Table of Contents

RESEARCH METHODOLOGY ................................................................................................ 2

RESEARCH AIM AND OBJECTIVE ....................................................................................... 2

SCOPE AND LIMITATION ...................................................................................................... 2

INTRODUCTION ....................................................................................................................... 3

WHAT IS CRYPTOCURRENCY? ............................................................................................ 4

HISTORY OF CRYPTOCURRENCY ....................................................................................... 5

FEATURES OF CRYPTOCURRENCY .................................................................................... 6

HOW CRYPTOCURRENCIES WORK? ................................................................................... 7

ISSUES AND CHALLENGES FACED BY CRYPTOCURRENCY ....................................... 8

CONCLUSION ......................................................................................................................... 12

1
RESEARCH METHODOLOGY
The methodology used by the researcher is based on doctrinal mode of research as researcher has
used some credible sources relevant to research problem without any scope of doubt. Researcher
has used secondary data to outline this project. With regards to this view, the researcher has gone
through some research papers already done on this subject, articles available on internet and
books. The deductive methodology helps the researcher to make this project in an appropriate
way by gathering admissible data from various sources. The researcher has analyzed the statutes
related to topic and referred to secondary sources such as books, scholarly articles, etc.

RESEARCH AIM AND OBJECTIVE

The main Aim and Objective of doing this research project is to study Cryptocurrency and issues
and challenges faced by it in today’s time.

SCOPE AND LIMITATION

Scope for this project is that this project will cover the concept and definition of cryptocurrency,
its formation, history and issues and challenges faced by it.

2
INTRODUCTION
In these changing times of market and economies, the world is constantly developing new ways
to trade. The continuous growth in the technology is making it easier for us to devise new ways
of transactions and trading. Cryptocurrencies is one such way which was devised to lucidify the
transaction system in the late 2000s. The first decentralized cryptocurrency, bitcoin, was created
in 2009 by 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.

While cryptocurrencies are digital currencies that are managed through advanced encryption
techniques, many governments have taken a cautious approach toward them, fearing their lack of
central control and the effects they could have on financial security. Regulators in several
countries have warned against cryptocurrency and some have taken concrete regulatory measures
to dissuade users. Additionally, many banks do not offer services for cryptocurrencies and can
refuse to offer services to virtual-currency companies.

In this research project we will study about the formation of cryptocurrencies their working and
what are the various issues and challenges faced by the cryptocurrencies in today’s developing
market economy.

3
WHAT IS CRYPTOCURRENCY?
A cryptocurrency is a digital or virtual currency that uses cryptography for security. 1 Public and
private keys are often used to transfer cryptocurrency between individuals. cryptocurrency is
essentially a fiat currency. This means users must reach a consensus about cryptocurrency's value
and use it as an exchange medium. However, it is not tied to a particular country; its value is not
controlled by a central bank. With bitcoin, the leading functioning example of cryptocurrency,
value is determined by market supply and demand, meaning that it behaves much like precious
metals, like silver and gold.2

Cryptocurrency transactions are anonymous, untraceable and have created a niche for illegal
transactions, like drug trafficking. Because the currency has no central repository, law
enforcement and payment processors have no jurisdiction over bitcoin accounts. For
cryptocurrency supporters, this anonymity is a primary strength of this technology, despite the
potential for illegal abuse, as it enables a shift in power from institutions to individuals

All cryptocurrencies are maintained by a community of cryptocurrency miners who are members
of the general public that have set up their computers or ASIC machines to participate in the
validation and processing of transactions.3 Most cryptocurrencies are designed to decrease in
production over time like Bitcoin, which creates a market cap on them. The technical system on
which all cryptocurrencies are based on was created by Satoshi Nakamoto.

1
https://www.investopedia.com/terms/c/cryptocurrency.asp last visited on 3rd September,2018.
2
https://www.techopedia.com/definition/27531/cryptocurrency last visited on 3rd September,2018.
3
https://www.ccn.com/cryptocurrency/ last visted on 3rd September,2018.

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HISTORY OF CRYPTOCURRENCY
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. This
was known as “blinded money.4

By the late 1980s, Chaum enlisted a handful of other cryptocurrency enthusiasts in an attempt to
commercialize the concept of blinded money. After relocating to the Netherlands, he founded
DigiCash, a for-profit company that produced units of currency based on the blinding algorithm.
Unlike Bitcoin and most other modern cryptocurrenncies, DigiCash’s control wasn’t
decentralized.

