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CRYPTO CURRENCY: IT’S RISK & GAINS Kankanampati Jyothsna, First Year MBA, Department of Management, M Kumarasamy College of Engineering, Karur, TamilNadu, [email protected] Gokulnath. M, First Year MBA, Department of Management, M Kumarasamy College of Engineering, Karur, TamilNadu,[email protected]

Abstract: In present scenario we are living into a virtual world. At every stage we need support of technology. Almost all our transactions particularly related to the financial part has become electronic. Now the currency is trend i.e. Crypto currency it is not a new concept but it is into different form. It is available in the market from long in different form of digital currency but a little knowledge is there about its existence and function. This paper aims to study in depth overview of crypto currencies.

Keyword: Crypto currency, Present, Future, Digital currency, World, India Introduction: Crypto currency has become a global term still not understood by most of the people, banks, governments and many companies. The value of one bitcoin was just a few cents just a few years back; hence it wasn’t worth a lot. Bit coin is released as open source software in 2009, is generally considered the first decentralized crypto currency. Crypto currency is a digital asset designed to work as a medium of exchange that uses strong cryptography to secure financial transactions, control the creation of additional units and verify the transfer of assets. Crypto currency can just be defined as limited entries in a database where change is not possible in the entries without fulfilling certain conditions.In present scenario, crypto currencies have become a common word but a very limited knowledge about it is available across the world. Even if someone is having knowledge about crypto currency but it is not clear.

Objective of the Study: This basically aims at: 1. To gain a knowledge about the crypto currencies 2. To study the present scenario of Crypto currency world wide 3. To study the future scenario of crypto currency 4. To study the advantages and dis advantages of Crypto currency

Review of Literature: Babaloff et al. 2012: In addition, Bentov et al. (2014) state, that all other crypto currencies share the same fundamentals and ideas with bitcoin. Only Danezis et al. (2012) and Miers et al. (2013) have researched Zerocoin which implements a stronger transactions anonymity than others CCs. All papers analyze the bitcoin protocol, identify existing weakness and develop enhancement to the existing protocol. Bentov et al. (2014) see a “Tragedy of the Commons”problem in the protocol in that fees from transactions could not cover the mining costs. A proof of activity to solve the problem and to “Decentralize the power that synchronizes the transactions in a quite pronounced fashion”.

Danezis et al. 2013: The developed protocol from Jayasinghe et al. “guarantees strong-fairness while preserving anonymity of the consumer and the merchant” (2014). Andrychowicz et al. (2014) engineer a protocol to secure multiparty lotteries without a trusted authority which is built on the bitcoin protocol. The protocol uses “modern techniques based on quadratic arithmetic programs resulting in smaller proofs and quicker verification”(Danezis et al. 2014). As all papers focus on the technical development of crypto currency protocols, a design science for all papers can be stated. Therefore, three of the papers discuss the protocol on aconceptual basis(Babaioff et al. 2012, Bentov et al. 2014, Denezis et al. 2013). Andrychowicz et al. (20140, Jayasingle et al. (2014), Kumaresan and Bentov (2014) and Miers et al. (2013) use prototyping methods with their proposed changes implemented and tested iteratively.

Karame et al. 2012: The second stream of research on the network layer of crypto currencies analyzes fast transaction support in bitcoin. As each transaction needs an average time of ten minutes to be included into the lockchain and up to one hour to be robust against double spending attacks, bitcoin is not suitable for e-Commerce scenarios where the exchange of services or goods and bitcoins happens at the same time (Karame et al. 2012). Singh et al. (2013) develop a scheme for fast transaction support in bitcoin, as long as payer and payee know and trust each other. If both parties of the transaction do not trust each other, other mechanisms have to be found. Bamert et al. (2013) suggest that payee connect to random peers in the network and check if inconsistencies occur during the validation phase of a bitcoin transaction. This gives the attacker only a “0.088% chance of performing a successful double-speaking attack” (Bamert et al. 2013). The authors tested their proposal at a snack vending machine accepting bitcoins. An alternatives, suggested by Karame et al. (2012), introduces observer to the bitcoin network which informs peers about double-spending attacks.

