In 1998, Wei Dai published a description of “b-money”, an anonymous, distributed electronic cash system.Shortly thereafter, Nick Szabo created “bit gold”. Like bitcoin and other cryptocurrencies that would follow it, bit gold (not to be confused with the later gold-based exchange, BitGold) was an electronic currency system which required users to complete a proof of work function with solutions being cryptographically put together and published. A currency system based on a reusable proof of work was later created by Hal Finney who followed the work of Dai and Szabo.
The first decentralized cryptocurrency, bitcoin, was created in 2009 by pseudonymous developer Satoshi Nakamoto. It used SHA-256, a cryptographic hash function, as its proof-of-work scheme. In April 2011, Namecoin was created as an attempt at forming a decentralized DNS, which would make internet censorship very difficult. Soon after, in October 2011, Litecoin was released. It was the first successful cryptocurrency to use scrypt as its hash function instead of SHA-256. Another notable cryptocurrency, Peercoin was the first to use a proof-of-work/proof-of-stake hybrid. IOTA was the first cryptocurrency not based on a blockchain, and instead uses the Tangle. Many other cryptocurrencies have been created though few have been successful, as they have brought little in the way of technical innovation. On 6 August 2014, the UK announced its Treasury had been commissioned to do a study of cryptocurrencies, and what role, if any, they can play in the UK economy. The study was also to report on whether regulation should be considered.
Central bank representatives have stated that the adoption of cryptocurrencies such as bitcoin pose a significant challenge to central banks’ ability to influence the price of credit for the whole economy.They have also stated that as trade using cryptocurrencies becomes more popular, there is bound to be a loss of consumer confidence in fiat currencies. Gareth Murphy, a senior central banking officer has stated “widespread use [of cryptocurrency] would also make it more difficult for statistical agencies to gather data on economic activity, which are used by governments to steer the economy”. He cautioned that virtual currencies pose a new challenge to central banks’ control over the important functions of monetary and exchange rate policy.
Jordan Kelley, founder of Robocoin, launched the first bitcoin ATM in the United States on February 20, 2014. The kiosk installed in Austin, Texas is similar to bank ATMs but has scanners to read government-issued identification such as a driver’s license or a passport to confirm users’ identities. By September 2017 1574 bitcoin ATMs were installed around the world with an average fee of 9.05%. An average of 3 bitcoin ATMs were being installed per day in September 2017.
The Dogecoin Foundation, a charitable organization centered around Dogecoin and co-founded by Dogecoin co-creator Jackson Palmer, donated more than $30,000 worth of Dogecoin to help fund the Jamaican bobsled team’s trip to the 2014 Olympic games in Sochi, Russia. The growing community around Dogecoin is looking to cement its charitable credentials by raising funds to sponsor service dogs for children with special needs.
The legal status of cryptocurrencies varies substantially from country to country and is still undefined or changing in many of them. While some countries have explicitly allowed their use and trade, others have banned or restricted it. Likewise, various government agencies, departments, and courts have classified bitcoins differently. China Central Bank banned the handling of bitcoins by financial institutions in China during an extremely fast adoption period in early 2014. In Russia, though cryptocurrencies are legal, it is illegal to actually purchase goods with any currency other than the Russian ruble.
On March 25, 2014, the United States Internal Revenue Service (IRS) ruled that bitcoin will be treated as property for tax purposes as opposed to currency. This means bitcoin will be subject to capital gains tax. One benefit of this ruling is that it clarifies the legality of bitcoin. No longer do investors need to worry that investments in or profit made from bitcoins are illegal or how to report them to the IRS. In a paper published by researchers from Oxford and Warwick, it was shown that bitcoin has some characteristics more like the precious metals market than traditional currencies, hence in agreement with the IRS decision even if based on different reasons.
Legal issues not dealing with governments have also arisen for cryptocurrencies. Coinye, for example, is an altcoin that used rapper Kanye West as its logo without permission. Upon hearing of the release of Coinye, originally called Coinye West, attorneys for Kanye West sent a cease and desist letter to the email operator of Coinye, David P. McEnery Jr. The letter stated that Coinye was willful trademark infringement, unfair competition, cyberpiracy, and dilution and instructed Coinye to stop using the likeness and name of Kanye West.
As the popularity of and demand for online currencies increases since the inception of bitcoin in 2009, so do concerns that such an unregulated person to person global economy that cryptocurrencies offer may become a threat to society. Concerns abound that altcoins may become tools for anonymous web criminals.
Cryptocurrency networks display a marked lack of regulation that attracts many users who seek decentralized exchange and use of currency; however the very same lack of regulations has been critiqued as potentially enabling criminals who seek to evade taxes and launder money.
Transactions that occur through the use and exchange of these altcoins are independent from formal banking systems, and therefore can make tax evasion simpler for individuals. Since charting taxable income is based upon what a recipient reports to the revenue service, it becomes extremely difficult to account for transactions made using existing cryptocurrencies, a mode of exchange that is complex and (in some cases) impossible to track.
Systems of anonymity that most cryptocurrencies offer can also serve as a simpler means to launder money. Rather than laundering money through an intricate net of financial actors and offshore bank accounts, laundering money through altcoins can be achieved through anonymous transactions.
