Business Information Systems Security

(BISS)
By

Valentin Adamescu

March 2018

Cryptocurrency
A 21st century fairy tale or the global currency of the future?

Table of Contents
Introduction...................................................................................................................................................................................2
A short history of money .............................................................................................................................................................2
What are the digital-money / virtual currencies (cryptocurrency)? .............................................................................................2
Blockchain: The technology behind cryptocurrency .....................................................................................................................2
How it works? ............................................................................................................................................................................2
Security ......................................................................................................................................................................................3
Strengths and Weaknesses of Cryptocurrencies ............................................................................................................................3
Strengths ................................................................................................................................................................................3
Weaknesses .............................................................................................................................................................................3
The Impact ....................................................................................................................................................................................4
Economic impact ........................................................................................................................................................................4
Legal, Ethical and Social impact ................................................................................................................................................4
Security impact ...........................................................................................................................................................................5
Conclusion.....................................................................................................................................................................................5
References .....................................................................................................................................................................................6

CRYPTOCURRENCY – A MODERN FAIRY TALE OR THE CURRECY OF THE FUTURE?

By Valentin Adamescu – March 2018
 Cryptocurrency (or digital currency)

A 21st century fairy tale or the global currency of the future?

Introduction
A short history of money
Money is part of our everyday life, since ancient times until today and it will be a very long period from now one.

In the early ages of the humankind the main form of trade was the barter where people exchanged directly goods and
services without the use of an intermediary or a medium of exchange. Over time, the ancient economic system become way too
complex for a simple barter system and somewhere between 3000 - 600 BC the first coins where introduced as payment method
(Davies, 2002) and the foundation of the monetary system was set. The root of the banking systems can be traced until around
2000 BC in Sumeria (Eitrheim, Flandreau, & Qvigstad, 2016) but the early beginning of the banking system as we know they
probably have origins in the Renaissance period in Italy somewhere in 14th century in Florence when the Medici family
established the first bank (Goldthwaite, 1995). During the 11th century the first paper money was introduced in China by Song
Dynasty (Headrick, 2009).
The latest metamorphose of the currencies is cryptocurrencies, which they cross the boundary between the physical curre
ncy (fiat money) and digital currency (electronic money). We must not confuse the digital money as electronic payment system,
based on fiat money (e.g. coins, banknotes) with the cryptocurrency, which is a digital asset, available only in a digital form
without a physical support (a virtual currency).

What are the digital-money / virtual currencies (cryptocurrency)?

The paleo-electronic era (Wilson, 1992) , the “Internet of Things” and all technological advances changed dramatically
how all financial transactions take place and removed the need of physical use of fiat money but the currency itself is
government-backed.

Relatively new technologies (less than 30 years – Hash, Cryptographic Timestamps, P2P networks, SHA-256) helped in
the creation of Bitcoin, “the world’s first completely decentralized digital currency” (Brito & Castillo, Bitcoin: A primer for
policymakers, 2013) which means it is not supervised, regulated or controlled by any government, commercial authority or
institution, providing a high level of privacy and anonymity for the users. Along with the with the “freedom” of the coins and
privacy many other issues are associated with the cryptocurrencies and some of them they will be analysed below.

Blockchain: The technology behind cryptocurrency

How it works?
Definition: “A blockchain is a special type of database. It is
a distributed database that maintains a continuously-growing list of
records that are secure from tamper and revision.” (Brobi & Paul,
2017).
Blockchain technology allows peers to exchange money
directly without the need for a traditional financial intermediary,
lowering the cost and increasing the speed of transactions.

The technology is an uncharted territory, with a rapid

development and it is hard to recognize its full potential at this
formative stage but to understand how it works we need to highlight
some aspects of the technology.
Distributed: Identical copies of DB are manipulated on many
separated computers and no one is trusted with keeping the definitive
copy of the blockchain.
Continuously growing: All transactions are recorded in the
list and they are never deleted or changed.
Secure: Each addition to the blockchain contains a hash of
previous transactions; if previous transactions are edited, we would
instantly spot that the hash is no longer correct.

Blockchain technology we can say that is the 5th big step in

step in the computer era evolution (previous steps would be:
Figure 1 - Flow of cryptocurrencies and cash
mainframes, personal computers, internet, mobile devices).
Analyzing the Figure 1, we can see that any transaction
inside of blockchain is done secure without the need of any intermediary. The intermediary comes in place only when a
cryptocurrency user wants to transform the virtual currency in fiat currency or vice versa.

CRYPTOCURRENCY – A MODERN FAIRY TALE OR THE CURRECY OF THE FUTURE?

