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Published by Enhelion, 2019-11-30 01:08:50

Module 9

Module 9




With the advent of online transactions and online contracts, the concept of digital currency was
inevitable. As early as 2008, during the great financial depression, together with the writings of
Satoshi Nakamoto1, the mysterious Bitcoin man who published white paper on Bitcoin in 2009,
the concept of cryptocurrency was envisaged. This was finally made true via the Blockchain
technology which overcame many drawbacks of online databases such as security problems, the
validation of transactions as well as centralized ledgers. These concepts are further discussed as

Digital Currency

Digital currency, as the name denotes, is money available in digital format as compared to
material and physical money like coins or banknotes. However, digital currency has all the
characteristics of traditional money has. I.e., it can be transferred instantaneously and its
ownership can also be transferred across borders.

Crypto Currency

Crypto currency is only a variety of digital currency. It is an asset which is considered as a
reliable source of exchange because it is protected via cryptography. 2

Though, crypto currency is a type of digital currency, there are some core differences between
the two. These are3-

1 Satoshi Nakamoto is the name used by the unknown person or people who developed bitcoin, authored the bitcoin
white paper, and created and deployed bitcoin's original reference implementation. As part of the implementation,
they also devised the first blockchain database.
2 One of the cryptography’s primary objectives is communications and how to make them secure. It creates and
analyzes the algorithms and protocols so no information is changed or interrupted during the conversation by third
parties. Cryptography is a mix of a large number of different sciences, with mathematics as the basic. It’s math that
attaches the severity and reliability to algorithms and protocols.

Structure. Digital currencies are centralized; there is a group of people and computers that
regulates the state of the transactions in the network. Cryptocurrencies are decentralized, and the
regulations are made by the majority of the community.

Digital currencies require user identification where you need to upload a photo of yourself and
some documents issued by the public authorities. Buying, investing and any other processes with
cryptocurrencies do not need require any of that. Nevertheless, cryptocurrencies are not fully
anonymous. Though the addresses don’t contain any confidential information such as name,
residential address, etc., each transaction is registered, the senders and the receivers are publicly
known. Thus, all the transactions are tracked.

Transparency. Digital currencies are not transparent. You cannot choose the address of the
wallet and see all the money transfers. This information is confidential. Cryptocurrencies are
transparent. Everyone can see any transactions of any user, since all the revenue streams are
placed in a public chain.

Transaction manipulation. Digital currencies have a central authority that deals with issues. It
can cancel or freeze transactions upon the request of the participant or authorities or on suspicion
of fraud or money-laundering. Cryptocurrencies are regulated by the community. It’s very
unlikely that the users will approve the changes in the Blockchain, although there were some
precedents such as the hack of The DAO. However, the amount of money was significant, and
the decision was uncertain.


As we already know, crypto currency is a type of digital asset that relies on cryptography for
chaining together digital signatures of asset transfers, peer-to-peer networking and
decentralization. In some cases a proof-of-work or proof-of-stake scheme is used to create and

3 Andrew Tar Digital Currencies vs. Cryptocurrencies, Explained (DEC 13, 2017) < https:// cointelegraph. Com
/explained/ digital-currencies-vs-cryptocurrencies-explained > last accessed on 1.12.2018.

manage the currency.4 Thus it is Crypto currencies that enable electronic money systems to


decentralized. The first and most popular system being Bitcoin. 5

3.2.1. Legal Aspects: Regulation

§ European Union

Since 2001, the European Union has implemented the E-Money Directive "on the taking up,
pursuit and prudential supervision of the business of electronic money institutions" last amended
in 2009.6 Doubts on the real nature of EU electronic money have arisen, since calls have been
made in connection with the 2007 EU Payment Services Directive in favor of merging payment
institutions and electronic money institutions. Such a merger could mean that electronic money is
of the same nature as bank money or scriptural money.