Gervais et al. 2014a: Simplified payment verification (SPV) clients are an additional important concept to foster bitcoin as an alternative for e-Business transactions. As specific devices like mobile phones have a limited amount of data storage and cannot store the complete blockchain. SPV allow peers to extract bitcoin transactions relevant for the client while outsourcing transaction validations to more powerful network peers (Gervais et al. shows that these “filter incur serious privacy leakage in existing SPV clients implementations” (2014) and suggest a light weight modification of the SPV clients.

Bissias et al. (2014): Network layer The second cluster of crypto currency related research focuses on the network layer. The majority of the papers grouped in this section examine bitcoin peer-to-peer network, only Bissias

et al. (2014) included LItecoin as alternative to bitcoin into their research. AnishDev (2014) names crypto currency, but sees them as derivates of bitcoin. One of the earliest papers on crypto currency research (Reid and Harrigan 2011) analysis the anonymity in the bitcoin network. The author’s state that despite the claim that bitcoin is a secure and anonymous currency, peers in the network can easily be identified by analyzing the topology of the bitcoin network.

Hevner et al. 2004: Research on the network layer has a strong design science orientation (Hevner et al. 2004). Based on identified limitation of the existing crypto currency peer-to-peer network, several papers(like Biryukov et al. (2014), Luo et al. (2013) or Singh et al. (2013)) design solutions to meet the limitations. Research methods for designing concepts to use bitcoin network for conceptual work like Miller et al. (2014) who introduce a concept to use the bitcoin network for distributed storage of archival data or use experiments( AnishDev 2014) or prototyping method (Bissias et al. 2014). In addition, a more descriptive or analytical approach can be identified. Authors like Decker and Wattenhofer(2013) analyze the public available bitcoin blockchain to research information shared in the bitcoin network. This quantitative data analysis approach is also used by Karame et al. (2012) and Reid and Harrigan (2011).

Taylor (2013): A different stream of bitcoin ecosystem’s research is about miming hardware and their development because mining is a resource consuming process, new types of hash calculating hardware have emerged. Taylor (2013) describes four phases of hardware development. In the first phase, the bitcoin mining was based on CPU, which were replaced by graphical processor units (GPU) in the second phase. The third phase started mid 2011 with the introduction of field programmable gate arrays (FPGA) for bitcoin mining. These FPGA were stepping-stone for the fourth phase, the introduction of application-specific integrated circuits (ASIC) providing a higher cost and energy efficiency. Malone and O’Dwyer calculated that “the entire bitcoin mining network is on par with Ireland for electricity consumption” (2014).

Gervais et al. (2014b): Users intentions to participate in the bitcoin ecosystems are described by Glaser et al., suggesting that “new users tend to trade bitcoin on a speculative investment intention basis and have low intention to rely on the underlying network as means for paying goods or services” (2014b) examine the claim of bitcoin as a decentralized currency and show that, despite the decentralized peer-to-peer network parties can influence the development of bitcoin. Protocol maintenance is performed by a small number of core developers and other participants only have limited influence on them. Other central parties include mining pools which provide a large portion of computational resources in the bitcoin ecosystem but “if these pools colluded to acquire more than 50% of computing power share they could effectively control all transactions. Crypto currencies and bitcoin twenty-first Americans Conference on Information systems, Puerto Rico, 2015 10 transactions” (Gervais et al. (2014) and El Defrawy and Lampkins (2014) propose new currencies scheme with stronger cryptographic methods and more sustainable decentralization currencies.

Meiklejohn et al. (2013): A characterization of the bitcoin ecosystem but emphasizes criminal behavior, notably fraud. Although, “Bitcoin does not provide a particularly easy or effective way to transact large volumes of illicitly obtained money” (Meiklejohn et al. (2013), the ecosystem is vulnerable to money thefts, money laundering and illegal transactions. It has been suggested that this is only possible for small amounts of illicit money as a large “movement with money laundering, it would incur attention both within the bitcoin community and ultimately at a law enforcement level”.

El Defrawy and Lampkins (2014): Ecosystem Layer The majority of literature looked at examined the crypto currency ecosystem. Like in the previous sections, bitcoin is the dominant CC examined. El Defrawy and Lampkins (2014), Malone and O’Dwyer (2014) and Taylor (2013) mention other crypto currencies like Lite coin but base their research on bitcoin. BenSasson et al. (2014) present Zero cash as an alternative for decentralized anonymous payments. Papers like Cusumano (2014), Evans-Pughe et al. (2014), Grier (2014), Hurlburtand Bojanova (2014), Parthemer and Klein (2014), Peck

(2012) and Peck (2013) give positivistic insights to the ecosystem and explain how bitcoin works. This type of research can be used as good starting point for researchers who want tounderstand the bitcoin ecosystem. Introductory papers without scientific rigor are reasonable if the research field is quite new.

