NEW YORK: Corporate leaders in many different industries have made it a priority to investigate blockchain’s feasibility or risk falling behind their competitors who have successfully adopted this technology.
In this paper, our first in a series on cryptocurrency, we focus on the evolution of the digital coins and the blockchain technology that supports cryptocurrency-related transactions.
Bitcoin (BTC) was launched in 2009, creating a new class of digital assets. BTC is just one of many digital currencies, but it is the most well-known and widely used.
Like the dollar and other currencies, Bitcoin has no intrinsic value and you can’t redeem it for a commodity such as gold. But unlike the dollar, it’s not considered legal tender in most countries and has no physical form.
What’s helping BTC enjoy this popularity? The answer is blockchain technology, which allows users to carry out cryptocurrency-related transactions. Blockchain can: track and secure not only digital coins but almost any asset of value help reduce the cost of digital transactions increase transparency generate a record that can’t be altered
Exchanging information online requires an intermediary, which can be risky as well as cause delays and unexpected expenses. This type of third-party validation should give you confidence that a company is correctly completing a transaction. But it could also lead to a concentration of sensitive data online, potentially opening the door to identity theft, phishing, fraud, spam, and malware.
How Does Blockchain Work?
Blockchain offers an alternative to intermediaries, providing a secure platform for storing and exchanging cryptocurrencies online. It’s basically a decentralized public ledger that maintains an irrevocable record of transactions between entities on a given blockchain network. The ledger has a system of replicated databases designed to operate via the internet.
When a transaction is executed, it’s grouped in a cryptographically protected “block” with other transactions that have occurred around the same time and sent out to the entire network. Members of the network who add these transactions to the BTC public ledger are called miners.
What are Miners?
Anyone can be a miner, including individuals, corporations, and groups. They all currently exist in the blockchain network. It’s visible only to members of the network exchanging the cryptocurrency.
What is a Network?
A network includes all individuals and entities conducting transactions online via a specific blockchain.
The most recent transactions, or ‘new’ blocks, are added to a blockchain and linked to older blocks. This creates a history of every transaction made in that particular blockchain.
Digital Coins as a Medium of Exchange
Will digital coins ever be accepted as a valid medium of exchange to pay for goods and services? In theory, a U.S. company could receive digital coins for items it sells, but it would then need to remit all taxes in the dollar. The company would be taking on exchange rate risk. Similarly, if a company paid its employee expenses with digital coins, its workers would be subject to exchange rate risk.
Since there’s a lack of solid regulation in the United States, we currently view cryptocurrency as a speculative asset and would not recommend it as a viable investment. If you’re interested in cryptocurrency as a direct investment, we suggest you proceed with caution. We believe the industry lacks the stability, transparency, and safeguards of the more traditional asset classes, despite the recent upturn in regulatory efforts.
We have a more favorable outlook on blockchain. We think the technology has the potential to transform business models and regulatory practices.