Annotation. Money has a long history in human society. Over the centuries, the monetary unit and its essence have changed. It has its own history in a separate country, and each currency is unique in itself. Initially, it was simply a natural exchange, which, due to the need for exchange, took the form of bartering one commodity for another. Later, humanity invented and introduced money. In the modern world, money, in addition to being a means of payment, is also a symbol of the country's independence and real sovereignty. Due to the high pace of globalization, the issue of the existence of an "international currency" is very relevant. We are currently witnessing the "Fourth Industrial Revolution", which is transforming various spheres, and the world economy is no exception. The Internet and modern technologies have laid the foundation for such a new concept as the digital economy. The digital economy is a whole range of economic, social and cultural activities that are carried out online, using modern information and communication technologies. In the digital economy, banking, trade, education, and other activities are carried out using the Internet and various technological devices. The digitalization of the economy has completely broken through the framework in which it was located and has established new rules of the game for international trade.

Keywords: Monet, Digital Currency, Bitcoin, Decentralization, Blockchain

Money has a long history in human society. Over the centuries, the monetary unit and its essence have changed. It has its own history in a separate country, and each currency is unique in itself. Initially, it was simply a natural exchange, which, due to the need for exchange, took the form of bartering one commodity for another. Later, humanity invented and introduced money. In the modern world, money, in addition to being a means of payment, is also a symbol of the country's independence and real sovereignty.

Due to the high pace of globalization, the issue of the existence of an "international currency" is very relevant. We are currently witnessing the "Fourth Industrial Revolution", which is transforming various spheres, and the world economy is no exception. The Internet and modern technologies have laid the foundation for such a new concept as the digital economy. The digital economy is a whole range of economic, social and cultural activities that are carried out online, using modern information and communication technologies. In the digital economy, banking, trade, education, and other activities are carried out using the Internet and various technological devices. The digitalization of the economy has completely broken through the framework in which it was located and has established new rules of the game for international trade.

In 1999, economist Milton Friedman predicted that the Internet would become the driving force that would completely change the rules of the game and globally weaken the role of governments. According to him, what the world lacks today, but will soon be created, is reliable electronic money that will allow people to send money to each other from anywhere in the world, even without trusting each other, and all this will happen without excessive control and interference from governments and banks.

Friedman's 1999 prediction came true in 2008, when the first cryptocurrency was created - Bitcoin. Bitcoin revolutionized the world, it was the first decentralized alternative digital currency, which was not backed by the state or the banking sector. No less important than the creation of Bitcoin was the creation of blockchain technology, which is the backbone of all cryptocurrencies. It is through the use of blockchain technology that cryptocurrencies achieve the long-awaited decentralization. The creation of cryptocurrency and blockchain technology has revolutionized the same way as the emergence of the Internet.

At this stage, the existing financial institutions and legal environment have not been developed with this technology in mind. Financial institutions and the legal world have adapted to work with old forms of currency. In conditions where cryptocurrencies and blockchain technology are used more and more widely every day and it is becoming increasingly obvious that transactions using cryptocurrencies will become a global norm, a complete reform of the legal and financial environment is needed.

To reform, it is necessary to understand what cryptocurrencies and blockchain technologies are, what are the mechanisms of their work, the legal, economic and technological nature, the state of legal regulation in the world, and so on. Those who were able to understand the main aspects of the principles of operation of blockchain networks quickly came to the conclusion that this technology and its subsequent development can significantly change the picture of the modern world order.

The document created in 2008 by Satoshi Nakamoto and the first practical implementation of blockchain technology, the "Bitcoin Project", went unnoticed by the world community at that time; only specialists noticed it. The real manifestation of interest in blockchain projects began in the first half of 2016. 

The essence of cryptocurrency

In order to understand the essence of cryptocurrency, it is important to understand the history of its creation and the basis that prompted its creator to create cryptocurrency.

The idea of creating cryptocurrency was laid in 1980. American programmer David Chaum was studying the possibility of creating electronic money, his idea was to create an electronic currency that would make trade more secure and protected from third parties.

In his opinion, electronic money should acquire the properties of physical money, but with the difference that it would become more anonymous and it would be impossible to interfere in transactions between two parties.

The next person to share a similar idea was Nick Szabo, a doctor of computer science and computer science. In 1999, he presented his paper “Bit-Gold,” in which he argued that it was necessary to create a currency that did not require the intervention of a bank or government to issue or control it. Finally, this idea was realized in 2008, when Satoshi Nakamoto’s white paper “Bitcoin: A Peer-to-Peer Electronic Cash System” was released. This paper echoed the ideas of David Chaum and Nick Szabo and created the first decentralized digital currency that did not require third-party supervision and management.

It is an interesting question why a digital currency, or means of payment, was created that would completely eliminate the need for supervision and intervention by banks and the state. In order to answer this question, we need to look at how the world’s current monetary system works.