By Valentin Adamescu – March 2018
Security
As security point of view I blockchain technology can be defined in just three words: Integrity, Traceability,
Immutability. The records on a blockchain are secured through cryptography. Network participants have their own private keys
that are assigned to the transactions they make and act as a personal digital signature. If a record is altered, the signature will
become invalid and the peer network will know right away that something has happened. Blockchain technology has no single
point of failure, which highly decreases the chances of an IP-based DDoS attack disrupting the normal operations. If a node is
taken down, data is still accessible via other nodes within the network, since all of them maintain a full copy of the ledger at all
times.
However, network security does not remove the risk of individual’s security breaches and victims of hacking. In fact, this
increased security brings another risk of the transfers because a transfer/payment is irreversible and if someone has own
account/wallet compromised there is no way to recover the virtual coins.
It can be seen as a paradox but blockchain technology increases users security. If traditional retailer has a security breach
and the customer’s details are stolen (e.g. credit cards details), the financial loss can be on the both sides: the retail and the
customer. In case of a retail using cryptocurrency payments, there is no risk of financial loss.
Blockchain enables peer-to-peer transactions by removing the need for a trusted intermediary verifying the transactions
- a role that is needed when peers do not know or trust each other.

Strengths and Weaknesses of Cryptocurrencies

Strengths
Lower Cost of Transactions: Due to the decentralized nature of cryptocurrencies, users have the ability to make online
transactions for a fraction of the fees charged by current intermediaries such as financial or legal institutions. Credit card
companies charge a fee per transaction for processing, which is a cost that is usually borne by merchants but which can also be
passed along to buyers through higher prices or an additional fee for purchasing with a credit card. Remittance service providers
charge senders an average of 8 percent to transfer money to family overseas. In the financial services sector alone, Spanish bank
Santander estimates that cryptocurrencies (based on blockchain technology) could save banks around the world $15-20 billion
annually in settlement, regulatory, and cross-border payment costs (Belinky, Rennick, & Veitch, 2015).

Faster Transactions: Cryptocurrencies transactions are processed much more quickly than most traditional money
transfer systems, usually in a matter of minutes. Using cryptocurrencies, time is saved by the elimination of intermediary
institutions such as clearinghouses that make sure banks or others parties have matching records. For example, when trading
stocks or bonds, it usually takes 3 days for a transaction to settle and for the participants to have their funds available or for
international payments which can take 5 working days.

Geographical Freedom of Transactions: Transactions with cryptocurrencies are not bound to geographical limits. Given
the virtual nature of the system, it does not matter whether an individual sends virtual currencies to a neighbor or to someone on
the other side of the world. In addition, as blockchain do not use intermediaries, which are bound by country-specific regulations,
transactions can cross national borders with less friction. This makes cryptocurrencies well suited for international transactions.

Irreversibility of Transactions: Cryptocurrencies payments are irreversible; once a payment is issued, it can only be
reversed by asking the receiver to pay the same amount back in another transaction. This feature is ideal for lowering transaction
risk for a payment recipient, allowing merchants to be sure that buyers cannot cancel a payment after the sale of a good or service
(the way they can with credit card purchases). This alleviates fraud risks and payment security costs for merchants. On the other
hand, buyers may not view this as an advantage. This is because conventional card-&-bank based payment providers, acting on
behalf of the buyer, can reverse transactions in order to protect buyers against fraud, such as being overcharged or if a good is
defective (Jaag & Bach, 2015).

Increased Privacy of Transactions: Currently, completing an ecommerce transaction or enacting a legally binding
contract requires participants to disclose their personal information to another party, such as an e-commerce platform. Doing a
payment with cryptocurrencies is similar to paying with cash: there is no need to disclose any personal information such as a
person’s name, address, credit history, or credit card number. Individuals only disclose their wallet information, which is an
“alphanumeric address”. In addition to protecting user privacy, cryptocurrencies transactions greatly reduce the risks of identity
theft and fraud that are common with other forms of transaction or payment, such as credit cards (Brito & Castillo, 2013).

Weaknesses
Technological Barriers: Blockchain and cryptocurrencies are new and very different from most of the traditional
technologies that people use. As such, in its current form, it requires above-average computer literacy to use properly, which acts
as a barrier to entry for businesses and individuals that are interested in applications but do not know where to begin. This can
limit access to the new technology for non tech-savvy users, and can expose them to fraud risks. Further, cryptocurrencies
decentralization means that there is no central customer care resource if users need assistance.

CRYPTOCURRENCY – A MODERN FAIRY TALE OR THE CURRECY OF THE FUTURE?

