this transaction to their ledger. This would transfer money from your account at the bank, into the bank’s, without any power for anyone to stop it.
Recent examples was the Wells Fargo fiasco where it was discovered that they had not only created accounts for customers without their permission, but were also charging them recurring fees… this went on for years before being brought to light.
These are just examples.
A blockchain is a decentralised ledger. This essentially means that there is no central administrator or centralised data storage. The ledger is shared across a large network of multiple sites, entities and people.
This means all the participants have a copy of the ledger. Each transaction is validated on the blockchain by solving a complex math problem, and only then is added to ledgers across the network.
If any manipulation of a ledger occurs and a malicious transaction is added onto the ledger of a particular node, the network can easily identify an invalid transaction as it is absent on other copies existing on the network.
3. What is Cryptocurrency?
A cryptocurrency is an encrypted digital currency that uses a decentralised ledger, called the blockchain, to record and validate the transactions. Cryptocurrencies are a peer-to- peer medium of exchange, which function without the oversight of a third party.
This eliminates counter-party risks and cost overheads.What this actually means is that one gets to avoid the inter-bank transactions that potentially take days for clearing, even after paying a significant transaction fees, in addition to foreign exchange or other fees.
The transactions on the blockchain are processed within minutes, 24/7, even outside the regular banking hours, and all with a negligible wallet transfer fee.
A transfer of funds between two digital wallets is called a transaction. That transaction gets submitted to a public ledger and awaits confirmation.
When a transaction is made, wallets use an encrypted electronic signature (an encrypted piece of data called a cryptographic signature) to provide a mathematical proof that the transaction is coming from the owner of the wallet.The confirmation process takes a bit of time (ten minutes for Bitcoin as of now) while other nodes in the blockchain confirm transactions and add legal entries into the distributed ledger.
A cryptocurrency (or crypto currency) is a digital asset designed to work as a medium of
form of computerized database using strong cryptography to secure transaction records, to control the creation of additional coins, and to verify the transfer of coin ownership. It typically does not exist in physical form (like paper money) and is typically not issued by a central authority. Cryptocurrencies typically use decentralized control as opposed to centralized digital currency and central banking systems. When a cryptocurrency is minted or created prior to issuance or issued by a single issuer, it is generally considered centralized. When implemented with decentralized control, each cryptocurrency works through distributed ledger technology, typically a blockchain, that serves as a public financial transaction database.
Bitcoin, first released as open-source software in 2009, is the first decentralized cryptocurrency. Since the release of bitcoin, over 6,000 altcoins (alternative variants of bitcoin, or other cryptocurrencies) have been created.
4. History
In 1983, the American cryptographer David Chaum conceived an anonymous cryptographic electronic money called ecash. Later, in 1995 he implemented it through Digicash an early form of cryptographic electronic payments which required user software in order to withdraw notes from a bank and designate specific encrypted keys before it can be sent to a recipient. This allowed the digital currency to be untraceable by the issuing bank, the government, or any third party.
In 1996, the National Security Agency published a paper entitled How to Make a Mint:
the Cryptography of Anonymous Electronic Cash, describing a Cryptocurrency system, first publishing it in an MIT mailing list and later in 1997, in The American Law Review (Vol. 46, Issue 4).
In 1998, Wei Dai published a description of "b-money", characterized as an anonymous, distributed electronic cash system.Shortly thereafter, Nick Szabo described bit gold. Like bitcoin and other cryptocurrencies that would follow it, bit gold (not to be confused with the later gold-based exchange, BitGold) was described as an electronic currency system which required users to complete a proof of work function with solutions being cryptographically put together and published.
The first decentralized cryptocurrency, bitcoin, was created in 2009 by presumably 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 successful cryptocurrency to use scrypt as its hash function instead of SHA-256. Another notable cryptocurrency, Peercoin was the first to use a proof-of-work/proof-of-stake hybrid.
On 6 August 2014, the UK announced its Treasury had been commissioned a study of cryptocurrencies, and what role, if any, they can play in the UK economy. The study was also to report on whether regulation should be considered.