The modern monetary system is dominated by so-called “Fiat currency” paper money, which is not backed by or secured by gold or any other precious metals. Modern paper money functions as a means of payment on the basis of state laws, and it is the laws issued by the state that give legitimacy to money as a means of payment.

Trust in the law, the state, and the banking system are vital attributes of the functioning of the modern monetary system. After all, money has power only because people have faith that it will be exchanged for something of value. But what happens when this faith is shaken?

The decline in the authority of the state government and the banking system leads to a decrease in the purchasing power of money. The loss of authority is caused by a breach of trust, especially in cases where the history of currencies is full of facts of violation of this trust. We entrust money to banks, and they issue loans, taking risks with the entrusted money. There is also no doubt that the global economic crisis of 2008 caused great reputational damage to both banks and the governments that oversee them. In these circumstances, the financial sector is becoming the least trusted sector while trust in the technology sector is increasing. The creator of Bitcoin saw a crisis of trust and that is why he created a cryptocurrency that would replace trust with technology. 

The concept and types of cryptocurrency

Defining the concept of cryptocurrency is not an easy task. Cryptocurrency, like blockchain, covers a wide range of technological developments. It is important to understand how different regulators at the European and international levels define cryptocurrency. According to the European Central Bank, cryptocurrency is a part of virtual currency that has a digital representation of value (a currency has a digital representation of value when it can be traded electronically, transferred or, in certain cases, used as an alternative to money) and is not issued by any bank.

According to the World Bank, cryptocurrency is a type of digital currency that has a digital representation of value and is different from E-money. According to the Anti-Money Laundering Group, cryptocurrency is a virtual currency that has a digital representation of value and that functions as: 1) a means of payment 2) a means of accumulation/storage of value.

According to the definition of the Bank for International Cooperation, cryptocurrency belongs to digital currencies that have the following characteristics: 1) A cryptocurrency is an asset whose value is determined by demand and supply. 2) Transactions are carried out without the need for their supervision, the need for trust in a third party is replaced by the use of blockchain technology. 3) Cryptocurrencies are not managed by any specific organization or person.

According to the definition of the European regulatory bank, cryptocurrency belongs to virtual currencies that have a digital representation of value, which is not issued by any bank or government body, but which is used by the population as a means of payment.

In summary, a cryptocurrency is a digital asset that is a medium of exchange that does not exist in physical form and is not controlled or issued by any state or banking authority.

It is important to distinguish between 2 types of cryptocurrency. 1) Cryptocurrency that has a two-way connection with the real economy. 2) Cryptocurrency that has no connection with the real economy.

A cryptocurrency that has a real connection with the economy is called a convertible virtual currency, it has an equivalent value in real currency and can be exchanged. A cryptocurrency that has no real connection with the economy is called a non-convertible virtual currency. It can only be used in the virtual world and does not have an equivalent value in real currency.

The first cryptocurrency is called Bitcoin, but besides it, there are several hundred other cryptocurrencies. All other cryptocurrencies except Bitcoin are called “Altcoins”. There are 2 types of so-called “Altcoins”. 1) They are based on the open Bitcoin protocol, but have some changes and have different features (improved) 2) They are not based on Bitcoin, have their own algorithm and protocol. CoinMarketCap is a website that lists all major cryptocurrencies, their prices, and the total market capitalization of cryptocurrencies. 

Bitcoin Origin History and How It Works

When we talk about cryptocurrency, the first thing that comes to mind is Bitcoin. In order to fully understand how cryptocurrency works, it is necessary to delve into the history of Bitcoin, its essence, and the principles of its operation.

The most important aspect of Bitcoin may be the concept behind it. This concept is as follows: The global financial crisis of 2008 was the most severe crisis in world economic history since the Great Depression of 1929-33. Many of the world's leading financial institutions fell victim to the crisis (some went bankrupt, some survived only after significant state aid, and some were nationalized), and a number of important financial centers suffered as never before since World War II. The beginning of the crisis was associated with the subprime mortgage crisis in the US real estate market.

In the face of this crisis, the creator of Bitcoin decided that it was time to create a decentralized financial system that would significantly reduce the influence of states that failed to fulfill their supervisory role in the financial world. The creator of Bitcoin decided that it was time for a new monetary system that is so different from the current financial system that it is even called a disruptive force.

The main goal of Bitcoin, created by Satoshi Nakamoto, was to decentralize the financial system. Decentralization means that we are all part of the Bitcoin ecosystem, and we all contribute to it with our actions. The Bitcoin ecosystem does not depend on governments, banks or intermediaries, Bitcoin belongs to everyone. 

Decentralized Network

The first important feature of Bitcoin is its decentralized network. When you go to your internet browser and type, for example, www.google.com, information starts to be exchanged between your computer and Google’s central server, at that moment the images, information that you are interested in appear in your internet browser. Imagine that the central server is down, you will not be able to find the information you want because this server has a central administration.

To understand how Bitcoin works, it is necessary to understand what a decentralized network means. In a decentralized network, data is everywhere. If Google used a decentralized network, you would still see the data because it is everywhere and not just in one place. This means that Google would never go down. 