By Valentin Adamescu – March 2018
 Security Concerns: Although the cryptocurrencies (inside the blockchain) have not been compromised so far, service
providers (such as wallet providers or exchange services), are vulnerable to attacks. Furthermore, the privacy of transactions seen
as a benefit to many is also a security concern. Not knowing the identity of the individual on the other side of the transaction
makes it difficult to resolve issues that may arise and can place users at risk for fraud or payment used for illicit transactions.

Limited Access: At present, access to cryptocurrencies is provided by online exchanges. Physical touchpoints, such as
Crypto ATMs and other physical service locations, are scarce and scattered. Service platforms are mostly new start-up firms with
little reputation and lack physical exchange points.

Regulatory Uncertainty: A lot of progress has been made in recent years, but there is still no international — or even
interstate — agreement about how to regulate cryptocurrencies. Current regulations focus on financial applications of blockchain
technology. Up to this point, some government entities have emphasized instituting consumer protections while letting innovation
continue to develop, but others have imposed more restrictive regulations. For example, the state of New York requires a
“BitLicense” for businesses operating with cryptocurrencies, causing many startup to leave the state (Perez, 2015). This regulatory
uncertainty, coupled with speculation, has led to other problems, such as the exchange rate volatility in the cryptocurrency
applications such as Bitcoin.

The Impact
Economic impact
The global economy is interconnected in a way that is unprecedented in human history. Trust in business is the
expectation that the other party will behave according to the four principles of integrity: honesty, consideration, accountability,
and transparency. Honesty is not just an ethical issue; it has become an economic one. To establish trusting relationships with
employees, partners, customers, shareholders, and the public, organizations must be truthful, accurate, and complete in
communications.

In report published by UniCredit, they state that “from a financial institution's point of view, cryptocurrencies can be
perceived as a threat” (Biella & Zinetti, 2016).
Regulators have begun to address these challenges, with a variety of approaches across countries. Responses have
included clarifying the applicability of existing legislation to the cryptocurrencies, issuing warnings to consumers, imposing
licensing requirements on certain virtual coins market participants, prohibiting financial institutions from dealing in
cryptocurrencies, completely banning the use of digital coins, and prosecuting violators.

Transitioning trillions of pounds (or any other fiat money) of transactions to a new system will involve an enormous
amount of testing and/or running parallel systems. Thus market participants will need to devote a significant amount of time and
capital to the process in order to minimize operation risks

Many countries around the world are preparing for incoming changes. Switzerland’s stock exchange chairman Romeo
Lacher, told Financial Times that “an e-franc backed by the Swiss central bank would boost the local economy as well as
electronic payment systems which were increasingly replacing cash” (Financial Times, 2018), and another example comes from
India, where a new national cryptocurrency is set to launch, “Laxmicoin”. The Reserve Bank of India (RBI) is now looking
forward to launching Laxmicoin after the big success of Bitcoin. The central bank is examining the possibility of a crypto-money
which would become an alternative to the Indian rupee for digital transactions (The Economic Times, 2014). Apart from India
other countries such as China and Russia are also opting actively for their own cryptocurrency.

Legal, Ethical and Social impact

Probably one of the most challenging legal issues with the cryptocurrencies is the fact that due to the high level
anonymity of transactions, is very common in the current form to avoid taxes using cryptocurrencies.

Transition from physical currency to digital currency will be a slow process but it seems inevitable. However, this
transition will need to address many issues such as elderly persons or persons with non-technical knowledge of how to operate a
digital currency. But we can see that first steps they are being made, if we take a look at the traditional banks which they push all
their customers more and more to online banking, automatic machines and self-management of any aspect of the customer
account.

Another possible positive impact is to facilitate small-scale international commerce. Local merchants in poorer countries
may struggle to access international payments systems to sell their goods abroad. For example, a rural crafts cooperative from
Nigeria might struggle to set up a website with an integrated credit card payments system, but getting a payment system in virtual
coins might enable them to sell their products internationally, avoiding traditional e-commerce systems (which often involve
having to set up a merchant account with a formal bank).

China’s e-commerce conglomerate, Alibaba, has developed a unique donation system called Ant Love based on
cryptocurrencies and blockchain. Ant Love can record the donations from any of Alibaba’s 450 million users, allowing them to

CRYPTOCURRENCY – A MODERN FAIRY TALE OR THE CURRECY OF THE FUTURE?

By Valentin Adamescu – March 2018
donate to various charitable groups and NGOs. The system also lets donors track their transaction histories, offering full
transparency and donors can better understand where and how the organizations use their donations (Lehr & Lamb, 2018).

