Cryptocurrency money what is it how does it effect to the financial system any potential financial crisis with the existence of cryptocurrency

Bitcoin and the Modern Cryptocurrency Boom Bitcoin is widely regarded as the first modern cryptocurrency — the first publicly used means of exchange to combine decentralized control, use

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CAPITAL MARKET MID TERM INDIVIDUAL ASSIGNMENT:

Cryptocurrency money? What is it? How does it effect to the financial system? Any potential financial crisis with the existence of cryptocurrency?

Elisa Giuliani

2014

Journal of Business Ethics

Vu Quynh Anh

Student ID: 11180556

Class: Advanced Finance 60B

Lecturer: Assoc Prof

BUI HUY NHUONG

HANOI

NOVEMBER 2020

Vu Quynh Anh

Student ID: 11180556

Class: Advanced Finance 60B

Lecturer: Assoc Prof

BUI HUY NHUONG

HANOI

NOVEMBER 2020

Elisa Giuliani

2014

Journal of Business Ethics

CAO PHUONG LINH Student ID: 11192751 Class: Advanced Finance 61B Lecturer: Assoc Prof Dr NGUYEN THI MINH HUE

Hanoi, 2022

Table of Contents

I INTRODUCTION OF CRYPTOCURRENCY 2

1 History of Cryptocurrency 2

2 Definition of Cryptocurrency 2

a Definition 2

b Distinguish the concepts of Electronic currency, Virtual currency, and Cryptocurrency 3

3 Types of Cryptocurrency 3

4 How does Cryptocurrency work? 4

5 Current situation of Cryptocurrency 5

a Global situation of Cryptocurrency 5

b Current situation of Cryptocurrency in Vietnam 5

II CRYPTOCURRENCY’S EFFECT ON FINANCIAL SYSTEM 6

1 Definition of Financial system 6

2 Positive impact of Cryptocurrency on Financial system 7

3 Negative impact of Cryptocurrency on Financial system 9

III POTENTIAL FINANCIAL CRISIS WITH THE EXISTENCE OF CRYPTOCURRENCY 10

1 What causes Financial crises? 10

2 Will Cryptocurrency cause the next Financial crisis? 11

3 Conclusion 13

REFERENCES 14

I INTRODUCTION OF CRYPTOCURRENCY

1 History of Cryptocurrency

Before Bitcoin

Cryptocurrency’s technical foundations date back to the early 1980s when an American cryptographer named David Chaum invented a “blinding” algorithm that remains central to modern web-based encryption The algorithm allowed for secure, unalterable information exchanges between parties, laying the groundwork for future electronic currency transfers

About 15 years later, an accomplished software engineer named Wei Dai published a white paper on b-money, a virtual currency architecture that included many of the basic components of modern cryptocurrencies, such as complex anonymity protections and decentralization However, b-money was never deployed as a means

of exchange

The late 1990s and early 2000s saw the rise of more conventional digital finance intermediaries Chief among them was PayPal, which made Tesla founder and noted cryptocurrency advocate Elon Musk’s first fortune and proved to be a harbinger of today’s mobile payment technologies that have exploded in popularity over the past 10 years But no true cryptocurrency emerged until the late 2000s when Bitcoin came onto the scene

Bitcoin and the Modern Cryptocurrency Boom

Bitcoin is widely regarded as the first modern cryptocurrency — the first publicly used means of exchange to combine decentralized control, user anonymity, record-keeping via a blockchain, and built-in scarcity

It was first outlined in a 2008 white paper published by Satoshi Nakamoto, a pseudonymous person or group

In early 2009, Nakamoto released Bitcoin to the public, and a group of enthusiastic supporters began exchanging and mining the currency

By late 2010, the first of what would eventually be dozens of similar cryptocurrencies

— including popular alternatives like Litecoin — began appearing The first public Bitcoin exchanges appeared around this time as well

2 Definition of Cryptocurrency

a Definition

A cryptocurrency is a digital or virtual currency that is secured by cryptography, which makes it nearly impossible to counterfeit or double-spend Many cryptocurrencies are decentralized networks based on blockchain technology—a distributed ledger enforced by a disparate network of computers A defining feature of cryptocurrencies is that they are generally not issued by any central authority, rendering them theoretically immune to government interference or manipulation

b Distinguish the concepts of Electronic currency, Virtual currency, and Cryptocurrency

