Cryptocurrency: Payment System, Digital Cash, and Risks

Cryptocurrency
4/7/2018

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Contents
Introduction......................................................................................................................................4
Payment system...............................................................................................................................5
Cash payment...............................................................................................................................5
Cash legacy system..................................................................................................................5
Cash dominance.......................................................................................................................6
Disadvantages of cash payment...............................................................................................7
Electronic payments.....................................................................................................................7
Evolution of Electronic payments...........................................................................................7
Advantages and disadvantages of Electronic payments..........................................................8
Pitfalls in electronic payment..................................................................................................9
Digital Cash...............................................................................................................................10
Need for digital cash..............................................................................................................10
Evolution of digital cash........................................................................................................10
Distributed ledger system of Cryptocurrency........................................................................11
Types of cryptocurrency................................................................................................................12
Bitcoin........................................................................................................................................12
Ethereum....................................................................................................................................13
Litecoin......................................................................................................................................13
Unobtanium...............................................................................................................................14

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Black Coin.................................................................................................................................14
Mining process of Bitcoin.............................................................................................................15
The initial stage of mining.........................................................................................................16
Hash technology in bitcoin............................................................................................................16
Data integrity of bitcoin.................................................................................................................18
Consensus Mechanism...................................................................................................................19
Pitfalls of bitcoin............................................................................................................................20
Risk of forks..............................................................................................................................20
Energy wastage..........................................................................................................................20
Price volatility............................................................................................................................21
Scams.........................................................................................................................................21
Transaction cycle of Bitcoin..........................................................................................................21
Transaction capability....................................................................................................................23
Legitimacy concerns of bitcoin.....................................................................................................25
Risks associated with the use of this technology...........................................................................26
Regulatory risk...........................................................................................................................26
Security Risk..............................................................................................................................26
Insurance risk.............................................................................................................................27
Fraud risk...................................................................................................................................27
Market Risk...............................................................................................................................27

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Conclusion.....................................................................................................................................28
References......................................................................................................................................29

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Introduction
The report is based on Cryptocurrency which is a digital or virtual currency which is used as a
medium of exchange that uses cryptography to secure its transactions (Investopedia, 2018).The
report includes the details related to the payment system and its disadvantages. This payment
system comprises of cash, electronic payment and digital cash (which include Cryptocurrency).
Along with this, it includes the types of Cryptocurrency which are used by people for
transactions. Further, the report includes the mining process, technology, and pitfalls of bitcoin
which is a cryptocurrency with the use of the example of bitcoin. In the end, it reflects the
Transaction Lifecycle and capability of a Bitcoin along with the legitimacy concerns and risk
that are associated with the use of technology.
Overview of cryptocurrency
Cryptocurrency make it easier for the consumer to transfer the funds among the two parties in
transactions. These transfer of cryptocurrency facilitated with the use of the public and private
keys for the security purpose. The minimal processing fees are the effective way through whicg
the transfer of firm is done. Bitcoin is the digital currency which is mostly used by numerous
numbers of customers for the transactions. In the month of September 2015, there were more
than 14.6 million bitcoin in circulation were available with the total market value of $3.4 billion.

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Payment system
A payment system is a financial system that supports the transfer of funds from suppliers to users
or from payers to payees through the exchange of credit and debits financial institutions. This
fund can be in the form of paper-based mechanism or handling drafts and checks or can be
electronic funds transfer which is high in demand nowadays (Dzemydiene, et.al, 2010). There
are numerous ways through which the customer can accomplish a transaction and can pay for the
goods and services. Some of the payment methods are: -
 Credit and debit card system
 Direct debit payments
 Online payment
 Cash payments
 Bitcoin and digital currencies
Cash payment
It is a form of liquid funds that are given by consumers to the provider of goods or services like a
compensation for receiving those goods or services. With the evolution of the technology, there
is an impact on the evolution of the currency also.
Cash legacy system
The payment in the earlier century was done with the exchange of goods and services which is
known as a Barter system. In this system of exchange, the goods and services were directly
exchanged for other goods or services without using a medium of exchange (money). The
change in the generation brought the change in the currency as well. After barter system, there

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was a use of pennies which were issued by the ruler of the country with their symbol. The
customer started making use of those for purchasing goods. This reflects the legacy of the cash at
an ancient time. The pennies were converted into the coins and notes which are currently used by
consumers. This cash is changed again in the form of debits and credit card. These changes came
into existence due to growth and expansion of the countries and their business in this competitive
situation (ACI, 2011). Currently, people like to make use of debit and credit card instead of cash
payment. Moreover, the evolution of digital currency is replaying the use of credit and debit card
for the transaction. Most of the people rely on digital currency for the payments as they find the
transparent control on the currency with the use of mobile which is convenient for the customers.
Cash dominance
Payment through cash is no longer dominating the market because of the evolution of
technology. There were numerous predictions done by the people on the coin and paper currency
which is declining. In the year 2013, the Federal Reserve payment study reflected that the
payment through the card is increasing. In Europe, cash payment accounted for 78% continents
was 388 billion retail transactions in the year 2008. This shows that by the year 2008, most of the
payments were made through cash (Finextra, 2018). The total cost of managing, distributing,
processing and handling of cash payment was €84 billion which was equal to 0.6% of GDO of
Europe or EUR 130 per person. The dominance of cash is reducing day by day with the
emergence of new technologies and mode of payments. In the initial stage of the 21st century
there was cash dominance in the market for making payment but after that, the expansion and
merges brought vast changes in the currency. Though, there are still few countries where people
like to make the daily payment through cash because these people are willing to make use of
other modes of payment (Kennedy, 2014).

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Disadvantages of cash payment
There are numerous disadvantages that are associated with the use of cash money for making the
transactions. Some of the disadvantages are discussed below: -
 Financial records: - It is essential for the customer to keep the track of the amount that a
person is spending. With the use of cash, it is very difficult to keep the record manually
but the use of credit and debit card automatically record the transactions that were made
irrespective of how often you made it (Krueger and Seitz, 2018).
 Rewards: - The use of credit card provide an opportunity to the customer to make use of
different types of perks, rewards, and pints which can be used by them in travel,
shopping, dining, etc. The use of cash doesn’t provide such benefits to the consumer.
 Protection and convenience: - The consumer can only carry a small amount of cash with
them for the day to day purchase and daily expenses. It is not convenient and saves to
carry a large number of customers. Moreover, there is risk associated with the cash that it
might get stolen or lost.
Electronic payments
Electronic payment refers to as the payment for goods and services on the internet. This payment
can be done through credit card, debit card, bank transfer and many others.
Evolution of Electronic payments
The evolution of electronic payments began when baking sector started offering banking services
through ATM, online, mobile tablets to meet the needs of their customers and for establishing a
strong customer base (FineTech Futures, 2013). The innovation in the electronic payment facility
provided the opportunity to the customers and small business customers to process the payments