The Fundamentals of Cryptocurrency

Have you ever wondered what a cryptocurrency is? I guess you have. But do you understand the concept of cryptocurrency? Okay, you don’t have to worry about that. This article will guide you on the meaning of cryptocurrency, the use cases, and why it is preferable to fiat currency.

Simply, the term cryptocurrency is a combination of two words: “crypto” — the short form of cryptography, and “currency.” cryptography is the art of writing codes and programs in encrypted form, ensuring that the message is read and understood by the intended recipient(s). In this sense, cryptography may be pseudonymous or fully anonymous. Cryptography maintains the security of codes to prevent third parties from reading or understanding a particular encoded message. A currency is a legally recognized payment system that may be exchangeable for goods and services.

Thus, the digital security of cryptocurrencies is maintained through what is known as the blockchain or decentralized ledger technology (“DLT”). The value of blockchain is that it enables cryptocurrency transactions to be recorded publicly in an immutable, timestamped block. As such, transactions are publicly accessible in real-time to computers connected to the blockchain from anywhere in the world, and these transactions, once recorded, stored, and distributed on the public ledger, cannot be changed.

The essence of cryptocurrency is that computer codes create valuable digital currencies as a means of payment in exchange for goods and services and as investment assets. The first known cryptocurrency is Bitcoin — created by an anonymous developer known as Satoshi Nakamoto in 2009. Since then, bitcoin has been gaining recognition from institutional investors and companies as a hedge against inflation of national currencies. Other cryptocurrencies have equally emerged, known as altcoins, and many of them are gaining massive adoption (sic): Ethereum, Binance Smart Chain (“BNB”), Bitcoin Cash, and over 5000 other existing coins. Most of the altcoins in the crypto space today are governance tokens for blockchains, used for fee payment, voting, raising of capital for project development.

Cryptocurrencies are highly-valuable, given that they are means of payment, investment assets, and a hedge against inflation. Cryptocurrencies are bought and sold, stored, transferred, o received in either Decentralized Exchanges (“DEX”) — powered by automated market maker technology (“AMM”), artificial intelligence, and machine learning; and Centralized Exchanges (“CEX”). I will explain all the terminologies used here in my subsequent articles.

But the legality of cryptocurrency either as means of payment or digital investment assets is still a debatable legal issue. The question as to whether cryptocurrency is legal or not today depends on the laws of every jurisdiction. Some countries like China, Kenya have prohibited any dealing in cryptocurrencies. And offenders are punished in different ways. A coin like XRP has been in a serious legal battle with the United States Security and Exchange Commission, which alleged that the parent company Ripple Lab had issued and traded investment securities without proper registration with the SEC. This case is ongoing, and the court decision will answer the question of whether cryptocurrency constitutes a security under United States laws. However, other countries like El Salvador have legalized bitcoin despite warnings from the World Bank on the volatility and economic risks of legalizing an unstable bitcoin.

Cryptocurrencies are preferred because no country or single entity has control over their issuance and circulation. Fiat currencies are generally known to be controlled by nations’ central banks, who use their control over the minting and distribution to control the economy in the areas of exchange rates, interest rates, enforcement of sanctions, and many others.

Cryptocurrency unlike fiat currencies enables trustless, speedy global transactions in split seconds at low fees. And holders can use their digital assets in a private, secured manner without monitoring by anyone, and as a hedge against inflation. But the legal battles it is experiencing currently are a major hold-back in its global adoption. One of the reasons cryptocurrency has been banned in some countries is due to the claims, that they are used for money laundering and terrorism financing. Existing technologies like the know your customer on-boarding process (“KYC”) and others have however shown that these transactions are traceable and remain the perfect means of payment or store of value globally.

In conclusion, cryptocurrencies are taking the lead in the transformation of world payment systems, the dominance of institutional investors in the banking system, international payment processing, settlement speed, and global exchange rate balance. It is increasingly gaining recognition — we hope to see many countries legalize cryptocurrency in the nearest future.