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A cryptocurrency is a medium of exchange designed around securely exchanging information which is a process made possible by certain principles of cryptography. The first cryptocurrency to begin trading was Bitcoin in 2009. Since then, numerous cryptocurrencies have been created. Fundamentally, cryptocurrencies are specifications regarding the use of currency which seek to incorporate principles of cryptography to implement a distributed, decentralized and secure information economy.
When comparing cryptocurrencies to real money, the most notable difference is in how no group or individual may accelerate, stunt or in any other way significantly moderate (or abuse) the production of money. Instead, only a fixed amount of cryptocurrency is produced by the entire cryptocurrency system collectively, at a rate which is bounded by a value both prior defined and publicly known. In centralized banking and economic systems such as the Federal Reserve System, governments control the value of currency by printing units of fiat money or demanding additions to digital banking ledgers. However, governments cannot produce units of cryptocurrency and as such, governments cannot provide backing for firms, banks or corporate entities which hold asset value measured in a decentralized cryptocurrency. The underlying technical system upon which all cryptocurrencies are now based was created by the anonymous group or individual known as Satoshi Nakamoto for the purpose of creating an economy within which the practice of fractional reserve banking would be fundamentally impossible.
Hundreds of cryptocurrency specifications now exist; most are similar to and derived from the first fully implemented cryptocurrency, Bitcoin. Similar protocols include Proof-of-stake, a common authentication protocol forked from the Proof-of-work authentication protocol used by Bitcoin. Within cryptocurrency systems the safety, integrity and balance of all ledgers is maintained by a community of mutually distrustful parties referred to as miners, who are usually members of the public, handling cryptocurrency transactions for a small fee. Miners use resource-intensive computer software to help secure a particular cryptocurrency's network by increasing that network's ability to solve mathematical equations which the network directly uses to impede fraud. Subverting the underlying security of a cryptocurrency is mathematically possible, but the cost may be unfeasibly high. For example, against Bitcoin's proof-of-work based system, an attacker would need computational power greater than that controlled by the entire community of miners in order to even have
of a chance, which means directly circumventing Bitcoin's security is now a task well beyond even a technology company the size of Google.
Most cryptocurrencies are designed to gradually introduce new units of currency, placing an ultimate cap on the total amount of currency that will ever be in circulation. This is done both to mimic the scarcity (and value) of precious metals and to avoid hyperinflation. As a result, such cryptocurrencies tend to experience hyperdeflation as they grow in popularity and the amount of the currency in circulation approaches this finite cap. Compared with ordinary currencies held by financial institutions or kept as cash on hand, cryptocurrencies are less susceptible to seizure by law enforcement. Existing cryptocurrencies are all pseudonymous, though additions such as Zerocoin and its distributed laundry feature have been suggested, which would allow for anonymity.
The first cryptocurrency, Bitcoin, was created in 2009 by pseudonymous developer Satoshi Nakamoto. It used SHA-256, a cryptographic hash function, as its proof-of-work scheme. In April 2011, Namecoin was created as an attempt at forming a decentralized DNS, which would make internet censorship very difficult. Soon after, in October 2011, Litecoin was released. It was the first cryptocurrency to use scrypt as its hash function instead of SHA-256. It also had a much faster transaction time compared to Bitcoin, making it more usable as a currency. Another notable cryptocurrency, Peercoin was the first to use a proof-of-work/proof-of-stake hybrid. Many other cryptocurrencies have been created though few have been successful, as they have brought little in the way of technical innovation.
Jordan Kelley, founder of Robocoin launched the first Bitcoin ATM in the United States on February 20, 2014. The kiosk installed in Austin, Texas is similar to bank ATMs but has scanners to read government-issued identification such as a driver's license or a passport to confirm users' identities.
The Dogecoin Foundation, a charitable organization centered around Dogecoin and co-founded by Dogecoin co-creator Jackson Palmer, donated more than $30,000 worth of Dogecoin to help fund the Jamaican bobsled team's trip to the 2014 Olympic games in Sochi, Russia. The growing community around Dogecoin is looking to cement its charitable credentials by raising funds to sponsor service dogs for children with special needs.
Cryptocurrencies are legal in all countries except Iceland, due primarily to Iceland's freeze on foreign exchange. Controversy over the misuse of cryptocurrency has also led to restrictions in certain countries – regulators in China banned the handling of Bitcoins by financial institutions during an extremely fast adoption period in early 2014. In Russia, though cryptocurrencies are perfectly legal, it is illegal to actually purchase goods with any currency other than the Russian ruble.
On March 25, 2014 the IRS ruled that Bitcoin will be treated as property for tax purposes as opposed to currency. This means Bitcoin will be subject to capital gains tax. One benefit of this ruling is that it clarifies the legality of Bitcoin. No longer do investors need to worry that investments in or profit made from Bitcoins are illegal or how to report them to the IRS.
Some cryptocurrency have legal issues such as Coinye, an altcoin that used, without permission, rapper Kanye West as its logo. This altcoin has been compared to the popular Dogecoin. Upon hearing of the release of Coinye, originally called Coinye West, attorneys for Kanye West sent a cease and desist letter to the email operator of Coinye, whose name remains unknown. The letter stated that Coinye was willful trademark infringement, unfair competition, cyberpiracy, and dilution and instructed Coinye to stop using the likeness and name of Kanye West.