5. Formal Definiton of Cryptocurrency
According to Jan Lansky, a cryptocurrency is a system that meets six conditions:
a) The system does not require a central authority, its state is maintained through distributed consensus.
b) The system keeps an overview of cryptocurrency units and their ownership.
c) The system defines whether new cryptocurrency units can be created. If new cryptocurrency units can be created, the system defines the circumstances of their origin and how to determine the ownership of these new units.
d) Ownership of cryptocurrency units can be proved exclusively cryptographically.
e) The system allows transactions to be performed in which ownership of the cryptographic units is changed. A transaction statement can only be issued by an entity proving the current ownership of these units.
f) If two different instructions for changing the ownership of the same cryptographic units are simultaneously entered, the system performs at most one of them.
In March 2018, the word cryptocurrency was added to the Merriam-Webster Dictionary.
6. Countries that Have or Are Issuing National or Regional Cryptocurrencies a) AI - Anguilla (ECCB)
b) AG - Antigua and Barbuda (ECCB) c) CN - China
d) DM - Dominica (ECCB) e) GD - Grenada (ECCB) f) IE - Ireland
g) LT - Lithuania
h) MH - Marshall Islands
j) KN - Saint Kitts and Nevis (ECCB) k) LC S- aint Lucia (ECCB)
l) VC - Saint Vincent and the Grenadines (ECCB) m) VE – Venezuela
7. Regulation of Cryptocurrency in South Africa
At present, there are no specific laws or regulations governing the use or trading of virtual currencies (VCs) in South Africa. However, in December 2014 the South African Reserve Bank (SARB), the central banking institution whose responsibilities include formulating and implementing monetary policy and issuing banknotes and coins in the country, issued a position paper on virtual currencies.
The position paper expressly stated that only the SARB may issue legal tender and that decentralized convertible virtual currencies (DCVCs), including bitcoin and litecoin, are not legal tender in South Africa. This means that “any merchant or beneficiary may refuse VCs as a means of payment.” The SARB warned of various risks associated with the use of VCs, including issues relating to payment systems and payment service providers, price stability, money-laundering and terrorism financing, consumer risk, circumvention of exchange control regulations, and financial stability. For instance, the position paper warns about risks that consumers are exposed to mainly due to the unregulated nature of VCs and the wild fluctuations in prices, which could result in heavy financial losses. This does not account for other risks such as losses incurred as the result of a security breach, fraud, and the absence of insurance mechanisms to cover losses, the SARB noted.
Regarding the abovementioned risks, the SARB stated that “no legal protection or recourse is afforded to users, traders or intermediaries of VCs and such activities are performed at the endusers sole and independent risk.”
While the SARB’s position paper warned individuals against involvement in trading or holding VCs, it also noted that it does not see VCs as posing any systemic threat at this time: Values ($6,25 billion) and volumes (60 000 daily average) currently traded in Bitcoin (the leading DCVC) remain insignificant when compared to the formal payment system and the larger economy. VCs are not considered legal tender in most jurisdictions.
A multitude of independent variants of VCs exist and are being developed, all aimed at the same niche market. Based on the aforementioned, VCs (particularly DCs), at this stage of their development, are neither broad nor evasive enough to be classified as systemic. However, it emphasized the need for constant monitoring of DCVCs and said
it “reserves the right to change its position should the landscape warrant regulatory intervention.”
On April 6, 2018, the South African Revenue Services (SARS) issued a clarification on the tax status of VCs. SARS noted that it “will continue to apply normal income tax rules to cryptocurrencies and will expect affected taxpayers to declare cryptocurrency gains as part of their taxable income.”
Taxpayers must therefore declare all their cryptocurrency income and failure to do so could result in imposition of interest and penalties. SARS appears to have not made a determination whether gains made from trading cryptocurrency are subject to income tax or capital gains tax. It states that: Whilst not constituting cash, cryptocurrencies can be valued to ascertain an amount received or accrued as envisaged in the definition of “gross income” in the Act. Following normal income tax rules, income received or accrued from cryptocurrency transactions can be taxed on revenue account under “gross income”.
Alternatively such gains may be regarded as capital in nature, as spelt out in the Eighth Schedule to the Act for taxation under the CGT paradigm. Determination of whether an accrual or receipt is revenue or capital in nature is tested under existing jurisprudence (of which there is no shortage). The amount of tax accrued to a person could differ a great deal depending on whether gains in VCs are taxed as income or capital gains.