3 Types of Cryptocurrency

Cryptocurrency can be clustered into two distinct categories: coins and tokens

- Coins and altcoins

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A coin is any cryptocurrency that uses its own independent blockchain For example,

Bitcoin is considered a “coin” because it runs on its own infrastructure Similarly, Ether is operated via the Ethereum blockchain

The term “altcoin” is used to refer to any coin other than Bitcoin Many altcoins operate similarly to Bitcoin However, others, such as Dogecoin, are rather different Doge, for instance, offers an unlimited supply of coins compared to Bitcoin’s cap of

21 million coins

- Tokens

Like coins, tokens are also digital assets that can be bought and sold However, tokens are a non-native asset, meaning that they use another blockchain’s infrastructure These include Tether, which is hosted on the Ethereum blockchain, and others, including TerraUSD, Chainlink, Uniswap, and Polygon

Blockchain technology is open source, meaning any software developer can use the original source code and create something new with it There are thousands of cryptocurrencies Ten popular types of cryptocurrency are Bitcoin, Ether, Binance Coin, Tether, Solana, XRP, Cardano, USD Coin, Terra and Avalanche

4 How does Cryptocurrency work?

Cryptocurrencies are not controlled by the government or central regulatory authorities As a concept, cryptocurrency works outside of the banking system using different brands or types of coins – Bitcoin being the major player

- Mining

Cryptocurrencies (which are completely digital) are generated through a process called “mining” This is a complex process Basically, miners are required to solve certain mathematical puzzles over specially equipped computer systems to be rewarded with bitcoins in exchange tends

In an ideal world, it would take a person just 10 minutes to mine one bitcoin, but in reality, the process takes an estimated 30 days

- Buying, selling and storing

Users today can buy cryptocurrencies from central exchanges, brokers, and individual currency owners or sell it to them Exchanges or platforms like Coinbase are the easiest ways to buy or sell cryptocurrencies

Once bought, cryptocurrencies can be stored in digital wallets Digital wallets can be

“hot” or “cold” Hot means the wallet is connected to the internet, which makes it easy

to transact, but vulnerable to thefts and frauds Cold storage, on the other hand, is safer but makes it harder to transact

- Transacting or investing

Cryptocurrencies like Bitcoins can be easily transferred from one digital wallet to another, using only a smartphone Once you own them, your choices are to: use them

to buy goods or services, trade-in them, or exchange them for cash

If you are using Bitcoin for purchases, the easiest way to do that is through debit-card-type transactions You can also use these debit cards to withdraw cash, just like at an ATM Converting cryptocurrency to cash is also possible using banking accounts or peer-to-peer transactions

5 Current situation of Cryptocurrency

a Global situation of Cryptocurrency

Every country in the world has different approaches to this new currency If the Netherlands accepts it recklessly, the United Kingdom and the US are more cautious with this currency because of their fear for speculation, and potential risks to the economy In contrast, China, and Thailand tend to adopt increasingly tightening and prudent policies on this kind of currency

b Current situation of Cryptocurrency in Vietnam

Bitcoin first appeared in Vietnam at the end of 2013 and at the beginning of 2014 in two major centers, including Hanoi and Ho Chi Minh City At present, Vietnam as well as many countries are still embarrassed about behaving with the cryptocurrency and related activities (exchanging transactions, importing and using digital currency

“digging” machine ) In Vietnam, Bitcoin has been traded but not recognized by the

Government as a currency or means of payment, and it has not been managed and put under control The informal cryptocurrency transfer activities have been developed relatively, even spreading in rural areas, accompanied by fraudulent activities and lack

of transparency In March, 2014, in Vietnam, the first Bitcoin dealer named Bitcoin Vietnam was set up at Bitcoin.vn, forming the Bitcoin VBTC Exchange On June 5th

2016, the first Bitcoin ATM machine existed in Vietnam In 2 years of 2016-2017, nearly 1000 Bitcoin diggers were imported to Vietnam

On August 21st 2017, the Prime Minister approved the project of improving the legal framework for management of virtual assets, electronic currency, digital currency, including Bitcoin Over the past time, the SBV has repeatedly issued warnings, affirming that Vietnam has not accepted cryptocurrency as monetary currency; the use

of cryptocurrency as payment means violates the law Previously, the State Bank of Vietnam (SBV) submitted the Government to issue Decree 80/2016/ND-CP providing regulation on legal means of payment in Vietnam (excluding Bitcoin and other cryptocurrency) and additional regulations on prohibiting issuance, supply, and use of cryptocurrency

