Digital Disruption – Page 26 – Digital Finance Analytics (DFA) Blog

New Payments Platform Launched

Today, the Reserve Bank of Australia and its Payments System Board (PSB) welcome the public launch of the New Payments Platform (NPP). The NPP is an important addition to Australia’s payments infrastructure and it will provide a platform for innovation and competition in the provision of payment services.

The Reserve Bank and the PSB thank the NPP Australia Board, NPP financial institutions and their thousands of staff who have contributed to the development of the platform over a number of years. It has been a highly collaborative industry program, which has involved considerable planning, effort and investment.

Philip Lowe, Governor and Chair of the PSB, said, ‘The public launch of the NPP represents the delivery of a major piece of national infrastructure. I would like to thank everyone who has been involved in the NPP project and I look forward to the payment innovations it will make possible and the benefits this will generate for all Australians.’

The launch of the NPP means that the industry is delivering on the key strategic objectives that were established by the PSB in June 2012 as part of its Strategic Review of Innovation in the Payments System. In particular, the NPP and the initial overlay service, Osko, will allow financial institutions to provide improved services to Australian businesses and consumers, including to:

make real-time payments, with close to immediate funds availability to the recipient

make and receive payments on a 24/7 basis

have the capacity to send more complete remittance information with payments

address payments in a relatively simple way.

Around 60 banks, credit unions and building societies will begin rolling out services to their customers from today, with the number of financial institutions and accounts linked to the NPP progressively increasing over the coming months.

The Reserve Bank developed new infrastructure, the RITS Fast Settlement Service, to enable the settlement of NPP transactions between financial institutions in real time on a 24/7 basis across exchange settlement accounts at the Reserve Bank. The Reserve Bank is also an NPP participant with newly developed services utilising the NPP for its government customers.

Open Banking Report Paves The Way For Competitive, Customer Centric Services

Treasurer Morrison has release the report by King & Wood Mallesons partner Scott Farrell today in to open banking which aims to give consumers greater access to, and control over, their data. It mirrors recent UK developments, and is another nail in the competitive advantage the large players currently have. Later the scheme could be widened to other industry sectors, such as energy or telecommunications.

This “open banking” regime mean that customers, including small businesses, can opt to instruct their bank to send data to a competitor, so it can be used to price or offer an alternative product or service.

The report recommends that the open banking regime should apply to all banks, though with the major banks to join it first. For non-banks and fintechs, the report wants a “graduated, risk-based accreditation standard”. Superannuation funds and insurers are not included for now.

In fact, all authorised deposit-taking institutions (ADIs) will automatically be accredited to receive data.

There are exclusions. For example, value added data which is created by banks as a result of their analysis will not be included in the regime. Know your customer data though should be sharable. De-identified aggregate data would not be sharable.

Data provided under the regime will initially be “read only”, but the successful adoption of open banking “could also lead to ‘write access’ reforms” in the future. The following products are called out as in scope.

Transfer of data should be made free of charge, the report says.

Safeguards will be important, including under the Privacy Act, and a customer’s consent under Open Banking must be explicit, fully informed and able to be permitted or constrained according to the customer’s instructions. Joint accounts will need some special considerations in terms of authority, and advice.

An appropriate data standard will need to be agreed, and a clear and comprehensive framework for the allocation of liability between participants in Open Banking should be implemented. This framework should make it clear that participants in Open Banking are liable for their own conduct, but not the conduct of other participants. To the extent possible, the liability framework should be consistent with existing legal frameworks to ensure that there is no uncertainty about the rights of customers or liability of data holders.

In terms of implementation, data holders should be required to allow customers to share information with eligible parties via a dedicated application programming interface, not screen scraping.
The starting point for the Standards for the data transfer mechanism should be the UK Open Banking technical specification.

A period of approximately 12 months between the announcement of a final Government decision on Open Banking and the Commencement Date should be allowed for implementation. From theCommencement Date, the four major Australian banks should be obliged tocomply with a direction to share data under Open Banking. The remaining AuthorisedDeposit-taking Institutions should be obliged to share data from 12 months after the
Commencement Date, unless the ACCC determines that a later date is more appropriate.

