Cryptocurrencies work on a decentralized methodology, there is no server or centralized place that holds account details and transactions.
Companies showcase their products, whether they are physical, virtual or services. Images of Steve Jobs launching an iPhone or Elon Musk announcing the latest Tesla generate media interest and hype. Cybersecurity companies are no different — ESET holds an annual event for journalists and security testers. At the event, people discuss the latest research news and find out what’s new in the company and the cybersecurity industry.
This year’s event was held in Tallinn, the Republic of Estonia. A country that has a very unique digital offering; it’s the first country that offers e-Residency. Anyone in the world can apply for a Government-issued digital ID that, for only €100, enables the holder to start and run a global business from a trusted EU environment.
A person can create a company online from anywhere in the world, can get access to business banking, with no local director needed, sign documents digitally, encrypt documents and send them securely, plus they can submit taxes online without ever needing to relocate their global business. To date there have been 23,735 applicants from 138 countries establishing 3,877 companies. Incredibly, the number of people signing up exceeds Estonia’s birth rate.
In the last few weeks, it was reported that Kaspar Korjus, Estonia’s e-Residency Managing Director, announced the concept of adding cryptocurrency, Estcoins. The media excitement that a sovereign state was announcing its intention to create a digital currency resulted in some inaccurate reporting, with the idea that it came from Mr. Korjus rather than from the Estonian Government. As Estonia offers e-residency, the concept of a digital cryptocurrency may sound appealing, but what is it?
If you are lucky enough to have some cash, you probably hold it in an account at a bank that provides you the ability to transact, get a balance statement and have access to a payment network. The financial institution works on a centralized methodology, and is typically accountable to a government regulator. The centralization stops the account holder from double spending, as every transaction is authenticated in one place.
Cryptocurrencies work on a decentralized methodology: there is no server or centralized place that holds account details and transactions. Imagine 10 friends creating their own digital currency; to make this work, every friend will need to know the balance and transactions of all the other friends in real-time. This stops friend #1 transacting with friend #2 and #3 to withdraw the same funds, making #1 overdrawn. When #1 transacts with #2 then all the friends need to be sent the details of the transaction and to confirm they received it, the effect is a distribution of the balance and history.
“Cryptocurrencies work on a decentralized methodology: there is no server or centralized place that holds account details and transactions.”
To make this scale, such as Bitcoin does, waiting for everyone to confirm would be too difficult so you need to create trusted, but still distributed, confirmers of a transaction. These are called miners, and they have a special encrypted relationship with each other. Imagine 10,000 friends using the currency and 100 of them being miners that have a trusted place in the network to confirm transactions and spread the word to the remaining participants.
With Bitcoin anyone can be a miner if willing and able to create a cryptography hub that can talk to the rest of the network. Their reward for doing this is the payment of a transaction fee paid in the digital currency. Now you have a secure network incentivized to confirm transactions and to stop people spending their cash more than once.
If we simplify this, it’s just a big database that multiple entities have copies of and before a transaction can take place they all need to agree it’s able to take place. Bitcoin works on the following principles:
- It’s fast and secure, regardless of where you transact; it works on a global network of computers that use strong cryptography.
- The actual identity of the account holder is a digital address; there is no link between this and an account holder’s real identity.
- There are no permissions; anyone can create an account using software without the need to be identified.
- Lastly, Bitcoin transactions cannot be reversed: once a transaction has been made and distributed, it’s final.
Cryptocurrency and state sponsorship
Is it possible for any government to create a cryptocurrency that would share the same values of the already established, and somewhat successful, cryptocurrencies available today?
The Republic of Estonia is a member of the European Union and part of the Eurozone currency, bringing with it regulation and procedures that may limit the success of any cryptocurrency that is state sponsored. Mario Draghi, the president of the European Central Bank, quickly dismissed the idea and stated the only currency for eurozone countries is the euro.
The success of Bitcoin is generally based on the lack of regulation; primarily it’s the currency of choice for people that wish to remain anonymous.
However, bad-intentioned people, like creators of ransomware, have used it also as the payment method to unlock infected machines, making them extremely difficult to identify – creating challenges for law enforcement trying to bring them to justice.
Allowing people to anonymously create accounts and transact with each other makes the cryptocurrency invisible to tax authorities, financial regulators and law enforcement. Making it unthinkable that any government which is part of a regulated financial community could disregard the processes that have been established to create a safe and trusted financial system.
This is probably just as unthinkable to the cryptocurrency users that they should be regulated and identified in the same way they are with traditional bank accounts.
I would like to hear the opinion of cryptocurrency users and advocates on what the legitimate uses are for the technology driven currency.