THE CRYPTOCURRENCY

About 10 years ago, someone had the brilliant idea of ​​creating a virtual currency with a limited supply that didn’t require banks to conduct transactions. It’s believed that the developer(s), known by the pseudonym Satoshi Nakamoto, began writing the code in 2007, launching the network and the first bitcoins in January 2009. Creating new bitcoins requires ever-increasing computing power and energy, and consequently, transaction fees for buying them are constantly rising.

Lloyd Blankein, the CEO of Goldman Sachs, explains that “the public was also very skeptical when fiat currency replaced gold” and is considering opening a trading floor dedicated to Bitcoin and other cryptocurrencies in response to numerous requests from his clients.

Bitcoin has already reached a market capitalization of almost $200 billion. It is growing rapidly and is increasingly accepted as a means of payment and as a safe haven asset. But it’s just the tip of the iceberg of this new phenomenon. Many other cryptocurrencies are starting to compete with it, such as Ether, Dash, Monero, and Ripple. Today, Aespen lists over 1,800 cryptocurrencies, and Bitcoin now represents only 40% of this rapidly growing market.

Cryptocurrencies form a strange and fascinating world that can be difficult for the uninitiated to navigate. The internet, in the early 1990s, revolutionized communication with HTML pages that could be exchanged using URLs via the HTTP protocol. Cryptocurrencies are an extension of this new world: new information technologies, independence from political power, and new benefits for consumers.

The first characteristic of a cryptocurrency is that it is entirely electronic. It exists only on a computer network. In other words, if you don’t own a computer, tablet, or mobile phone, you don’t have access to this type of currency. Traditional currencies like the euro exist in the form of banknotes or coins, which is not the case for cryptocurrencies. However, it’s important to know that traditional currencies are increasingly becoming digital. For example, when you make a bank transfer, you electronically transfer a sum of money from one account to another. The same is true for direct debits. Coins and coins now represent only 15% of the money in circulation.

A second difference lies in the very nature of money. Traditional currencies are primarily entries in accounts held by banks. A bank transfer therefore consists of making a debit entry in one account and a credit entry in the opposite direction in the account of the bank receiving the money. Cryptocurrencies are computer code, programs, that are sent from one computer to another. That is why these are 100% electronic and secure currencies.

Traditional currencies, particularly banknotes, can be counterfeited. Every year, between 500,000 and 1 million counterfeit euro banknotes are withdrawn from circulation. These are mostly €50 notes, and the total amount involved is significant.

Cryptocurrencies, as their name suggests, are encrypted currencies, and the encryption is primarily carried out using a “blockchain,” that is, a database containing the history of all transactions made between its users since its creation. This database is secure. It is shared by its various users, allowing them to verify the chain’s validity.

While the blockchain is public (some can be private), it is a large ledger that anyone can read freely and without charge, on which anyone can write with the agreement of others, but which cannot be erased and is indestructible.

To protect itself from counterfeiting, the newly created currency, the new block, must demonstrate “proof of work” to be validated by other users. Proof of work is a coding process, a problem-solving algorithm, that requires significant time and effort from the creator but is easily verifiable by a third party. Thus, on the blockchain, if one wants to modify a transaction, it must be changed simultaneously on all computers in the network, which is impossible.

Our current monetary system is centralized: all participants in the system trust an identified and universally recognized arbiter, namely the bank, and above it, the central bank. This entity validates operational changes and transactions. Thus, all commercial banks, such as LCL or BNP Paribas, can create as much money as they wish (scriptural money, in the form of account entries) under the control of the central bank, which regulates this creation through various means, particularly by setting the short-term interest rate. The central bank, for its part, retains the monopoly on the creation of banknotes. In a decentralized monetary system, there is no arbiter. The money is based on a computer network where each user acts as both server and client. This is what is called a peer-to-peer (or P2P) system. The system is managed collaboratively by all users, who validate (or reject) all decisions: this is the rule of consensus. For any change in operation or transaction to occur, the (often tacit) agreement of everyone is required.

In this system, anyone can create currency. With a powerful computer and ample electricity, certain participants in the system, the “miners,” create new currency, called “blocks,” which are added to the blockchain and verified by all system users. Creation is a lengthy and complex process, but verification is simple. All participants accept the creation of this new block once the “miner” has provided proof of the work performed.
The more widely known a currency becomes, the more expensive its creation becomes, as adding blocks to the existing ones requires powerful computers and ever-increasing electricity consumption. Therefore, the system is self-regulating: monetary creation is limited by the very nature of currency. In this decentralized and self-regulating system, where everyone can create currency, banks no longer have a role. It is therefore understandable why they are very reluctant to recognize cryptocurrencies: they lose their power to create money and therefore sources of profit.

By its very nature, each block comprises multiple transactions, each recording the email address of the sender and recipient, as well as the transaction amount. All transactions are recorded in a permanent public ledger, allowing anyone to view the complete history of each cryptocurrency and all account activity.

This transparency, which guarantees the validity of transactions, also makes it possible to determine if the cryptocurrency has passed through illicit hands. The currency itself is not anonymous. However, this information is encrypted and hidden from public authorities.

Traditional currencies are inflationary. When the central bank prints money, it increases the money supply. Those with more money are incentivized to consume more and thus increase their demand for goods. If the production of goods does not increase, or if it increases with a delay, the price of goods rises according to the law of supply and demand. With the same amount of money, an individual can no longer buy the same quantity of goods: the currency has lost purchasing power, its value. In short, when the money supply increases, its value decreases.

This is not the case for cryptocurrency: the more it develops, the longer the blockchain becomes, and the more expensive it is to create new currency. For example, the amount of Bitcoin issued is halved every four years, until the year 2140, at which point it will no longer be possible to issue new Bitcoins. The value of cryptocurrencies is therefore destined to rise in the long term because they will become increasingly expensive to produce and thus increasingly scarce. When it was created in 2009, one Bitcoin was worth one dollar.

Like any traditional currency such as the euro or the dollar, cryptocurrencies allow the purchase of goods and services. Being decentralized currencies and therefore unregulated, they have long been associated with dubious transactions.

Cryptocurrencies allow the purchase of many consumer goods online; however, paying for everyday items at physical stores with them is less common, although demand is rapidly increasing. They are, however, shedding their negative reputation by becoming more widespread and attracting an increasingly broad audience. To buy cryptocurrencies, most brokers and exchange platforms implement KYC (Know Your Customer) procedures and require proof of identity. This is, in fact, one of the steps we require of all clients to comply with financial authorities (LEI, FSMA, etc.).

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