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.In late 2012,
WordPress became the first major merchant to accept payment in BitcoinDozens of merchants
now view the world’s most popular cryptocurrency as a legitimate payment method. Though few
other cryptocurrencies are widely accepted for merchant payments, increasingly active
exchanges allow holders to exchange them for Bitcoin or fiat currencies – providing critical
liquidity and flexibility.5

4
https://www.moneycrashers.com/cryptocurrency-history-bitcoin-alternatives/ Last visted on 3rdSeptember,2018.
5
https://medium.com/koinex-crunch/a-brief-history-of-cryptocurrency-889fed168555 last visited on 3rd September,
2018

5
FEATURES OF CRYPTOCURRENCY

 DECENTRALIZED SYSTEM

Cryptocurrencies are also marked by decentralized control. Cryptocurrencies’ supply and value
are controlled by the activities of their users and highly complex protocols built into their
governing codes, not the conscious decisions of central banks or other regulatory authorities. In
particular, the activities of miners – cryptocurrency users who leverage vast amounts of
computing power to record transactions, receiving newly created cryptocurrency units and
transaction fees paid by other users in return – are critical to currencies’ stability and smooth
function.6

 EXCHANGE WITH FIAT CURRENCIES

Cryptocurrencies can be exchanged for fiat currencies in special online markets, meaning each
has a variable exchange rate with major world currencies. Cryptocurrency exchanges are
somewhat vulnerable to hacking and represent the most common venue for digital currency theft
by hackers and cybercriminals7.

 FINITE SUPPLY

Most, but not all, cryptocurrencies are characterized by finite supply. Their source codes contain
instructions outlining the precise number of units that can and will ever exist. Cryptocurrencies’
finite supply makes them inherently deflationary, more akin to gold and other precious metals –
of which there are finite supplies than fiat currencies, which central banks can, in theory,
produce unlimited supplies of8.

6
http://www.moneycontrol.com/cryptocurrency/ Last visited on 4th September,2018.
7
https://www.cnbc.com/cryptocurrency/ Last visited on 4th September,2018.
8
"The Divi Project – Crypto for the Masses?, 12 October 2017.

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HOW CRYPTOCURRENCIES WORK?

 BLOCK CHAIN

cryptocurrency’s blockchain is the master ledger that records and stores all prior transactions and
activity, validating ownership of all units of the currency at any given point in time. As the
record of a cryptocurrency’s entire transaction history to date, a blockchain has a finite length,
containing a finite number of transactions that increases over time9.

 PRIVATE KEYS

Every cryptocurrency holder has a private key that authenticates their identity and allows them to
exchange units. Users can make up their own private keys, which are formatted as whole
numbers between 1 and 78 digits long, or use a random number generator to create one. Once
they have a key, they can obtain and spend cryptocurrency. Without the key, the holder can’t
spend or convert their cryptocurrency rendering their holdings worthless unless and until the key
is recovered.

 WALLETS

Cryptocurrency users have “wallets” with unique information that confirms them as the
temporary owners of their units. Whereas private keys confirm the authenticity of a
cryptocurrency transaction, wallets lessen the risk of theft for units that aren’t being used.
Wallets used by cryptocurrency exchanges are somewhat vulnerable to hacking. For instance,
Japan-based Bitcoin exchange Mt. Gox shut down and declared bankruptcy a few years back
after hackers systematically relieved it of more than $450 million in Bitcoin exchanged over its
servers.

9
Cryptocurrencies: A Brief Thematic Review, Economics of Networks Journal, 28 August 2017.

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  MINERS

Miners serve as record-keepers for cryptocurrency communities, and indirect arbiters of the
currencies’ value. Using vast amounts of computing power, often manifested in private
server farms owned by mining collectives comprised of dozens of individuals, miners use highly
technical methods to verify the completeness, accuracy, and security of currencies’ block
chains. The scope of the operation is not unlike the search for new prime numbers, which also
requires tremendous amounts of computing power.

ISSUES AND CHALLENGES FACED BY CRYPTOCURRENCY

 USER EXPERIENCE

Payments play a very important role in each business. It’s also an area that causes most of the
headaches. Cryptocurrency on the other hand, simplify those headaches significantly by reducing
fees to a mere 1%, and eliminating the need for extra hardware. which is a big plus.However, due
to the novelty of blockchain technology, all of the headaches were temporarily forwarded to the
end customers10.

Firstly, customers pay fees. Depending on the blockchain, you can end up paying from $0.01
(Dash) to up to $30 (Bitcoin) in commission which can push away regular people. That’s why
cryptocurrencies that will offer the cheapest or free transactions will be eventually used by the
masses.Next, limited functionality. There are tens of different cryptocurrency wallets already, but
most of them offer basic primitive functions of sending coins from one wallet to another. That’s
simply not enough.If cryptocurrencies want to compete with online banking, Visa/Mastercard,
Paypal or Venmo, they have to deliver at least the same features that people are accustomed to:
regular payments, various types of accounts, simple recovery11, built-in bill payments, mobile top
up, encrypted messaging, and even marketplace. Some of the networks have/will have one or two
items from this list but there’s no unified open platform yet.