In the United States, electronic money is governed by Article 4A of the Uniform Commercial
Code for wholesale transactions and the Electronic Fund Transfer Act for consumer transactions.
Provider's responsibility and consumer's liability are regulated under Regulation E. 7

Digital currencies pose challenges for central banks, financial regulators, departments or
ministries of finance, as well as fiscal authorities and statistical authorities. In May 2014 the U.S.
Securities and Exchange Commission (SEC) "warned about the hazards of Bitcoin and other
virtual currencies". 8

4 Ian Steadman Wary of Bitcoin? A guide to some other cryptocurrencies WIRED.CO.UK < >
last accessed on 1.12.2018.
5 A peer-to-peer electronic monetary system based on cryptography.
6 Directive 2009/110/EC of the European Parliament and of the Council of 16 September 2009 on the taking up,
pursuit and prudential supervision of the business of electronic money institutions amending Directives 2005/60/EC
and 2006/48/EC and repealing Directive 2000/46/EC OJ L 267, 10.10.2009, p. 7–17 (BG, ES, CS, DA, DE, ET, EL,
EN, FR, IT, LV, LT, HU, MT, NL, PL, PT, RO, SK, SL, FI, SV) Special edition in Croatian: Chapter 06 Volume
011 P. 94 – 104.
7 In Introduction to Electronic Money Issues <
money-issues-appendix.pdf> last accessed on 1.12.2018.
8 See Bobelian, Michael SEC Warns Investors To Beware Of Bitcoin (Forbes 9 May 2014); Securities and Exchange
Commission guidance.

Bit License, the most comprehensive regulation of virtual currencies to date proposed by the
New York State Department of Financial Services in July 2014.9 Unlike the US federal
regulators it has gathered input from bitcoin supporters and the financial industry through
public hearings and a comment period until 21 October 2014 to customize the rules. The
proposal per NY DFS press release “sought to strike an appropriate balance that helps protect
consumers and root out illegal activity". It has been criticized by smaller companies to favor
established institutions, and Chinese bitcoin exchanges have complained that the rules are
"overly broad in its application outside the United States".10


As of 2016, over 24 countries are investing in distributed ledger technologies (DLT) with $1.4bn
in investments. In addition, over 90 central banks are engaged in DLT discussions, including
implications of a central bank issued digital currency.11 Some of the major adoptions by
governments in this regard are-

§ Hong Kong: Octopus card system which was launched in 1997 as an electronic purse for
public transportation. It is the most successful and mature implementation of contactless
smart cards used for mass transit payments. After only 5 years, 25 percent of Octopus
card transactions are unrelated to transit, and accepted by more than 160 merchants.12

§ Canada: The Bank of Canada have explored the possibility of creating a version of its
currency on the blockchain where the Bank of Canada teamed up with the nation’s five
largest banks — and the blockchain consulting firm R3 — for what was known as Project
Jasper. In a simulation run in 2016, the central bank issued CAD-Coins onto a blockchain
similar Ethereum.13 The banks used the CAD-Coins to exchange money the way they do
at the end of each day to settle their master accounts.

§ India: Unified Payments Interface (UPI) is an instant real-time payment system
developed by National Payments Corporation of India facilitating inter-bank transactions.
The interface is regulated by the Reserve Bank of India and works by instantly

9 Digicash files Chapter 11 (January 2, 2002).
10 Sydney Ember More Comments Invited for Proposed Bitcoin Rule ( Deal Book, NY Times, 21 August 2014).
11 BoE explores implications of blockchain and central bank-issued digital currency (,9/9/2016).
12 Ibid.
13 Central Banks Consider Bitcoin's Technology, if Not Bitcoin (The New York Times).

transferring funds between two bank accounts on a mobile platform. UPI is built over
Immediate Payment Service (IMPS) for transferring funds. Being a digital payment
system it is available 24*7 and across public holidays. Unlike traditional mobile wallets,
which take a specified amount of money from user and store it in its own accounts, UPI
withdraws and deposits funds directly from the bank account whenever a transaction is
requested. It uses Virtual Payment Address14, account number with IFS Code, mobile
number with MMID (Mobile Money Identifier), Aadhaar Number, or a one-time use
Virtual ID. An UPI-PIN15 is required to confirm each payment.
§ South Korea: South Korea plans national digital currency using a Blockchain.16 The
chairman of South Korea’s Financial Services Commission (FSC), Yim Jong-yong,
announced that his department will "Lay the systemic groundwork for the spread of
digital currency." 17South Korea has already announced plans to discontinue coins by the
year 2020.
§ Switzerland: In 2016, a city government first accepted digital currency in payment of
city fees. Zug, Switzerland, added Bitcoin as a means of paying small amounts, up to 200
SFr., in a test and an attempt to advance Zug as a region that is advancing future
technologies. In order to reduce risk, Zug immediately converts any Bitcoin received into
the Swiss currency. Swiss Federal Railways, government-owned railway company of
Switzerland, sells Bitcoins at its ticket machines.18
§ UK: The chief economist of Bank of England, the central bank of the United Kingdom,
proposed abolition of paper currency. The Bank has also taken an interest in Bitcoin. In
2016 it embarked on a multi-year research program to explore the implications of a
central bank issued digital currency.19 The Bank of England has produced several
research papers on the topic. One suggests that the economic benefits of issuing a digital
currency on a distributed ledger could add as much as 3 percent to a country's economic
output. The Bank said that it wanted the next version of the bank’s basic software
infrastructure to be compatible with distributed ledgers.

