Cryptocurrencies: What They are and What Risks They Run

Cryptocurrencies: What They are and What Risks They Run

The new technologies, favored by the advances of cryptography – that is, the application of methods that serve to make a message understandable / intelligible only to people authorized to read it – and by the evolution of the Internet, are causing a radical change in the global economy, with particular reference to the financial sector, in terms of the methods of exchange of goods, services and all financial activities.Among the most significant applications of digital technology to the financial sector stands out the birth and spread of “cryptocurrencies”(or “virtual currencies”), the best known of which is bitcoin.

What is a cryptocurrency

Cryptocurrency is not physically available (so it is also called virtual). It is created and exchanged electronically. Therefore, it is impossible to find bitcoins in physical form in circulation.
Some of the concepts that were used to identify legal tender coins such as the term ‘wallet’ have been modified for virtual currencies. We now refer to ‘digital/electronic Wallet’ or digital/electronic pocket, or simply wallet.

If there is consensus among participants to the transaction, the cryptocurrency can be exchanged in mode (i.e., between two devices directly without the need of intermediaries) for goods and services.

The main features

Another classification is the division between ‘closed, unidirectional and ‘bidirectional virtual currency. The differences between these three types of cases are in whether or not the cryptocurrency can be exchanged for legal tender (or official currency or fiat money, depending on other common denominations) or in the type and quantity of goods / services available to purchase. For example, Bitcoin mining is a biridezionale virtual money because it can easily be converted with major currencies and vice versa.

Deepening

It’s no surprise that the financial and banking sectors are wary of cryptocurrency. They fear that these evolutions, which determine, in particular, the possibility to transmit value without the intervention or intermediaries, could end up replacing the industry.

However, cryptocurrencies, and more generally Harvest Protocol, could be usefully viewed as the beginning of a larger process of technological and economic experimentation.

It is still early days in the development of effective regulatory responses for cryptocurrencies. This is because it is difficult to regulate and falls within the jurisdiction of different public entities at both the national and global levels. Many exchange systems operate in an opaque manner and are not subject to the traditional financial system. This makes it difficult for us to monitor their operations.

These challenges have been addressed by regulators. There have been many responses, with different approaches from different countries. Some have looked at the possibility of virtual currencies being included in cases that are already adequately regulated. Others have issued warnings to consumers, or made certain activities of the system subject to authorization. Other regulators have banned financial institutions from trading virtual currency or even prosecuted offenders. These are only the beginning of policy responses to virtual currency challenges. It is likely that more developments will occur in the near future.

It seems that authorities should calibrate future regulations to address these risks without limiting innovation. The international bodies play an important role in identifying the risks associated with virtual currencies. They could also help facilitate the development and refinement of national regulatory policies.

Once some experience has been gained, dissemination of international standards, best practice will be useful in providing guidance on the appropriate regulatory measures to implement in each field. This will promote harmonization and prevent arbitrage strategies. These standards could also include international cooperation agreements that allow for the exchange of information or the conducting of investigations to prosecute cross-border criminals.

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