10
https://www.livemint.com/Opinion/qIXLJ3abfggcJfYlL8REYO/Challenges-in-regulating-cryptocurrencies.html
last visited on 4th September,2018.
11
https://www.cygnet-infotech.com/blog/major-issues-in-cryptocurrency-trading last visited on 4th Septemver, 2018

8
  ACCEPTANCE OF CRYPTOCURRENCY

Despite the media buzz around Bitcoin, the growth of cryptocurrency acceptance has declined.
It’s primarily related to excessive Bitcoin fees and high volatility. In any case, right now there are
only a couple of resources that you can use in order to look for crypto-friendly places. Typically,
they are represented in the form of a map which is rather visual. The problem with such services
is that you can’t be sure that a certain merchant still accepts cryptocurrency which leads to
customer dissatisfaction, and decreases the level of trust.

 TECHNICAL LIMITATION

If we assume that cryptocurrency will indeed become the next generation’s payment system for
financial and non-financial operations, then scalability has to be one of the main
priorities.Currently most of cryptocurrencies can handle 10–100 transactions per second. This
limitation stops blockchain networks from being used by solid companies and real world business
use cases. Obviously that’s a temporary thing that is close to being solved by various solutions,
like Lightning network, Waves-NG, Graphene, etc12.

 UNREGULATED MARKET

The absence of regulation is the most important aspect that prevents merchants from accepting
digital currencies. Every country has its own laws that people have to follow.Japan, Switzerland
and South Korea have made the biggest contribution into this space by making it fully or partially
legal, the US recently opened futures market for Bitcoin, Russia and Europe will have their own
rules that will be determined soon.

 VOLATILE MARKET

12
https://www.forbes.com/sites/forbestechcouncil/2018/03/29/the-problems-with-bitcoin-and-the-future-of-
blockchain/ last visited on 4th Septemver, 2018.

9
There’s an idea that people won’t use cryptocurrency because its price is too unsustainable and
volatile. We can’t deny this statement in 2017, but 5 years from now that might not be true
anymore.The market is volatile because it’s small. Just about 0.0001% of the entire population
knows about Bitcoin, and even less use it. Moreover, in a market of $630 bn even a few millions
can make significant damage. However, when the total marketcap reaches tens of trillions of
dollars, it will stabilize and evolve into a solid payment solution.

 LEGAL CONCERNS

As the popularity of and demand for online currencies has increased since the inception of
bitcoin in 2009, so have concerns that such an unregulated person to person global economy that
cryptocurrencies offer may become a threat to society. Concerns abound that altcoins may
become tools for anonymous web criminals.13 Cryptocurrency networks display a lack of
regulation that has been criticized as enabling criminals who seek to evade taxes and launder
money. Transactions that occur through the use and exchange of these altcoins are independent
from formal banking systems, and therefore can make tax evasion simpler for individuals. Since
charting taxable income is based upon what a recipient reports to the revenue service, it becomes
extremely difficult to account for transactions made using existing cryptocurrencies, a mode of
exchange that is complex and difficult to track.

 COUNTRIES BANNING BLOCKCHAIN SYTEM

Some countries are prohibiting bitcoin transactions, citing its untraceable nature and its
reputation as the currency of choice for criminal activities like terrorism or the drug trade as the
main reasons why. Vietnam is one of the most recent countries to outlaw bitcoin transactions. Its
state bank declared bitcoin and other cryptocurrencies an illegal form of payment, with violators
subject to heavy fines.

13
Sarah Jeong, DEA Agent Who Faked a Murder and Took Bitcoins from Silk Road Explains Himself, Vice, 29
December 2017

10
China’s recent clampdown on bitcoin trading and exchange sites and its prohibition of Initial
Coin Offerings – a new method of raising capital where businesses offer cryptocurrency instead
of shares. Bangladesh, Bolivia, Ecuador and Kyrgyzstan have banned the use of bitcoin as well.
In the United States, the Securities and Exchange Commission is debating whether to introduce
new regulations for cryptocurrency markets, and many powerful players in the financial industry
have publicly expressed a dim view of bitcoin, likening it to yet another economic bubble that
will eventually burst.14

14
https://multichannelmerchant.com/blog/global-challenges-opportunities-bitcoin-cryptocurrency/ last visted on 4th
September,2018.

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CONCLUSION
So, as we can see that despite being one of the most lucid and revolutionary was of currency
which can be used in a transaction there are still various issues such as bad user experience,
technical limitation and volatile and unregulated market. All these problems are needed to be
tackled as soon as possible if cryptocurrencies want to stabilize themselves and stay here for
years to come.

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