Decree 96/2014/ND-CP stipulated sanctions on administrative fines to illegal issuance, provision and use of payment instruments In essence, the SBV believes that cryptocurrency is virtual assets (often called coins) However, both the Civil Code of

2005 and the Civil Code of 2015 have not yet had definitions and specific regulations

on governing virtual properties (including cryptocurrency)

II CRYPTOCURRENCY’S EFFECT ON FINANCIAL SYSTEM

1 Definition of Financial system

A financial system is an economic arrangement wherein financial institutions facilitate the transfer of funds and assets between borrowers, lenders, and investors Its goal is

to efficiently distribute economic resources to promote economic growth and generate

a return on investment (ROI) for market participants

There are several financial system components to ensure a smooth transition of funds between lenders, borrowers, and investors:

● Financial Institutions: act as intermediaries between the lender and the borrower when providing financial services These include banks, insurance companies, investment companies and brokerage firms

● Financial Markets: These are places where the exchange of assets occurs with borrowers and lenders, such as stocks, bonds, derivatives, and commodities Financial markets help businesses to grow and expand by allowing investors to contribute capital

● Tradable or Financial Instruments: Tradable or financial instruments enable individuals to trade within the financial markets These can include cash, shares

of stock (representing ownership), bonds, options, and futures

● Financial Services: Financial services provide investors a way of managing assets and offer protection against systemic risk These also ensure individuals have the appropriate amount of capital in the most efficient investments to promote growth Banks, insurance companies, and investment services would

be considered financial services

● Currency (Money): is a form of payment to exchange products, services, and investments and holds value to society

2 Positive impact of Cryptocurrency on Financial system

- Cryptocurrency decreases the dependence on Fiat money, leading to inflation hedge

One characteristic of cryptocurrency is natural decentralization Crypto assets were created as an alternative to traditional banking infrastructure that don’t need an intermediary and aren’t controlled to the capacity of a centralized government, bank,

or agency Instead of relying on centralized intermediaries in these transactions, the trust is placed in the blockchain code and the distributed nature of the blockchain Therefore, it doesn’t have an impact on traditional currency resulting in the opportunities to be an alternative for fiat money Nowadays, technology is developed rapidly, people depend more on digital transferring services because of its convenience, especially the high speed of transferring Using crypto to be a payment method can decrease the dependence on traditional or authorized money, therefore, contributing to inflation hedge Because mineable cryptocurrencies with a limited supply cap, like Bitcoin, Litecoin, and Monero, to name a few, are thought to be good hedges against inflation Since the 1970s, confidence in U.S banks has consistently decreased And in countries where the domestic currency is constantly fluctuating, causing living conditions to plummet, cryptocurrency can be used to circumvent these situations

- Cryptocurrency supports customer’s transactions

1.7 billion people worldwide don’t have a bank account They are financially disadvantaged and often must resort to dangerous lending practices Interestingly, a

large number of this population possess a cell phone, and because cryptocurrencies can be transacted through mobile applications, cryptocurrency can easily become a viable option for them An added advantage of cryptocurrency is that it’s completely decentralized, which means that for citizens living in countries with currency instability, cryptocurrency allows them to trade freely across borders with citizens of more well-off countries, creating a level of economic equality

- Cryptocurrency creates potential for an effective payment system

Traditional monetary and electronic payment systems involve a number of intermediaries, such as government central banks and private financial institutions To carry out transactions, these institutions operate and maintain extensive electronic networks and other infrastructure, employ workers, and require time to finalize transactions To meet costs and earn profits, these institutions charge various fees to users of their systems Advocates of cryptocurrencies hope that a decentralized payment system operated through the internet will be less costly than the traditional

payment systems and existing infrastructures

In addition, as can be seen from the characteristics of the cryptocurrency, there are many aspects that can support this system to be an effective one:

● Unlimited possibilities of transaction – each of the wallet holders can pay to anyone, anywhere, and any amount The transaction can not be controlled or prevented, so you can make transfers anywhere in the world

● Speed of transaction – it is possible to process thousands of transactions

in less than one second

● Secure and private

● Anonymity – It is completely anonymous and at the same time fully transparent Any company can create an infinite number of bitcoin addresses without reference to name, address, or any other information

custody services for customers

- Cryptocurrency is eliminating previous imperfections in the banking system