Fiat money is the usual means of payment in national currencies that are issued by the Central Banks of a particular country. Digital financial assets (DFA) are assets created in electronic form using special algorithms. A token is a digital asset, similar in essence to shares (equity securities), which is issued to attract investment in a project or company. For ease of understanding, the token can be regarded as a substitute for securities in the crypto market. The issue of tokens is made by the one who raises funds. Cryptocurrency is a virtual currency that appeared in circulation without the participation of the Central Bank or any central organizer of the issue. Cryptocurrency has only some functions and properties of fiat money and can be a means of exchange, and savings, in addition, it is a unit of account in payments.
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Cryptocurrency is built on a blockchain system literally, a chain of blocks a technology for encrypting and storing data registry, which is distributed over many computers connected to a common network. In the blockchain, each next block contains information about the previous block. In the process of creating blocks, complex algorithms are used that require a lot of computing power. As a result, it is extremely difficult to interfere with the blockchain and introduce false data. That is why the technology is well suited for maintaining a register of transactions, for example, payment transactions. In the case of cryptocurrencies, information about the movement of funds is recorded in the blocks – what amounts were transferred, from which wallet to which.
Where do they get cryptocurrency from?
Participants in the cryptocurrency market literally mine it mining, from English. Mining production, and carrying out complex calculations using the computers participating in this network. As a result of these mathematical operations, new cryptocurrency blocks are formed, which contain information about previous blocks and new transactions. For these calculations, miners receive a reward the balance of their crypto wallets increases. An important difference between cryptocurrencies and tokens: cryptocurrencies are mined through mining, while digital assets can only be issued by the issuer.
Gaps in regulation
Prime Minister Mishustin in his report emphasized that the government is against the recognition of cryptocurrencies as a means of payment, and also called for discussing the concept of regulating cryptocurrencies. “Currently, the system of legal regulation of cryptocurrency cannot be called built,” says Daniil Gorkov, a lawyer at the Criminal Defense Firm, a member of the expert council under the Commissioner for the Protection of the Rights of Entrepreneurs in Moscow. The expert considers the lack of a legal definition of cryptocurrency to be one of the main problems: “Contrary to popular belief, the law “On Digital, Financial Assets and Digital Currency” regulates tokens, not cryptocurrencies.”
In practice, for a Russian with a crypto wallet, the current situation means potential risks in relations with government and law enforcement agencies. “According to the analysis of the existing judicial practice, starting from 2019, the number of criminal cases in which the same cryptocurrency assets are the subject of a crime is rapidly growing,” Daniil Gorkov warns. – The lack of a legal definition of cryptocurrency in practice creates uncertainty in the qualification of the actions of the accused and suspected persons (who, according to law enforcement officers, commit the theft of cryptocurrency, its extortion, transfer as a bribe or commercial bribery), as well as in matters of imposing a judicial arrest on cryptocurrency.
How Cryptocurrency Works: Key Features
Most cryptocurrencies use a technology called a blockchain. The latter is a sequence of hierarchically linked blocks. It contains a database of all conducted transactions. New transactions are written into blocks that are created by node operators. Each of the computer nodes stores its own copy of the blockchain and, in the course of reaching a consensus, confirms new blocks, passing the result to other nodes. Based on this information, user balances are changed.
Hash functions are widely used in cryptocurrencies. The latter allows you to “collapse” an arbitrary array of data into one line – a hash. The blockchain is a single whole since each subsequent block includes the hash of the previous one. The use of other data leads to a significant change in this line. The algorithm excludes the possibility of canceling a transaction without changing all subsequent blocks.
The consensus algorithm is responsible for confirming transactions and verifying all blockchain data, in which network members, and nodes, participate. The most popular consensus algorithms are the already mentioned Proof-of-Work (used in Bitcoin) and Proof-of-Stake.
In order to confirm transactions, the nodes consume processing power or block their own funds, which act as a guarantee of data validity. After adding a new block, it is no longer possible to re-spend the funds spent at the current stage. In the process of reaching the algorithm, its participants receive new cryptocurrencies both in PoW and PoS. Thus, these mechanisms serve as a way to issue a new cryptocurrency.
Blockchain addresses where cryptocurrencies are stored are built on the basis of two keys – public and private. The first is used for the “open” part of the address, the second is used to sign transactions and access the address. The private key is only for the owner of the address. Existing computer power does not allow hacking a blockchain address, in particular, “guessing” a private key by brute force. Blockchain addresses can be created and managed in a special application a wallet.