14 A unique ID provided by the bank.
15 UPI Personal Identification number that one creates on the UPI app of the bank.
16 South Korea plans national digital currency using a Blockchain (Brave New Coin, 26.9.2016).
17 Ibid.
18 Uhligje, Christian Alpine 'Crypto Valley' pays with Bitcoins (DW Finance, 1.7.2016).
19 Ibid.


3.4.1. Pros

In a centralized system, there is a group of people responsible for the state of the whole system.
If you made a mistake in a transaction, you can make a request to the company and rely on the
successful outcome. You cannot do this in the decentralized system. On the other hand,
centralized networks keep a lot of confidential information about the users. This data may get
lost, hacked or be transferred to law enforcement agencies at court request. Decentralized
networks do not have these problems. The same goes for a transaction cancellation. If the system
is revocable, you can make changes to a transaction. At the same time, it opens room for
fraudulent activities.

3.4.2. Cons

Bitcoin itself “is always one big hack away from total failure”.20 One of the major problems of
decentralized system is hacking. Whilst decentralization, in its response to a perceived threat,
has facilitated certain elements of electronic communication it also opens a new problem: the
computer virus. 21 The decentralized multiple and weak nodes are now made vulnerable to
viruses, worms, hacking, cyber-terrorism, anomalies, accidents, assemblages, contagions, and so
forth. The “solution” of decentralization creates its own new problems and threats. The very
nature of a decentralized network with multiple weak nodes and packet-switching produces the
perfect environment for a virus to spread and hacking to occur. Packet-switching is a mode of
data transmission in which a message is broken into a number of parts which are sent
independently, over whatever route is optimum for each packet, and reassembled at the
destination. This is championed in Baran’s network, and introduces local intelligence to
communications. Instead of being controlled from above from a centralized, hierarchical
position, network communications decentralized control into small packets which find their own
way from sender to recipient.22

20 Popper, 2015, p 13.
21 Ivan Leshko Decentralized Payment Models Changing Tradition (Financial Services Oct 09, 2017).
22 Ibid ; See also Paul Baran, On Distributed Communications Networks, (1962, p-18).

Other than this, the risk and volatility involved, the affect on the monetary policy of countries are
also major drawbacks which need to be smoothed over by the governments in their adoption of
decentralized systems of payment and digital currencies.

The question now stands is it possible to combine the benefits of both centralized system and
digital decentralization payment?

Adopting centralized systems for the decentralized network might work.23

As reported by Forbes, more than two billion people are unbanked or do not have access to bank
services. There are over five billion people that use mobile phones, and this number is growing
rapidly. Thus, the banking system can be implemented into the mobile network to provide
services to more people. Using crypto currency and Blockchain, you can enjoy all the benefits of
transparency, security and decentralization. With digital money, you get controlling body, a
number of digital wallets and regulation base.

One of the examples of how to combine the two is being realized by Telcoin. The main idea is to
combine mobile companies over the world with the banking system. The banking system is
represented by the symbiosis of digital money and a new crypto-currency, that will provide
different services, like mobile money, prepaid credit and postpaid billing platforms.24


Thus it is concluded that despite its drawbacks, they can be overcome eventually over a period of
time. The technology is as yet developing, but one thing is for sure known, that with the ongoing
progress of market and technology, online transactions are inevitable and as a result for the ease
of working, digital currencies are indispensible. This is where Blockchain comes in. it creates a
database which makes it possible to have a decentralized system of payment which ensures
secure validation of transactions and prevents fraud from any party.

23 Andrew Tar Digital Currencies vs. Cryptocurrencies, Explained (DEC 13, 2017) < https:// cointelegraph. Com
/explained/ digital-currencies-vs-cryptocurrencies-explained > last accessed on 1.12.2018.
24 Ibid.

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