Security impact
The cryptocurrencies have the power to remove the need for trust in financial institutions, banks and auditors. As with
most technology related privacy concerns, identifying and addressing weaknesses and solutions is intertwined with the use to
which the technology is put. Cryptocurrencies used in a payment network, a principal concern is whether an individual user can be
identified as the sender or recipient of a payment.

A challenge comes from the immutable nature of cryptocurrencies. If a disagreement arises between two parties involved
in a transaction, there is no way to go backward; modifications require that the network create an additional record (or block) to
confirm a change. If the parties involved in the transaction cannot agree on a change, they are stuck with the original transaction,
forever.
Blockchain technology prevents data manipulation by design. Any digital data on the cloud and not on a blockchain
ledger is susceptible to manipulation but cryptocurrencies are secure and free from fraud and corruption. Conventional payment
methods have been vulnerable to fraud. In a survey conducted by CFCA (Communications Fraud Control Association) it is
estimated that over $29.2 billion (£20.8 B) was lost in 2017 (CFCA, 2018) with traditional methods of payment. Digital currencies
are secure and the system is designed to be transparent and secure to prevent fraud, therefore cryptocurrencies may have a positive
impact on financial transactions.

Conclusion

At a global level different approaches toward cryptocurrencies, signal the initial response to the challenges that
cryptocurrencies pose, but further development is needed. In particular, national authorities will need to calibrate regulation in a
manner that appropriately addresses the risks without stifling innovation.

International bodies are playing an important role in identifying and discussing the risks posed by cryptocurrencies and
possible regulatory responses, and they should continue to do so. Widespread adoption of cryptocurrencies will likely require
significant coordination and cooperation among local, regional and global regulators. Also, new regulatory requirements or
changes to existing rules are required to fully implement the system across asset classes and for cross-border transactions.

To achieve a positive network effect and reap all the benefits of cryptocurrencies but also to tackle some of the issues, all
capital market participants (banks, broker/dealers, clients, etc.) will probably need to adopt a uniform standard across the
ecosystem. Thus competitors will have to collaborate with one another, and agree on how and when to universally adopt the
technology. All market participants will have to agree on how to standardize the entire capital markets system across various asset
classes, covering everything from basic settlement information to account information, trading records, order information, and
other data.

Cryptocurrencies could drive greater efficiencies in the global cash equities market, primarily through streamlining the
post-trade settlement and clearing processes. By reducing the duplicative, often manual affirmation and reconciliation of trades
across buy-side clients, broker-dealers, trust/custody banks and/or any other organization involved in the end-to-end transfer.

Many financial institutions, mainstream banks, governments, and other companies are starting to experiment how they
can use blockchain technology in financial applications and uses consensus protocols to provide transparency. This mirrors the
history of financial innovation beyond the few points in time where an industry mandate or regulation forced the industry to
cooperate. Blockchain technology and cryptocurrencies have the potential to disrupt services that traditionally require
intermediaries and create eventually big changes to the world economy.
In the era when physical barriers are removed more and more every day it is inevitable that in the next 2-3 decades the
fiat money as we know it will disappear or suffer major modifications and if not a unique global coin will surface, probably many
countries (or zones like euro-zone) will adopt a form of a cryptocurrency for economic stability or they will use blockchain
technology and implicit cryptocurrencies to improve the inter-bank settlement system for existing mainstream currencies.
Analysing the facts, we can observe a global demanding trend for transparency of financial transactions at any level and
the cryptocurrencies can offer this kind of transparency.
Digital currencies and blockchain technology are still new and yet unproven in many cases, and the cryptocurrency
market is still largely unregulated and extremely volatile. Cryptocurrencies are not a “miraculous solution” for addressing social
challenges, but the technology will continue revolutionize how individuals and systems interact across sectors. Cryptocurrencies
are in a similar position to what email was like at the beginnings of ‘90s. Hardly anyone understood how it worked or why we
would need it but nowadays we cannot concept a business, organization or individual without and email address. Therefore,
cryptocurrencies may play a major role in global economy and the way we will do financial transactions in the future.
However, another question arises – “If the financial institutions and governments adopts the cryptocurrencies globally,
they will preserve the core principles such as transparency and integrity or they will just change one technology with other and the
whole process restarts?” but this will be another study for that time.

CRYPTOCURRENCY – A MODERN FAIRY TALE OR THE CURRECY OF THE FUTURE?

By Valentin Adamescu – March 2018
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CRYPTOCURRENCY – A MODERN FAIRY TALE OR THE CURRECY OF THE FUTURE?

By Valentin Adamescu – March 2018