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Cryptocurrency 101 Featured

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Most people have never heard of Etherium or Monero, but they have heard of Bitcoin. All three are cryptocurrencies – a form of digital money – and they are a few of the dozens of digital currencies available.

Cryptocurrency 101A cryptocurrency uses cryptography, the process of converting legible information into an almost uncrackable code, to track purchases and transfers. Cryptocurrencies use decentralised technology to let users make secure payments and store money without the need to use their name or go through a bank. They run on a distributed public ledger called blockchain, which is a record of all transactions updated and held by currency holders.

Units of cryptocurrency are created through a process called mining, which involves using computer power to solve complicated maths problems that generate coins. Users can also buy the currencies from brokers, then store and spend them using cryptographic wallets.

In short, cryptocurrencies are secure and anonymous bytes of data that have a worth equivalent to a physical currency. Transactions cannot be faked or reversed and they tend to have lower fees than traditional monetary movements.

For this reason, these currencies have become popular with cyber criminals and ordinary people alike. With cryptocurrencies, opening an “account” is as easy as a few clicks of a mouse. There are no hidden costs, spurious charges or personal questions. For this same reason, governments all over the world are trying to tap into this growing financial market.

South Africa is the latest of the countries evaluating the benefits of regulating cryptocurrencies. At a recent Q&A session in Parliament, Finance Minister Malusi Gigaba said that while cryptocurrencies are currently not regulated – they operate without the authority of central banks – a number of institutions were working to address this.

“The National Treasury together with the SARB, FIC, and FSB have also established an Intergovernmental Fintech Working Group in December 2016, to develop an approach and potential revised policy stance towards fintech, including cryptocurrencies, and to deal with fast-emerging fintech matters in the financial sector, like crowdfunding, robo-advice, machine learning and alternate payment platforms,” he said.

“A balanced approach is being taken, which is supportive of the objectives of enhanced innovation, competition and financial inclusion in the financial sector, while also reviewing risks related to financial customer protection, money laundering and financial stability.”

Whether regulations are passed or not, cryptocurrencies are widely held to be the monetary system of the future. And despite the fact that their innate anonymity has made cryptocurrencies the default monetary system of cyber criminals, their benefits for average people are resulting in more common usage of currencies like Bitcoin, which is now accepted in many physical stores around the world.

However, while there are no traditional costs, mining these currencies requires expensive computer hardware that has kept them from becoming more mainstream. Until the currencies become easier to mine, there will be fewer people who can access them compared to traditional financial systems. Until then, successful virtual currencies coexisting with fiat currencies – and being subject to the same kind of regulation – will be hard to achieve.

Image credit: Copyright: stevanovicigor / 123RF Stock Photo

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