The World Economic Forum (WEF) issues the latest edition of his Global Risks Report for the year 2017. On a list of twelve key emerging technologies blockchain and distributed ledger technologies takes the sixth place. WEF predicted that more than 1.3 Billion dollars is invested in this industry in 2016 alone.
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An oldest central bank in a world, Sweden’s ‘The Riksbank’, started a research on an implementation of the national digital currency e-krona. The Riskbank announced that two-years long probe period, would be focused on a possible impact decision might have for the monetary system. Also they will research the possible technical solution with emphasize on a blockchain technology. This move is partially driven by the constant drop of the cash money used in Scandinavian countries. The Riskbank officials noted that e-kruna would not be the replacement of the cash but to compliment to it.
The digital currencies story is a continuation of the long-running saga of economics, markets, and commodity exchange in human society. With the constant rise of the global network, we have witnessed many global services becoming widely accepted and in a way changing (by adding to) our experience of mutual interaction. Looking back in history of the Internet we can conclude that public-key cryptography and digital signatures make e-money possible.
E-money can either be centralised (with the control point of money supply) or decentralised, where the control over the supply can come from various sources or network of sources (Bitcoin and/or other virtual currencies). The main difference between e-money and virtual currencies is that e-money does not change the value of the fiat currency (euro, dollar, etc), but virtual currency is not equivalent to any fiat currency. In other words, all digital currency is electronic money, but e-money is not necessarily digital currency.
Electronic money or e-money in short is the money balance recorded electronically on a stored-value card or remotely on a server. The Bank for International Settlements defines e-money as ‘stored value or prepaid payment mechanisms for executing payments via point-of-sale terminals, direct transfers between two devices, or even open computer networks such as the Internet’. E-money is usually associated with so-called smart cards issued by companies such as Mondex and Visa Cash.
Electronic money is a floating claim that is not linked to any particular account. Examples of e-money are bank deposits, electronic fund transfer, payment processors, and digital currencies.
The term ‘stored-value card’ means the funds and/or data are 'physically' stored on the card, in the form of binary-coded data. With prepaid cards, the data is maintained on the card issuer's computers. Typical stored-value cards include: prepaid calling cards, gift cards, payroll card, loyalty cards, travel cards.
E-money can also be stored on (and used via) mobile phones or in a payment account on the Internet. Most common and widely used mobile subsystems are Google Wallet and Apple pay.
The fast introduction of e-money has lead to governmental regulatory activities. Hong Kong was among the first jurisdiction to regulate e-money, by allowing only licensed banks to issue stored-value cards. Since 2001, the European Union has implemented a directive on the taking up, pursuit and prudential supervision of the business of electronic money institutions (E-Money Directive - 2009/110/EC).
Electronic currencies can be divided into soft currency and hard currency. Hard electronic currency is one that only supports non-reversible transaction. Reversing transaction, even in case of a legitimate error is not possible. They are more oriented to cash transactions. Examples for hard currencies are: Western Union, KlickEx, or Bitcoin. On the other hand, soft electronic currency is one that allows reversal of payments in a case of fraud or disputes. Examples are PayPal and credit cards.
Simple intention drives this technological avalanche, based on financial and commercial competition (as is the case of regulated economies). In this struggle, the regulated market and the privacy of the affairs of financial actors are crucial. Fair and constructive financial institutions acting as intermediaries are the safeguards of these principles. In most cases these are state regulatory agencies. But something has changed in the digital era. Regulation is taking a new form of teamwork and networking.
The European Central Bank defined in 2012 virtual money (virtual currencies) as a ‘type of unregulated, digital money which is issued and usually controlled by its developers, and used and accepted among the members of a specific virtual community’. This Internet based medium of exchange have properties similar to physical currencies, however allows for instantaneous transaction and borderless transfer-of-ownership. Banks and customers use their keys to encrypt (for security) and sign (for identification) blocks of digital data that represent money orders. A bank ‘signs’ money orders using its private key and customers and merchants verify the signed money orders using the bank’s widely published public key. Customers sign deposits and withdraw using their private key and the bank uses the customer's public key to verify the signed withdraws and deposits.
In 2014, the European Banking Authority defined virtual currency as ‘a digital representation of value that is neither issued by a central bank or a public authority, nor necessarily attached to a fiat currency, but is accepted by natural or legal persons as a means of payment and can be transferred, stored or traded electronically’.
Both virtual currencies and cryptocurencies are types of digital currencies.
Cryptocurrencies are set to take the online world by storm, as their popularity and use, and understanding of their advantages and limitations increases. Giant companies like Apple, Dell and PayPal have already indicated their plans to integrate cryptocurrencies as a payment method, and more are likely to follow, with Bitcoin emerging as one of the most popular virtual electronic currencies. The main invention of this cryptocurrency is to present the central ledger of all transactions, known as blockchain. This open source software allows all peers in a network to verify every transaction ever made in the Bitcoin system and therefore serve as guardians to this central ledger.