Cryptography

Another important component of Bitcoin is cryptography. Cryptography was actively used during World War II. It converted radio messages into a code that no one could read. To read it, you need to go back to the original message. And for this you need a key. This was possible through mathematical formulas.

Bitcoin also uses cryptography. Instead of converting radio messages, Bitcoin uses cryptography to convert transaction data. That is why Bitcoin is called a cryptocurrency. An important question is why Bitcoin uses cryptography. The word "crypto" literally means hidden or secret. Cryptographic technology provides pseudo or complete anonymity. Cryptography ensures the security of transactions and participants, the independence of transactions from a central authority, and protection against the so-called double-spending problem.

Cryptography ensures the security of Bitcoin transactions carried out on the network, namely their encryption so that it does not become known to everyone: 1) the sender 2) the recipient 3) the amount of Bitcoin sent and received. Simply put, cryptography is a secure message technique between two or more participants, when the sender encrypts a message using an algorithm, and the recipient decrypts this encrypted message and reads the original message.

This procedure is performed automatically by software, no one manually enters any encryption code, the Bitcoin ecosystem is designed in such a way that the software itself performs this. 

Bitcoins working concept

Now let’s see how these two concepts work together. In order to record the history of transactions, we need a database (like a bank statement, where information about transfers is stored). Normally, this information is stored centrally (e.g., on a bank’s computer), but because Bitcoin uses a decentralized network, the Bitcoin database is shared across many different computers. Imagine a ledger, copies of which are stored on millions of computers, and in which the history of every Bitcoin transaction ever made is reflected (this ledger is called the blockchain).

This ledger solves the so-called double-spending problem. Since the history of every Bitcoin spent is stored in the ledger, it is impossible to spend the same Bitcoin twice at the same time.

In order to make a Bitcoin transaction, in addition to the ledger (blockchain), you need a corresponding program, the so-called Bitcoin wallet. When you create a wallet (to store your Bitcoin), you will receive a public and private key. Public keys and private keys are long combinations of numbers and letters. In order to send Bitcoin to your account, the sender must know your public key, which represents your account (like a bank account) in some way, and since it consists only of numbers and is also encrypted using cryptographic technology during the sending process, the Bitcoin user remains anonymous. As for your private key, it cannot be disclosed, it is an analogue of an electronic signature, and it should be known only to you. The detailed scheme of transactions will be explained in the Blockchain chapter. 

Advantages of cryptocurrency over modern money and trends in its development

The main reason for the creation of cryptocurrency was the loss of trust in banking and government agencies. Its creators considered money to be unreliable, which is certainly justified, and therefore created a system whose goal was to eliminate the state and banking sector. In addition to the advantage of replacing trust with technology, it is interesting to see what other problems cryptocurrency can solve that modern money cannot cope with.

Cryptocurrency has laid the foundation for a unique revolution that can change the entire financial system. By its nature, it can correct the shortcomings that exist in the global financial world today. Cryptocurrency, by its nature, can solve the problem of people who do not have access to bank accounts. Most of the population in developing countries does not have access to bank accounts at all.

As of 2020, 60 percent of the population in Latin America does not have a bank account at all, which is about 600 million people. We face the same problem on the African continent, in this case, we are already dealing with 66 percent of the population. Cryptocurrency technology allows individuals to exchange currencies, without bank supervision and interference, using a mobile phone. For example, 70 percent of the Latin American population has access to a so-called “smartphone.”

Transferring money is certainly possible through a bank, but it often takes several days, intermediary banks also have unjustifiably high commissions, and there is often a moment when there can be a large difference between the transferred amount and the actual amount deposited, which is unacceptable for international business entities.

Cryptocurrency has attracted the attention of investors around the world, as well as businesses and consumers. The advantages offered by cryptocurrency are diverse. It simultaneously provides security, confidentiality, efficiency and wide accessibility. Its unique advantage - decentralized and autonomous nature - has led to the rapid growth of crypto transactions.

As we have mentioned, the first cryptocurrency, Bitcoin, was created with the aim of eliminating the interference of banks and the state in the transactions of consumers. in transactions carried out by. Banks, seeing the danger of losing control of financial flows in whole or in part, have begun issuing their own cryptocurrencies, or already using cryptocurrencies that have a central regulator. The use of cryptocurrencies by banks is fundamentally at odds with the idea of creating Bitcoin, which by its very nature aspired to decentralization and the abolition of control.

Whether cryptocurrencies will completely replace cash is difficult to say, but the fact is that in countries where trust in government is weak or inflation is rampant, the use of cryptocurrencies is growing. How long the adoption of cryptocurrencies as a global norm will last depends on the consumer. Cryptocurrency use must reach a critical mass before it becomes the future of finance. For this to happen, financial institutions, regulators, and investors must agree that the advantages of cryptocurrencies and blockchain Exaggerates their shortcomings. 

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