Critical Analysis of Crypto Currencies and Economic Activities

This report provides a critical analysis of the emergence and development of crypto currencies and their impact on economic activities, focusing on the evolution of cryptocurrencies, starting with their background and early development. It explores their challenges, threats, benefits, and limitations, as well as their prospects. The study examines the influence of crypto currencies on accounting practices, highlighting their impact on the global economy. The report also assesses the significance of crypto currencies within the market, their future development, and their positive and negative impacts on economic activities, including their effects on accountancy. Furthermore, the study addresses whether crypto currencies pose a threat to banks and financial institutions in the future and whether they disrupt the global economy. The research utilizes a qualitative methodology, analyzing data to evaluate the effects of crypto currencies and provide recommendations.

MSc Accounting and Management
August 2018
A CRITICAL ANALYSIS OF THE EMERGENCE AND
DEVELOPMENT OF CRYPTO CURRENCIES AND
HOW IT AFFECT ECONOMIC ACTIVITIES
STUDENT NAME: TANZIM HUSSAIN
STUDENT ID: 170837345
SUPERVISOR: DR SUKI SIAN
Date of submission: 28/08/18

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ACKNOWLEDGEMENTS
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CONTENTS
CHAPTER 1: INTRODUCTION.................................................................................................................5
1.1 INTRODUCTION...............................................................................................................................5
1.2 BACKGROUND.................................................................................................................................5
1.3 AIM OF THE RESEARCH....................................................................................................................7
1.4 OBJECTIVES......................................................................................................................................7
1.5 RESEARCH PROBLEM.......................................................................................................................8
1.6 RATIONALE OF THE CURRENT STUDY..............................................................................................9
CHAPTER 2: LITERATURE REVIEW.......................................................................................................10
2.1 INTRODUCTION.............................................................................................................................10
2.2 THEORETICAL FRAMEWORK..........................................................................................................10
2.3 EMERGENCE AND DEVELOPMENT OF CRYPTO CURRENCY............................................................13
2.4 THE POSITIVE AND NEGATIVE IMPACTS OF CRYPTO CURRENCY ON ECONOMIC ACTIVITIES........14
CHAPTER 3: RESEARCH METHODOLOGY...........................................................................................19
3.1 INTRODUCTION.............................................................................................................................19
3.2 RESEARCH DESIGN.........................................................................................................................19
3.3 RESEARCH APPROACH...................................................................................................................19
3.4 RESEARCH METHOD......................................................................................................................20
3.5 DATA COLLECTION.........................................................................................................................20
CHAPTER 4: DATA ANALYSIS AND INTERPRETATION.........................................................................22
4.1 INTRODUCTION.............................................................................................................................22
4.2 QUALITATIVE ANALYSIS OF THE ACQUIRED DATA.........................................................................22
POSITIVE EFFECTS OF CRYPTO CURRENCY...........................................................................................22
NEGATIVE EFFECTS OF CRYPTO CURRENCY.........................................................................................24
IMPACTS OF IDENTIFIED FACTORS OF CRYPTO CURRENCY.................................................................25
STUDY OF DIFFERENT CASES ON GOVERNMENT REGULATION...........................................................26
CHAPTER 5: EFFECTS OF CRYPTO CURRENCY ON ACCOUNTING........................................................31
5.1 POSITIVE EFFECTS OF CRYPTO CURRENCY ON ACCOUNTING........................................................31
5.2 NEGATIVE EFFECTS OF CRYPTO CURRENCY ON ACCOUNTING......................................................33
CHAPTER 6: DOES CRYPTO CURRENCY HAVE A FURTHER DEVELOPMENT AND DOES IT POSE A
THREAT TO FINANCIAL INSTITUTIONS IN THE FUTURE?....................................................................34
CHAPTER 7: CONCLUSION AND RECOMMENDATION........................................................................38
CHAPTER 8: REFERENCES....................................................................................................................40
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ABSTRACT
In recent years, cryptocurrencies have become a highly deliberated topic within the finance
industry. Essentially, a crypto currency is a digital or virtual currency that utilizes
cryptography for the purpose of security. A crypto currency is an encrypted digital currency,
which uses a decentralised ledger, called block chain which keeps a record of transactions
and validates them (The Quint, 2018). Crypto currency has been difficult to counterfeit due to
the nature of its security aspect. The most defining aspect of crypto currency and possibly the
most enthralling factor is primarily its organic character. Crypto currency is not issued or
controlled by any central government authority, therefore making it supposedly immune to
intervention or else manipulation by any central governing authority. This study will
elucidate the various facets of crypto currencies, beginning with their evolution and early
development, various challenges, threats, benefits, limitations and their prospects in the
upcoming period. The study will also explore the emergence and future development of
crypto currency, the research will look into how crypto currency has affected the accounting
world and how it affects accountants, highlighting the way crypto currency has exerted an
impact on the global economy. The World Economic Forum suggests that 10% of the Gross
Domestic Product (GDP) will be stored on block chain related technology by 2025. This
therefore shows an indication of how transactions are documented and interconnects will
completely change within this period. The evolution of money requires accountants of the
future to educate themselves about crypto currencies, as it is expected to dictate transactions
of the future. Although the evolution of crypto currency is having an impact, it was also
hereby concluded that it is complicated to forecast the future prospect of crypto currencies as
there remains a lot to be done, particularly in the area of formal convention and set of laws.