There are signs that central banks are also paying more and more attention to virtual currencies. As an example, in early 2016, the People's’ Bank of China announced that it was looking into the possibility of launching its own virtual currency, considering that this would contribute to making economic activities more transparent, while also reducing money laundering and tax evasion.
The main issues
There are many comparative advantages of this system of money creation and payments compared to the usual form of online financial transactions. Using one source (the Internet) to connect to a unique global financial system sounds like possible futuristic idea, but with virtual currencies, it is not far away.
At the same time, there are also many warnings that virtual currencies could be misused for illegal goods and services, fraud, and money laundering. The anonymity associated to the use of virtual currencies (such as bitcoin) transactions increases the potential of possible misuse. A US government-funded report on the 'National Security Implications of Virtual Currencies', published at the end of 2015, noted that ‘non-state actors’, including terrorist and insurgent groups, may exploit virtual currency by using it for regular economic transactions.
Government regulation is still the key to virtual currencies attracting more users, as well as to potentially address the risks of misuse. States around the world are currently considering its regulation. This will not only increase consumer confidence in the technology, it will also involve more companies and investors in the growing business. While some are arguing that unregulated virtual currencies are safe haven for money laundering and illegal flow of money, others present this as an ultimate tool in fighting identity thefts and leakage of personal financial information.
The session was moderated by Mr Walid A Saqaf, Internet Society, and was part of EuroDIG’s educational track. At the beginning, Mr Ken Hansen, Blockchain Roadshow, offered a simplified explanation on blockchain technology. He explained that blockchain is a distributed open ledger network with no single centralised point. It operates on the P2P (peer-to-peer) distributed application architecture. Hanson clarified that bitcoin is not synonymous with blockchain, it is just one of the applications that runs on a blockchain, such as ‘Ripple’ (financial transfers solution) or ‘FlightDelay’ (instant payout in case of a delayed flight).
After Hansen’s presentation, the interactive part of the session started. It was organised as a game in which the audience learned how blocks are created inside a blockchain. ‘Miners’ (volunteers from the audience),were working as block creators and were awarded with Yummi coins (chocolate bars). Miners serve as protectors of this distributed ledger, monitoring the transactions which take place in a blockchain. The audience learned why blockchain ensures the immutability of transactions by referring to everything that happens in a network.
Continuing the discussion, Mr Anton Zurenko, Stratum, addressed the question of trust on the Internet, and the question was raised: is blockchain a technology that can help? He pointed out that blockchain is a system that requires no trust, since everything is regulated by algorithms and mathematics. It is a system that makes sure that there is a shared protocol, but that each participant still retains independence.
Ms Hannahe Boujemi, blockchain researcher, added that there is no clear picture on what should be regulated. This technology is not yet mainstream and it would be good to wait a while longer with the regulations. The EU is taking this specific approach regarding regulation. Generally speaking, regulators do not have a lot of options at the money, and they need to leave it to the market to bring more clarity.
Mr Arvin Kamberi, DiploFoundation, pointed out that blockchain was developed as an answer to the loss of trust after the 2008 financial downfall. It was created as a response to the need for a decentralised trust system. He added that is important to distinguish that, aside from open blockchains (such as the bitcoin blockchain), other blockchain applications can include permissions, and adding additional layers of security and scalability. These blockchains would be managed in a centralised way, but would significantly help in reducing cost and increasing efficiency. On the other hand, open blockchains offer a new way of system governance by emerged consensus. Since the story of developing blockchains resembles the early days of the Internet and the discussions of standardisation, Kamberi added that we might need a similar solution (for example the multistakeholder model within the Internet Corporation for Assigned Names and Numbers – ICANN).
Mr Michael Oghia, Internet governance consultant, added that one important aspect of governance is the sustainability of blockchains. When it comes to blockchains, many applications will be developed, and this might lead to significant levels of energy consumption. He added that as we move forward, this issue should be incorporated as much as possible into the Internet governance discussions.
Questions from the audience addressed the issue of regulation. Regulation needs to be done in the context of specific sectors. If it has impact on the financial sector, it should be regulated there, but not as a technology in itself. It was concluded that the Internet, as we know it today, emerged as a platform that provides services. One can anticipate that blockchains will have a similar range of applications to build on top. Some of the most prominent players are involved in harnessing this new technology for their products. That has been recognised as the main challenge for future regulation.
The tech news portal Wired argued in this article that it has obtained the strongest evidence yet of the true identity of Bitcoin’s creator. According to the article, the mysterious creator is allegedly the 44-year-old Craig Steven Wright, an unknown genius hailing from Australia.
This article addresses three aspects of Internet taxation: 1) transacting business with virtual currencies, 2) providing digital goods and services and 3) transacting business enhanced by the Internet
The article highlights how dominant of a player China (and the Chinese Yuan) is on the bitcoin market.
This article explains how Microsoft has started to accept Bitcoin payments, allowing customers to buy apps, games. and videos from online stores with the crypto-currency.