The ACCC as lead regulator should coordinate the development and implementation of a timely consumer education programme for Open Banking. Participants, industry groups and consumer advocacy groups should lead and participate, as appropriate, in consumer awareness and education activities.

The ABA welcomed the report:

Banks are excited to enter the Open Banking age that will spark new innovations and deliver cutting edge products, with customers the big winner.

The Farrell Report into Open Banking released by the Treasurer today recognises both the opportunities and challenges that data sharing will bring. While the Australian Bankers’ Association has some concerns surrounding the implementation, the report lays out a broadly sensible path to Open Banking. Mr Farrell’s report should be commended for its focus on customers and its commitment to work with stakeholders to design a safe and secure data sharing framework.

Giving customers greater access to their own data will boost choice in banking and further simplify the application process for a financial product.

Australians have one of the most innovative and technologically advanced banking systems in the world. Examples of this is 24-hour banking, payWave and the soon to be launched PayID and New Payments Platform.

As the Productivity Commission affirmed this week, Australian banks are at the forefront of global innovation which has delivered a superior customer experience. Investments in how banks use data are already leading to new innovations that are improving the customer experience and this is set to continue under Open Banking.

A reform as large as Open Banking must be carefully considered and properly implemented.

Research shows that Australians trust their banks with personal information, more than online retailers, social media companies and even governments. It’s important that banks maintain this trust and ensure that the open data reforms don’t place personal information at risk.

Banks will continue to work with stakeholders like consumer groups, FinTech’s, regulators and government to get this right so it is a good model for all industries and customers are protected.

The ABA looks forward to carefully analysing Mr Farrell’s report and working with members and stakeholders to address any challenges to ensure its success. Banks would also like to thank Mr Farrell for his thorough and thoughtful inquiry

Mandatory Comprehensive Credit Reporting Draft Bill Released

The Treasury has released draft legislation to require the big four banks to participate fully in the credit reporting system by 1 July 2018. They say this measure will give lenders access to a deeper, richer set of data enabling them to better assess a borrower’s true credit position and their ability to pay a loan.

We note that there is no explicit consumer protection in this bill, relating to potential inaccuracies of data going into a credit record. This is, in our view a significant gap, especially as the proposed bulk uploading will require large volumes of data to be transferred.

It does however smaller lenders to access information which up to now they could not, so creating a more level playing field. Consumers may benefit, but they should also beware of the implications of the proposals.

The Government is seeking views on the exposure draft legislation and accompanying explanatory materials, which implements this measure. Closing date for submissions: 23 February 2018

The Bill amends the Credit Act to mandate a comprehensive credit reporting regime such that from 1 July 2018 large ADIs and their subsidiaries must provide comprehensive credit information on open and active consumer credit accounts to certain credit reporting bodies. It also expands ASIC’s powers so it can monitor compliance with the mandatory regime. The Bill also imposes requirements on the location where a credit reporting body must store data.

Since March 2014, the Privacy Act has allowed credit providers and credit reporting bodies to use and disclose ‘positive credit information’ or ‘comprehensive credit information’ about a consumer.

This includes information about the number of credit accounts a person holds, the maximum amount of credit available to a person and repayment history information.

Prior to March 2014, the information that could be shared was limited to ‘negative information’. This includes details of a person’s overdue payments, defaults, bankruptcy or court judgments against that person.

However, the Privacy Act does not mandate the disclosure of comprehensive credit information by credit providers to credit reporting bodies.

The 2014 Murray Inquiry and the Productivity Commission Inquiry into Data Availability and Use recommended that the Government mandate comprehensive credit reporting in the absence of voluntary participation. Comprehensive credit reporting is expected to enable credit providers to better establish a consumer’s credit worthiness and lead to a more competitive and efficient credit market.

In the 2017-18 Budget, the Government committed to mandating a comprehensive credit reporting regime if credit providers did not meet a threshold of 40 per cent of data reporting by the end of 2017.

On 2 November 2017 the Treasurer announced that he would introduce legislation for a mandatory regime as it was clear the 40 per cent target would not be met.

The Bill amends the Credit Act to establish a mandatory comprehensive credit reporting regime which will apply from 1 July 2018. The amendments do not require or allow disclosure, use or collection of credit information beyond what is already permitted under the Privacy Act and Privacy Code.