On August 6, 2013, Magistrate Judge Amos Mazzant of the Eastern District of Texas federal court ruled that because cryptocurrency (expressly bitcoin) can be used as money (it can be used to purchase goods and services, pay for individual living expenses, and exchanged for conventional currencies), it is a currency or form of money. This ruling allowed for the SEC to have jurisdiction over cases of securities fraud involving cryptocurrency.
GBL, a Chinese bitcoin trading platform, suddenly shut down on October 26, 2013. Subscribers, unable to log in, lost up to $5 million worth of bitcoin.
In February 2014, cryptocurrency made national headlines due to the world’s largest bitcoin exchange, Mt. Gox, declaring bankruptcy. The company stated that it had lost nearly $473 million of their customer’s bitcoins likely due to theft. This was equivalent to approximately 750,000 bitcoins, or about 7% of all the bitcoins in existence. Due to this crisis, among other news, the price of a bitcoin fell from a high of about $1,160 in December to under $400 in February.
On March 31, 2015, two now-former agents from the Drug Enforcement Administration and the U.S. Secret Service were charged with wire fraud, money laundering and other offenses for allegedly stealing bitcoin during the federal investigation of Silk Road, an underground illicit black market federal prosecutors shut down in 2013.
On December 1, 2015, the owner of the now-defunct GAW Miners website was accused of securities fraud following his development of the cryptocurrency known as Paycoin. He is accused of masterminding an elaborate ponzi scheme under the guise of “cloud mining” with mining equipment hosted in a data center. He purported the cloud miners known as “hashlets” to be mining cryptocurrency within the Zenportal “cloud” when in fact there were no miners actively mining cryptocurrency. Zenportal had over 10,000 users that had purchased hashlets for a total of over 19 million U.S. dollars.
On August 24, 2016, a federal judge in Florida certified a class
action lawsuit against defunct cryptocurrency exchange Cryptsy and
Cryptsy’s owner. He is accused of misappropriating millions of dollars
of user deposits, destroying evidence, and is believed to have fled to
Main article: Darknet market
Cryptocurrency is also used in controversial settings in the form of online black markets, such as Silk Road. The original Silk Road was shut down in October 2013 and there have been two more versions in use since then; the current version being Silk Road 3.0. The successful format of Silk Road has been widely used in online dark markets, which has led to a subsequent decentralization of the online dark market. In the year following the initial shutdown of Silk Road, the number of prominent dark markets increased from four to twelve, while the amount of drug listings increased from 18,000 to 32,000.
Darknet markets present growing challenges in regard to legality. Bitcoins and other forms of cryptocurrency used in dark markets are not clearly or legally classified in almost all parts of the world. In the U.S., bitcoins are labelled as “virtual assets”. This type of ambiguous classification puts mounting pressure on law enforcement agencies around the world to adapt to the shifting drug trade of dark markets.
Since most darknet markets run through Tor, they can be found with relative ease on public domains. This means that their addresses can be found, as well as customer reviews and open forums pertaining to the drugs being sold on the market, all without incriminating any form of user. This kind of anonymity enables users on both sides of dark markets to escape the reaches of law enforcement. The result is that law enforcement adheres to a campaign of singling out individual markets and drug dealers to cut down supply. However, dealers and suppliers are able to stay one step ahead of law enforcement, who cannot keep up with the rapidly expanding and anonymous marketplaces of dark markets.
An Initial Coin Offering (ICO) is an unregulated means by which funds are raised for a new cryptocurrency venture. An ICO is used by startups to bypass rigorous and regulated capital-raising processes required by venture capitalists or banks. In an ICO campaign, a percentage of the cryptocurrency is sold to early backers of the project in exchange for legal tender or other cryptocurrencies, often Bitcoin or Ethereum.
Cryptocurrencies use various timestamping schemes to avoid the need for a trusted third party to timestamp transactions added to the blockchain ledger.
The first timestamping scheme invented was the proof-of-work scheme. The most widely used proof-of-work schemes are based on SHA-256, which was introduced by bitcoin, and scrypt, which is used by currencies such as Litecoin. The latter now dominates over the world of cryptocurrencies, with at least 480 confirmed implementations.
Some other hashing algorithms that are used for proof-of-work include CryptoNight, Blake, SHA-3, and X11.
Modifications of the proof-of-work algorithm have been created to address the problem of scaling, such as the way the IOTA ledger works. IOTA uses a simplified Proof-of-work algorithm making use of directed acyclic graph. A new transaction becomes part of the ledger after its sender does a small amount of proof-of-work. Each network participant is therefore also a miner. This system scales automatically as it gets used more.
Some cryptocurrencies use a combined proof-of-work/proof-of-stake scheme. The proof-of-stake is a method of securing a cryptocurrency network and achieving distributed consensus through requesting users to show ownership of a certain amount of currency. It is different from proof-of-work systems that run difficult hashing algorithms to validate electronic transactions. The scheme is largely dependent on the coin, and there’s currently no standard form of it.
Cryptocurrencies are used primarily outside existing banking and governmental institutions, and exchanged over the Internet. While these alternative, decentralized modes of exchange are in the early stages of development, they have the unique potential to challenge existing systems of currency and payments. As of June 2017 total market capitalization of cryptocurrencies is bigger than 100 billion USD and record high daily volume is larger than 6 billion USD.
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