Research Methodology: This study is based on secondary data obtained from different websites and newspapers.

Evolution of Crypto currency: Crypto currencies first emerged in 2009 when the world’s first decentralized currency, Bitcoin was created. Since then its value has skyrocketed. As of 5, December 2017, 1 Bitcoin could set you back £8,804 a massive increase considering it was valued at £745 at the start of the year. Bitcoin was originally created by software developer with the pseudonym Satoshi Nakamoto who developed the electronic payment system and based it around mathematical proof. The result was a currency independent from the central authorities and almost instantly transferable with very low transaction fees. Since Bitcoin was introduced, there have been several hundred other crypto currencies enter the market. Being sold at a cheaper rate, they are a more accessible alternative to Bitcoin e been aptly named altcoins. Current popular alternatives include Lite coin (trading at £47.75), Ethereum (trading at £229.24) and Doge coin (A joke currency which currently has 100 million mined coins. The main idea behind crypto currency was to create a secure and anonymous way ti transfer currency from one person to another and since then it’s been heralded as ‘Digital gold’. To promote the anonymity, Satoshi Nakamoto had to develop something new. This is when block chain and the digital ledger of bitcoin transactions were created. Block chain is continuously growing list that records every crypto currency transactions and secures each block using cryptography. Each part of the chain contains a timestamp and transaction data which is approved and stored on a peer-to-peer network. The main security benefit of a block chain is that once a block has been stored, it cannot be altered, ensuring that any crypto currency ledgers can’t be tampered with. If you imagine a block chain as a medical record and each entry as a block

labeled with the date and time it was entered. These entries make up a history which is important for determining future treatments, so no one alter these past records. In the world of crypto currency, Bitcoin is not the world’s first crypto currency, but it is most successful. Many have come before it but all have failed. Virtual currency had an inherent problem and it was easy to double spend. With the increasing popularity of bitcoin and the idea of decentralized and encrypted currencies catch on the first alternative crypto currencies appear. These are sometimes known as altcoin and generally try to improve on the original bit coin design by offering greater speed, anonymity or some other advantage, among the first to emerge were Namecon and Lite coin. Currently there are over 1,000 crypto currencies in circulation with new ones frequently appearing.

Scams and theft: Crypto currency thefts, scams and fraud seem like they’re subsiding as the technology goes mainstream, right? Wrong. Crypto criminals and fraudsters stole more than $1.2 billion in the first quarter of 2019, According to a report by crypto currency security firm Cipher Trace. Cipher Trace develops crypto currency anti-money laundering, crypto currency forensics, block chain threat intelligence and regulatory monitoring solutions for exchanges, banks, investigators, regulators and digital asset businesses. The company was founded in 2015 and has backing from U.S. Department of Homeland Security (DHS) Science and Technology (S&T) and Defense Advanced Research Projects Agency(DARPA). The report found that criminals stole more than $356 million in crypto currency from exchange and infrastructure during the first quarter of 2019. Among this losses exit scams-where founders of crypto companies make off with the money-robbed crypto currency users of nearly $195 million.Once these payments reach exchanges and wallets in other parts of the globe they fall off the radar of U.S. authorities. Clearly, these problems will need to be addressed before crypto currency goes mainstream.

Pre-Crypto currency era: Although bitcoin was the first established crypto currency, there had been previous attempts at creating online currencies with ledgers secured by encryption. Two examples of these were BMoney and bit gold, which were formulated but never fully developed.