Currently, Australia’s credit reporting system is characterised by an information asymmetry. A consumer has more information about his or her credit risk than the credit provider. This can result in mis-pricing and mis-allocation of credit.

The Bill seeks to correct this information asymmetry. It lets credit providers obtain a comprehensive view of a consumer’s financial situation, enabling a provider to better meet its responsible lending obligations and price credit according to a consumer’s credit history.

The Government expects that the mandatory regime will also benefit consumers. Consumers will have better access to consumer credit, with reliable individuals able to seek more competitive rates when purchasing credit. Consumers that are looking to enter the housing market will be better able to demonstrate their credit worthiness. Consumers that possess a poor credit rating will also be able demonstrate their credit worthiness through future consistency and reliability.

The mandatory regime applies to ‘eligible licensees’ which initially will be large ADIs and their subsidiaries that hold an Australian credit licence. An ADI is considered large where its total resident assets are greater than $100 billion. Other credit providers will be subject to the regime if they are prescribed in regulations.

Eligible licensees are required to supply credit information on 50 per cent of their active and open credit accounts by 28 September 2018. The information on the remaining open and active credit accounts, including those that open after 1 July 2018, will need to be supplied by 28 September 2019.

The bulk supply of information must be given to all credit reporting bodies the eligible licensee had a contract with on 2 November 2017. In this way the credit provider has an established relationship with the credit reporting body and will have an agreement in place on the handling of data to ensure it remains confidential and secure.

Following the bulk supply of information, large ADIs and their affected subsidiaries must, on a monthly basis, keep the information supplied accurate and up-to-date, including by supplying information on accounts that have subsequently opened. This information must be supplied to credit reporting bodies the credit provider continues to have a contract with.

Credit providers that are not subject to the mandatory regime will be able to access credit information supplied under the regime by voluntarily supplying comprehensive credit information to a credit reporting body or becoming a signatory to the PRDE.

The security and privacy of a consumer’s credit information will be preserved and protected. The Bill relies on the existing protections established by the Privacy Act and Privacy Code and the oversight of the Australian Information Commissioner. The Bill also places a new obligation on credit reporting bodies on where data is stored. In addition, the Bill places an obligation on credit providers to be satisfied with the security arrangements of the CRBs prior to supplying information.

ASIC will be responsible for monitoring compliance with the mandatory regime. It has new powers to collect information and require audits to confirm the supply requirements are being met. ASIC will also have the ability to expand the content to be supplied under the mandatory regime and prescribe the technical standards for the format of the information.

The Treasurer will also receive statements from large ADIs, their affected subsidiaries and credit reporting bodies to demonstrate that the initial bulk supply requirements, as well as the ongoing supply requirements, have been met.

The mandatory comprehensive credit regime, implemented by this Bill, recognises that industry stakeholders have already taken a number of steps to support sharing comprehensive credit information. This includes the PRDE and supporting ARCA Technical Standards.

The mandatory regime includes the ‘principles of reciprocity’ and the ‘consistency principle’ that have been developed by industry. To the extent possible, the mandatory comprehensive credit reporting regime operates within the established industry framework but also provides scope for future technological developments.

An independent review of the mandatory regime must be completed by 1 January 2022. The review will table its report in Parliament.

Bitcoin Down, Down, Down

The fall in the price of bitcoin continues, to a new 2018 low. More evidence of the volatility of this commodity, which further undermines its potential as a virtual currency. After all, the whole point of a currency is to have some relatively stable view on its value. Yelland’s “This is a highly speculative asset”, looks right.

Other major cryptocurrencies – including Ripple XRP, Ethereum and Bitcoin Cash – are also falling. Many of them are seeing more dramatic swings even than bitcoin.

A few factors are playing here. Facebook has banned cryptocurrency advertising on its platform.

There have been several bitcoin exchange hacks, including the now famous US$534m job on Coincheck.

And South Korea, one of the main trading centres, has banned anonymous trades, effective 30th January 2018. Also the country’s customs service says that around 637.5bn KRW (US$598.6m) worth of foreign exchange crimes have been uncovered. That said, South Korea is not planning to ban cryptocurrency trading, the country’s finance minister has said.