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CHAPTER 1: INTRODUCTION
1.1 INTRODUCTION
The current introductory section of the study elucidates in detail about the background of the
topic, the aim of studying the impact of innovative technologies and the emergence of virtual
communities generating new modes of transactions as well as the change of methods within
accounting on the global economy. The intention of analysing these virtual communities that
generate and distribute their own disbursement medium for exchange of both goods as well as
services will be presented and discussed throughout. In that way, it can deliver a mode of
transaction, in which emissions or else centrally authorised monetary units are not engaged.
The study will also present research objectives and questions framed for understanding the
nature and the degrees of influence of virtual currencies (indicating crypto currencies) on
economic actions. This study will analyse crypto currencies from the perspective of economic
and legal factors together, showing its advantages as well as its limitations.
1.2 BACKGROUND
The notion of electronic currency can be dated back to 1983, when a research paper by David
Chaum introduced the idea of electronic money. In 1990, David Chaum founded Digi Cash,
which was an electronic cash company (Chaum, 1982). Digi Cash was one of the earliest
methods of electronic payment. It required user software in order to withdraw notes from a
bank and elect precise encrypted keys before it could be directed to the receiver. Bitcoin,
which is currently the top crypto currency in the market, was introduced in 2009 by a
pseudonymous developer named Satoshi Nakamoto, Bitcoin can be considered as the first
ever victorious decentralized crypto currency. Crypto currency is in fact a virtual method of
coinage that works as a typical legal tender, helping users to deliver disbursement for goods
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as well as services, liberated from a central authority. Lee et al (2018) assert that crypto
currencies depend on digital transmission of information, using cryptographic mechanisms to
ensure legitimate, exclusive transactions. In essence, Bitcoin took the virtual market for coins
one stage ahead, decentralising this currency and liberating the same from hierarchical
structures of authority and power. Litecoin was first offered during the autumn season of the
year 2011, which gained a humble achievement of getting the highest market cap of crypto
currency only second to Bitcoin until it was surpassed by Ripple during 2014 (Decourt et al,
2017). Essentially, Litecoin customized protocols of Bitcoin, enhancing speed of transaction
with the thought that it might prove to be more suitable for regular transactions. Ripple was
introduced in 2013, which established a completely exclusive model utilised by electronic
currency and presently preserves second uppermost capitalisation of specific market of
roughly $255 million. The crypto currency sector is comprised of more than 550 coins with
diverse based as well as trade volume users. Owing to increasing volatility, capitalisation in
the market of crypto currency business alters radically which is estimated to be higher than
$3.5 billion. However, virtual currency reflects around 88% of entire market capitalisation
(Bouri et al. 2017). In essence, there are diverse and at the same time confronting alternatives
as regards prospects to crypto currencies overall and especially Bitcoin. However, the ones
with more libertarian opinions regarding life are optimistic and embrace the system of crypto
currency. On the other hand, there are authors, instigators, economists along with scholars
from this particular field who are not keenly interested in the usage of crypto currency
especially in the scheme of disbursements as well as financial transactions (Guo and Li,
2017). They also assert that crypto currencies are extremely volatile and can be utilised for
the purpose of money laundering and financing other illegal actions.