This is one of the first mainstream media articles labout bitcoin. It gives an overview of the virtual currency, as a 'revolutionary concept' at that time, and discusses its implications.
This report, published by the Economic Commission for Latin America and the Caribbean (ECLAC), looks at the usage of digital currencies in the Caribbean region, while outlining the related risks and opportunities.
The latest edition of glossary, compiled by DiploFoundation, contains explanations of over 130 acronyms, initialisms, and abbreviations used in IG parlance. In addition to the complete term, most entries include a concise explanation and a link for further information.
The book, now in its sixth edition, provides a comprehensive overview of the main issues and actors in the field of Internet governance and digital policy through a practical framework for analysis, discussion, and resolution of significant issues. It has been translated into many languages.
This paper, which is considered to represent the ‘birth of bitcoin’, outlines the conceptual and technical details of a payment system that would allow individuals to perform electronic financial transactions without relying on a financial institution.
The report, prepared by the Global Commission on Internet Governance, outlines a series of recommendations to policy makers, private industry, the technical community and other stakeholders on modalities for maintaining a ‘healthy Internet’. It tackles aspects such as: the promotion of a safe, open and secure Internet, human rights for digital citizens, the responsibilities of the private sector, safeguarding the stability and resiliency of the Internet’s core infrastructure, and improving multistakeholder Internet governance.
This report discusses the potential benefits and risks posed by virtual currencies and how financial regulators could approach them. The report addresses legal and economic perspectives, as well as issues of consumer protection, taxation, financial stability and monetary policy.
The report examines the feasibility for non-state actors, including terrorist and insurgent groups, to increase their political and/or economic power by deploying a virtual currency (VC) for use in regular economic transactions.
In this Opinion, the European Banking Authority (EBA) discusses whether virtual currencies should or can be regulated. It starts with defining virtual currencies and market participants, and it continues with an overview of potential benefits of virtual currencies, as well as of associated risks and their causal drivers. Based on this analysis, a potential regulatory approach for virtual currencies is then described.
The report analyses the risk management of electronic banking and electronic money activities from a banking supervisory perspective. It provides definitions of electronic banking and electronic money, and it identifies and analyses several categories of risks: operational, reputational, and legal risks. It also discuss modalities for risk management.
The 47th WEF Annual Meeting, which took place in Davos-Klosters, Switzerland, on 17‒20 January, brought together leaders from across business, government, international organisations, academia, and civil society, to discuss several digital policy issues.
The future of the digital economy was an overarching theme for many sessions, exploring aspects such as the digital transformation of industries, the fourth industrial revolution and its implications (in areas such as gender equality and jobs), steps for shaping national digital strategies, the need for shared norms and rules for the digital economy, and trust-based collaboration among stakeholders. Security and crime in the digital era were part of the discussions, with a focus on multistakeholder approaches for tackling cybercrime, the cyber resilience of critical infrastructures, cyberwar and forms of manifestation, and terrorism in the digital age. During the meeting, WEF launched a report on Advancing Cyber Resilience: Principles and Tools for Boards. Prepared in collaboration with the Boston Consulting Group and Hewlett Packard Enterprises, the report outlines a series of principles and tools for companies to tackle cybersecurity risks and ensure the resilience of their information infrastructures.
The advancements in the field of Internet of Things (IoT) and artificial intelligence (AI) were also looked at during this year's WEF meeting, as participants explored policy implications and outlined the need for principles and standards to ensure that IoT and AI products bring benefits to society as a whole, while minimising the risks (in areas such as social inclusion, privacy, and security). Trustworthy online information, a topic that has attracted a lot of attention lately, was also discussed, with a focus on possible modalities for balancing freedom of expression with the need to educate users on how to differentiate between real and misinformation.
In addition to contributing thir views to these and many other discussion tracks, WEF participants used the meeting as an opportunity to launch new initiatives and agree on future actions. In one such example, major financial service providers (e.g. Mastercard, Visa, and Paypal), global IT and telecom companies (e.g. Ericsson and GSMA), and intergovernmental organisations (e.g. the United Nations Development Program and the United Nations High Commissioner for Refugees) agreed on six principles on public-private cooperation aimed at facilitating digital cash payments in crisis-affected populations.
As has been the case at many other high-level events recently, the Agenda for Sustainable Development also featured high in Davos. On a more general level, world leaders discussed the challenges of globalisation and the increasing anti-globalisation trends. Many of the debates revolved around the need to identify modalities for reforming the governance of globalisation processes, with a view to improving them and making them better suited to contribute to global growth and development.
In this official brief, the HM Revenue and Customs in the UK (the country's tax agency) has outlined its position on the tax treatment of income derived from bitcoin-related activities.
The guidance was issued with the aim to clarify the applicability of the US Bank Secrecy Act to persons creating, obtaining, distributing, exchanging, accepting, or transmitting virtual currencies. The document explains the notion of virtual currency and provides definitions for the user, exchanger, and administrator of virtual currencies.