After China shut down the largest cryptocurrency exchanges last September, and also banned Initial Coin Offerings, Japan has taken on the mantle of bitcoin’s new capital, where strong interest in currency trading AND technology align. In fact Japan had 51% of global trading volumes in January 2018. Bitcoin is also recognised as a payment mechanism there, and regulators there have introduced measures to monitor transactions on the lookout for criminal activity.

Today Japan’s financial regulator on Friday swooped on Coincheck Inc with surprise checks of its systems and said it had asked the Tokyo-based cryptocurrency exchange to fix flaws in its computer networks well before hackers stole $530 million of digital money last week, one of the world’s biggest cyber heists.

German President Frank-Walter Steinmeier on Thursday warned the financial sector that it had a responsibility to prevent speculation and the formation of trading bubbles in the cryptocurrency market. Steinmeier told about 1,000 guests at a Deka Bank event in Frankfurt that a new debate was needed about regulating cryptocurrencies, given recent gyrations in their valuations.

Ajeet Khurana, the head of the India’s blockchain and cryptocurrency committee, told the YourStory website, the government, like all governments in the world apart from Japan, did not recognise cryptocurrency as money. Many websites have been reporting, falsely, that Indian Finance Minister Arun Jaitley told parliament while presenting the national budget that India would make cryptocurrencies illegal.

Locally, Assistant Treasurer Michael Sukkar, speaking at a financial services briefing on Wednesday night, confirmed the Turnbull government is investigating how it could tax digital currencies like bitcoin.

In the U.S., Bank of America is now the largest lender barring customers from using credit cards to buy cryptocurrencies. According to Bloomberg, the policy was made known to employees yesterday and took effect today. Neither Discover nor Capital One allow crypto transactions on their cards. JPMorgan still does.

Expect more volatility ahead.

Liberty Buys MoneyPlace

From Australian Broker.

Non-bank lender Liberty has acquired marketplace lender MoneyPlace in a push towards personal lending.

The move will see Liberty merging its existing personal loan product with that of MoneyPlace, which will remain an independent brand and continue to be managed by an entrepreneurial leadership team.

Liberty said there will be no impact or change to its existing personal loan customers.

Chief executive James Boyle said Liberty will help build on MoneyPlace’s recent initiative of launching its broker channel with aggregators.

“Brokers are very important to MoneyPlace and over the past six months the business has had tremendous success launching its broker channel with aggregators,” said Boyle.

MoneyPlace’s next phase of growth involves expanding its distribution nationally through accredited brokers.

“We’ll work with the MoneyPlace team to leverage the power and reach of the broader broker distribution network,” said Boyle.

MoneyPlace connects investors with creditworthy borrowers seeking unsecured personal loans between $5,000 and $45,000 for three to five year terms. Last year, Auswide took a controlling interest in it for a total of $14.0m. Australian Broker understands that Auswide has sold its stake in MoneyPlace into the deal with Liberty.

MoneyPlace chief executive, Stuart Stoyan, said the marketplace lender is well positioned to scale up and gain a meaningful share of Australia’s $100 billion consumer lending market.

“More borrowers view personal loans as a way to achieve their financial goals and brokers have an opportunity to engage consumers on their needs. A personal loan might be useful to replace a high interest credit card, cover the costs of a major life event or consolidate debt in order to be ‘mortgage ready’,” said Stoyan.

MoneyPlace’s proprietary technology uses 10,000 data points to give consumers a personalised interest rate. Once approved, the funds are available within 24 hours.

How Australian Regulators Would Handle a Cryptocurrency Hack Like Coincheck

From The Conversation.

New risk rules for cryptocurrency exchanges will be put to the test with the latest hack on Japanese exchange Coincheck. Hackers stole US$660 million worth of NEM (its native cryptocurrency).

In the past eight years, more than a third of all cryptocurrency exchanges have been hacked. The total losses exceed US$1 billion. Because cryptocurrencies are almost untraceable, the rate of recovery after a hack is very low.

A number of countries (including Australia) have enacted legislative provisions to regulate the conduct of cryptocurrency exchanges. Regulators hope these will reduce the risk of attack and make operators more accountable for losses suffered by customers when an attack does occur.

These hacks don’t just expose gullible investors to risk. They mean funds could be flowing undetected into the hands of money launderers and terrorists.