2008- The Mysterious MrNakamoto: A paper called Bit coin- A Peer to Peer Electronic Cash System was posted to a mailing list discussion on cryptography. It was posted by someone calling themselves Satoshi Nakamoto, whose real identity remains a mystery to this day

2009- Bitcoin begins: The bitcoin software is made available to the public for the first time and mining- the process through which new bitcoins are created and transactions are recorded and verified on the blockchain- begins

2010- Bitcoin is valued for the first time: As it had ever traded only mined, it was impossible to assign a monetary value to the units of the emerging crypto currency. In 2010, someone decided to sell theirs for the first time-swapping 10,000 of them for two pizzas. If the buyer had hung onto those bit coins, at today’s prices they would be worth more than $100 million

2011- Rival crypto currencies emerge: As bitcoin increases in popularity and the idea of decentralized and encrypted currencies catch on, the first alternative crypto currencies appear. These are sometimes known as altcoin and generally try to improve on the original bitcoin design by offering greater speed, anonymity or some other advantage. Among first to emerge were Name coin and Lite coin. Currently there are over 1,000 crypto currencies in circulation with new ones frequently appearing.

2013- Bitcoin price crashes: Shortly after the price of one bitcoin reaches $1,000 for the first time, the price quickly begins to decline. Many who invested money at this point will have suffered losses as the price plummeted to around $300-it would be more than two years before it reached $1,000 again.

2014- Scams and theft: Perhaps unsurprisingly for a currency designed with anonymity and lack of control in mind, bitcoin has proven to be an attractive and lucrative target for criminals. In January 2014, the world’s largest bitcoin exchange Mt. Gox went offline and the owners of 850,000 bitcoins never saw them again. Investigations are still trying to get to the bottom of exactly what happened but whatever the story, someone dishonestly got their hands on a haul which at time was valued at $450 million dollars. At today’s prices, those mining coins would be worth $4.4 billion.

2016- Ethereum and ICOs: One crypto currency came close to stealing bit coin’s thunder this year, as enthusiasm grew around the Ethereum platform. This platform uses crypto currency known as Ether to facilitate blockchain- based smart contracts and apps. Ethereum’s arrival was marked by the emergency of Initial Coin Offering (ICOs). These are fundraising platforms which offers investors the chance to trade what are often essentially stocks or shares in startup ventures, in the same manner that they can be invest and trade crypto currencies. In the US the SEC warned investors that due to the lack of oversight ICOs could easily be scams or Ponzi schemes disguised as legitimate investments. The Chinese government went one further, by banning them outright

2017- Bitcoin reaches $10,000 and continues to grow: A gradual increase in the places where bitcoin could be spent contributed to its continued growth in popularity, during a period where its value remained below previous peaks. Gradually as more and more uses emerged; it became clear that more money was flowing into the bitcoin and crypto coin ecosystem. During this period the market cap of all crypto count rose from $11bn to its current height of over $300bn. Banks including Barclays, Citi Bank, Deutsche Banked BNP Paribas have said they are investigating ways they might be able to work with bitcoin. Meanwhile the technology behind bitcoin-blockchain-has sparked a revolution in the fintech industry which is only just getting started.

How crypto currency works: When a transaction is being made in the world of crypto currency, the most critical thing in this process is confirmation of the transaction. Crypto currency transaction is all about confirmation. The transaction can be forged till confirmation is not received. Whenever a transaction is initiated, its information is received by the whole network. As soon as the confirmation of a particular transaction is being received, it gets set in stone. Once transaction is being made and confirmation received of that transaction, it can’t be reversed at any cost and it becomes non forgeable. It becomes a part of an irretrievable record of historical transaction called block chain. Every node has to add to its database.

Status of crypto currency worldwide: Country to country the legal status of crypto currency varies and still there is no defined rule or the rules are changing in different countries. Whereas most of the country has not given legal status to the usage of crypto currency. The status of crypto currency as money or commodity varies, with different regulatory implications. Different status has been given by different government agencies, departments and courts have classified this currency differently. There are certain countries which have given legal status to crypto currency and are as below:

United States: Crypto currency: Not considered legal tender Crypto currency exchanges: Legal, regulation varies by state A positive approach has been taken by United states towards the acceptance and uses of bicoin. In the mean time several government departments of U.S., is working towards preventing or reducing the use of bitcoin for any illegal transactions. Dish network, has already started accepting payments in bitcoin. The bitcoin has also made its way to U.S. derivatives markets, which is a prominent proof of its increasing legitimacy.