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1.3 AIM OF THE RESEARCH
The aim of the current research is to analytically assess the influence of crypto currency on
different economic actions. Fundamentally, this research hopes to concentrate on the
materialisation and development of crypto currency in the current and upcoming period. In
addition, this research study aims to examine the way in which crypto currency has exerted
an influence in the arena of accountancy, and the way the same can affect diverse
accountants. Another purpose of this research study is to highlight the critical role crypto
currency plays a part in the global economy. Analysis of the reports declared by the World
Economic Forum reveals that 10% of the global GDP can be maintained and stored on block
chain associated technology by the year 2025 (Lehner et al. 2017). This will reflect if the
manner in which different transactions are registered and interlinked can be entirely altered
within a specified period. The ‘evolution of money’ which has been changing for decades,
calls for adequate education and training of future accountants on Bitcoin along with other
crypto currencies, since it is anticipated to dominate various business transactions of the
upcoming period (Bunjaku et al, 2017). In itself, it can hereby be observed that this
occupation also required evolution and skills of adaptation over the coming years.
Accountants and auditors have therefore begun work of auditing business transactions within
the block chain. In effect, crypto currency has been extensively put to use over the past few
years for buying goods and services as well as for investment purposes (D’ Alfonso et al.
2016). The evolution of crypto currency will affect accountancy, as accountants are expected
to help clients understand its reporting and tax ramifications.
1.4 OBJECTIVES
The objectives of this research study will be:
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1. To evaluate the significance of crypto currencies within the market.
2. To identify the future development of crypto currencies.
3. To analyse the positive and negative impact of crypto currency in the economic
activities, and how it will affect accountancy.
The research questions that this research paper intends to answer are:
1. Do crypto currencies affect the activities occurring in the economy?
2. Does crypto currency have further development in future?
3. Whether crypto currencies will pose threaten to the banks and financial institutions in
the future?
4. Does crypto currency disrupt the global economy?
1.5 RESEARCH PROBLEM
In general, there are different as well as challenging perspectives regarding the effect of
crypto currencies on economic actions and the future of crypto currencies. There are
libertarian opinions of life that are generally optimistic and embrace this system of crypto
currency. Various authors, economists and scholars of this field are not keen on the usage of
crypto currency in the system of disbursement and pecuniary transactions. The optimistic
opinion concerning usage is supported by the fact that they make it easier to transfer finances
between two diverse parties in a particular transaction. In essence, these transactions are
assisted by means of public as well as private key purposes for security. Fundamentally,
transfers of finance are carried out with minimal processing fees, permitting users to avert the
steep fees charged by the majority of banks. On the other hand, opponents of this virtual
community of crypto currency state that crypto currencies are extremely volatile and can be
utilised for money laundering and to finance other illegal activites. Therefore, the current
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study intends to evaluate pessimistic and optimistic views on crypto currencies and the
influence of the same on economic actions based an analysis of advantages as well as
disadvantages of the same.
1.6 RATIONALE OF THE CURRENT STUDY
The current study can help in analysing the use of crypto currency in general and evaluate the
benefits along with the drawbacks of the same. Study of advantages as well as disadvantages
can help in analysing the nature of the influence of the same taking place in the economy
both nationally as well as internationally. In addition, the study can help in analysing whether
the future holds a certain place for this virtual currency as a significant currency solution or
whether it shows the way to financial fraud that can lead to downfall of the financial system.
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CHAPTER 2: LITERATURE REVIEW
2.1 INTRODUCTION
More recently, crypto currency has demanded a larger in presence and has increased in
popularity; however, there are already a substantial number of literary works and empirically
supported evidence regarding the emergence, evolution, significance as well as the
limitations of the usage of the same in the global economic scenario. A structured literature
review is undertaken for overview of the state of field of academic research on the topic of
cryptocurrencies. Several philosophies have been developed and highlighted in the context of
cryptocurrencies. Since the introduction of Bitcoin in 2009, there have since been numerous
private crypto currencies. Concerning the technology of digitized assets, the first application
is the introduction of crypto currencies. This section further highlights and includes
discussion on the development and emergence of cryptocurrencies along with the advantages
and disadvantages and how such digitised assets development has affected the economy. This
section of the report aims to carry out an extensive review of the already existing literatures
available within this domain. Analysis illustrates how the development of crypto currencies
affects the economy in different aspects.
2.2 THEORETICAL FRAMEWORK
Many scholars have defined the term ‘crypto currency’ in innumerable ways from different
perspectives. However, the most comprehensive definition of the term is given by Anderson
(2017), who explains the term as the new type of virtual currency or medium of exchange in
the contemporary global economy with the vision of decreasing the fraudulent and unfair
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activities in the financial market. A crypto currency uses cryptography to secure and verify
transactions as well as to control the creation of the new units of a particular crypto currency.
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