There have been very few arrests in the United States related to Bitcoin. This is primarily due to the difficulty of tracking Bitcoin payments. The arrests that have been made are all on charges of using Bitcoin to launder money. The most notable case was the arrest of Charlie Shrem, the CEO of BitInstant, a Bitcoin exchange backed by the Winklevoss twins.
Florida has taken a firm stance against money laundering through Bitcoin with its recent arrest of three money launderers. The launderers were purportedly using the website localbitcoins.com to launder hundreds of thousands of dollars worth in Bitcoin. They were apprehended after an undercover agent asked to purchase Bitcoin with the intent of buying stolen credit cards online.
Though not directly related to cryptocurrency, Ross Ulbricht was arrested in October 2013 for running an illegal drug trafficking website, The Silk Road, that used Bitcoin as the only payment option. Ross William Ulbricht was arrested on charges of alleged murder-for-hire and narcotics trafficking violation and identified him as the founder and chief operator "Dread Pirate Roberts." Bitcoins are the only currency accepted on the site, because they are traded electronically and are difficult to trace to individuals. But Bitcoin accounts also lack protections that most bank accounts have, including government-backed insurance.
The greatest threat to cryptocurrencies lies in the ability of hackers or potential inside-parties to break the system and infiltrate the security systems in place. In a high-profile case in 2011, a hacker infiltrated Bitcoin's database and artificially created 2 million units of the currency, essentially crashing the value of the currency to nearly zero. The value of Bitcoin did recover, but the vulnerability of cryptocurrencies to such attacks cannot be overlooked.
On August 6, 2013 Magistrate Judge Amos Mazzant of the Eastern District of Texas federal court ruled that because cryptocurrency (expressly Bitcoin) can be exchanged for government issued currencies, cryptocurrency could be considered real currency. This ruling allowed for the SEC to have jurisdiction over cases of securities fraud involving cryptocurrency.
GBL, a Chinese Bitcoin trading platform suddenly shut down, and up to $5 million worth of Bitcoin disappeared with it. Subscribers were unable to log into the Chinese bitcoin platform on October 26, 2013 and as much as $5 million disappeared.
In February 2014 cryptocurrency made national headlines due to the world's largest Bitcoin exchange, Mt. Gox, declaring bankruptcy. The company stated that it had lost nearly $473 million of their customer's Bitcoins likely due to theft. This was equivalent to approximately 750,000 Bitcoin, or about 7% of all the Bitcoins in existence. Due to this crisis, the price of a Bitcoin fell from a high of about $1,160 in December to under $400 in February.
|This section requires expansion. (June 2014)|
The most widely used proof-of-work schemes are SHA-256, which was introduced by Bitcoin, and scrypt, which is used by currencies such as Litecoin. The latter now dominates over the world of cryptocurrencies, with at least 480 confirmed implementations.
This is a list of cryptocurrencies. By May 2014 there were more than 275 cryptocurrencies available for trade in online markets.
(US$ mn)[nt 1]
|Yes||bitcoin.org||~4,676||60.14%||~12.63 of 21||SHA-256d||Yes||No|
|Ripple[nt 3]||XRP||N/A||2013||Chris Larsen &|
|Yes||ripple.com||~637||100%||100,000 of 100,000||ECDSA||No||No|
|Litecoin[nt 4]||LTC||Ł||2011||Charles Lee||Yes||litecoin.org||~253||32.58%||~27.37 of 84||scrypt||Yes||No|
|Darkcoin[nt 5]||DRK||N/A||2014||Evan Duffield &|
|Yes||darkcoin.io||~47||19.86%||~4.37 of 22||X11||Yes||Yes|
|Yes||peercoin.net||~29||N/A||~21.3 of ∞||SHA-256||Yes||Yes|
|Dogecoin[nt 6]||DOGE||Ɖ||2013||Jackson Palmer|
& Billy Markus
|Yes||dogecoin.com||~25||69.13%||~69,131 of 100,000||scrypt||Yes||No|
|Mastercoin||MSC||N/A||2013||J. R. Willett ||Yes||mastercoin.org||~15||100%||~0.619478 of 0.6194786||SHA-256d||No||No|
|Namecoin[nt 7]||NMC||ℕ||2011||N/A||Yes||dot-bit.org||~12||40.38%||~8.48 of 21||SHA-256||Yes||No|
|Yes||auroracoin.org||~11||50.86%||~10.68 of 21||scrypt||Yes||No|
|Yes||primecoin.org||~3||N/A||~5.18 of ∞||1CC/2CC/TWN||Yes||No|
|Vertcoin||VTC||N/A||2014||David Muller||Yes||vertcoin.org||~3||4%||~3.36 of 84||Scrypt-Adaptive-Nfactor||Yes||N/A|
|MazaCoin||MZC||N/A||2014||Payu Harris||Yes||mazacoin.org||~0.2||9.38%||~226.98 of 2419.2||SHA-256||Yes||No|