform.
In Australia, one of the most popular trading platforms is Coinjar. Just like Commonwealth Bank’s Commsec or ANZ Bank’s E-Trade platforms, you can sign up for a cryptocurrency trading account on Coinjar, link your bank account or credit card and begin trading. You also have the option of creating a digital wallet for added security, which is the same as your physical wallet, except the latter is heavily coded to securely store your cryptocurrency and information.
Basically, trading in cryptocurrency is like exchanging AUD with USD, except for a more favourable exchange rate.
Is cryptocurrency legal?
The legality of a cryptocurrency varies from country to country. For instance, while countries like Russia have banned the use and trade of cryptocurrency, in Australia, the Turnbull Government is busy investing in it.
The Australian Taxation Office has published a guideline on how cryptocurrencies are treated in Australia for tax-related purposes. For example, if you earn an income from buying and selling a Bitcoin, that income is assessable as capital gain.
The Australian Securities and Investments Commission also provides guidance on the operation of virtual currencies and their risks.
So, while cryptocurrency in Australia is not banned, it is getting closer to being regulated.
Is it the future?
Currently, the trading value of cryptocurrencies are extremely volatile.
For instance, on 12 November 2017, a single Bitcoin was trading at AUD $7,537; as of 23 November 2017, 1 Bitcoin was trading at AUD $10,816, making it a very risky investment.
At the same time, the relatively unsafe and unregulated trading platforms also mean that your money can be stolen by a computer hacker. Then, there is the absence of any laws and regulations. This makes cryptocurrencies attractive to criminals for money laundering or other illegal activities and there is very little law enforcement can do to seize them.
And while there are still thousands of merchants accepting payments in cryptocurrency, a recent study suggests that Bitcoin acceptance amongst retailers is low and is getting lower. Yet, if you really want to know my opinion on whether the cryptocurrency has a future, I’d say it does and that only a matter of time before it gains widespread acceptance.
Do you remember how the internet in the early 1990s was perceived? I believe cryptocurrency technology is the internet of the 21st Century. But the reason why most of us can’t quite see it that way is that cryptocurrency systems are at their early stages of development. And no matter how long it might take, one can’t deny the fact that soon traditional monies will be replaced by digital currencies and leather wallets will be replaced by microchip implants.
Welcome to the future of cryptocurrency.
Arthur Marusevich is a Canberra-based lawyer.
This work is licensed under a Creative Commons Attribution-NonCommercial-NoDerivs 3.0 Australia License
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