Canada: Crypto currencies: Not legal tender Crypto currency exchange: Legal, regulation varies by province Crypto currency isn’t legal tender in Canada but the Canada Revenue Agency has taxed hem since 2013. Canada has been fairly proactive in its treatment of crypto currencies: bavk in 2014 it brought entities dealing in virtual currencies under the Proceeds of Crime and Terrorist Financing Act, while in 2017 the British Columbia securities commission registered the first crypto currency-only investment fund.

Singapore: Crypto currencies: Not legal tender Crypto currency exchange: Legal, no registration required In Singapore, crypto currency exchanges and trading are legal and the city-state has taken a friendlier position on the issues than regional neighbors. Although crypto currencies are not considered a legal tender, Singapore tax authority treats bitcoins as ‘goods’ and so applies goods and service tax.

Australia: Crypto currencies: Legal, treated as property Crypto currency exchange: Legal, must register with AUSTRAC Crypto currencies and exchanged are legal in Australia and the country has been progressive in its implementation of crypto currency regulations. In 2017, Australia’s government declared that crypto currencies were legal and specifically stated that bitcoin should be treated as property and subject to Capital Gains Tax. Crypto currencies had previously been subject to a controversial double taxation under Australia’s goods and service tax- the change in tax treatment is indicative of the Australian government’s progressive approach to the crypto issue.

India: Crypto currencies: Not legal tender Crypto currency exchange: Effectively illegal- regulations being considered Crypto currencies are not legal tender in India and while exchanges are legal, the government has made it very difficult for them to operate. Although there is currently a lack of clarity over the tax status of crypto currencies, the chairman of the Central board of Direct Taxation has said that anyone making profits from bitcoin will have to pay taxes on them. Other Income Tax Department sources have suggested that crypto currency profits should be taxed as capital gains. In recent years 2018-2019 union budget bitcoin has been legalized in India. It has also been emphasized by the finance minister, that there will strong vigil on any illegitimate activity by using crypto-asset.

Countries that say no to bitcoin: Russia: In early days in Russia the status of crypto currency was not clear, the legality of bitcoin in Russia was disputed. As of now Ministry Finance, Government of Russia is hoping to pass a law to legalize bitcoin by the end of March 2018.

China: Trading of bitcoin by individuals in china is legal. There are no clear rules from People bank of China, ministry of industry of any other regulatory bodies on the issues of legality of crypto currency

Kyrgyzstan: Using bitcoin and altcoin as a payment form is illegal in Kyrgyzstan

South Africa: In South Africa bitcoin has no legal status or regulatory framework

Japan: In Japan bitcoin and digital currencies has been legalized since April, 2017.

Benefits: 1. No need of central regulations like bank or governments. It gives power in the hand of common man they can do person to person transaction all around the world in seconds without paying hefty charges to banks. 2. Anonymity, it is one of the important advantages provided by crypto currency. You don’t need to reveal your identity 3. Not affected by government actions demonetization, inflation adjustment etc., which control the value of fiat currencies 4. Lower transaction fees, fast processing of payments 5. Millions of trees can be saved by not using paper currencies. It can help in making our environment safe

Drawbacks: 1. Actively maintaining the blockchain with hashes is commutatively wasteful 2. There is no overarching centralized entity with universal control of funds on the network 3. Transfer time too slow 4. Not backed by tangible assets 5. The regulatory frame work is incomplete

Future of crypto currencies: The market of crypto currencies is fast and wild. Crypto currencies philosophy is to break all borders and barriers, at least associated with finance and trade. Every crypto currency which gets launched in the market comes with a unique promise that may turn the world around. In future there may be a single leader while others are rendered superseded, or there may be only 3-4 coins which will define the entire payments, lending, trading and banking infrastructures globally. Within the next few years, it is expected that crypto currencies will be popular enough among mainstream to adopt blockchain-based apps. It will be a new world, in a new light, in a new era.

Conclusion: Most of the countries still don’t have any clear regulation or system which can check, curb, regulate or ban the use of crypto currency. Decentralized and anonymity are two main characteristics of crypto currency, which has become a challenge for the governments to curb its uses use in criminal activity or transactions and how to allow a legal status to it. Most countries are still analyzing ways to properly regulate the crypto currency. However, crypto currencies have a long way to go before they can replace credit cards and traditional currencies in use, which is being used as a tool for commerce across the globe. In the world of crypto currency for a savvy investor-Patience, decisiveness and skepticism are the most important tools in their toolkit.

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