While cryptocurrency exchanges may operate like banks, they are not regulated in the same way as banks. There is no depositor’s insurance and most exchanges remain unregulated.

Due to the almost anonymity afforded to users of Bitcoin and other cryptocurrencies, it is very difficult to trace missing funds. When a hack occurs, the attacker gains access to the virtual wallet operated by the exchange and then transfers the cryptocurrency to their own virtual wallet.

The Coincheck Hack

The Japanese exchange Coincheck hack dwarfs an earlier hack on Bitcoin exchange platform Mt Gox in 2014, which saw the theft of US$480 million worth of Bitcoin.

The operator of Mt Gox, Mark Karpeles was arrested and jailed for his role in the collapse. At the time Mt Gox was the world’s biggest Bitcoin exchange.

He was charged with falsifying records and embezzlement, but there were no laws in place at the time to regulate the Mt Gox exchange and its trade in Bitcoin.

So as to bring virtual currency exchanges in line with international anti-money laundering and counter-terrorism financing measures, Japanese lawmakers enacted the Amended Settlement Act. Under these new laws, all exchanges operating in Japan must register and comply with rules. These rules include knowing their customers, employing sufficient staff, keeping balance sheets, and (critically) must keep all customers’ deposits in “cold storage” (that is, on a computer hard drive that is not accessible via the internet).

These new laws mean that when an exchange is hacked or collapses, operators can be made liable for the way that they managed their customers’ funds. Japanese authorities are threatening to prosecute the operators of Coincheck for their failure to comply with the new laws.

In their online apology, the operators of Coincheck have admitted that the hacked deposits were in a “hot wallet” (connected to the internet instead of being offline) and that this was due to “staff shortages”. Both of these failures to comply will give the Japanese authorities good reason to prosecute.

Close scrutiny of the accounts will be likely to reveal other irregularities. But this is little comfort for Coincheck’s investors. Coincheck has promised to return 90% of the lost NEM to its customers, but has yet to say how or when this will happen.

How would Australia’s regulator react?

Japan is not alone in its scramble to regulate cryptocurrency exchanges. Just this month, the Australian government announced the Australian Transaction Reports and Analysis Centre (AUSTRAC) will have new powers to monitor Bitcoin and other cryptocurrencies. New legislation also forces cryptocurrency exchanges to disclose details of investors and transactions.

The new laws are part of the government’s efforts to combat money laundering and terrorism financing. Exchanges will be required to identify customers more stringently and report suspicious transactions.

All transactions of A$10,000 or more must reported to AUSTRAC. The report must include the names of the customers conducting the transaction, the names of the the recipient of the proceeds of the transaction, and how the transaction was effected.

Any failure by an operator to comply with these laws would result in heavy fines and possibly imprisonment. However, as breaches are almost impossible to detect, enforcement of these laws depends on honesty of the exchange.

One way to detect reportable transactions is to monitor the size of the deposits made into the exchange’s bank account. However, individuals can create fake trading accounts and money-laundering syndicates breakup deposits into smaller amounts, so as to avoid raising suspicion.

Complying with AUSTRAC’s new regulations will be expensive for exchanges. With Australia’s new data breach notification laws coming into effect next month, gathering and securing sensitive information about customers and their deposits will be more onerous than ever.

The problem that faces regulators and investors is that the cost of compliance acts as a deterrent to registration. And because registration requires compliance, exchanges need to outlay significant capital before they start to trade. The sheer size of Coincheck’s losses indicates it was a high-volume exchange and yet, at the time of the hack, its registration was still pending.

Traditionally, when a foreign exchange collapses and is unable to return customers’ deposits, the regulator might prosecute the directors for operating without a licence, failure to comply with financial services regulations, or for insolvent trading. Insolvent trading, for example, attracts both civil and criminal sanctions.

When a cryptocurrency exchange is hacked, the operators and their customers are all victims, but the operators will be made liable for those losses. Under Australia’s current laws, a major hack of a cryptocurrency exchange will be met with similar challenges as those facing the Japanese authorities in the wake of the Coincheck theft.

Any investigation of an exchange could involve the Australian Securities and Investments Commission (ASIC), the Australian Taxation Office (ATO) and AUSTRAC. The level of scrutiny that would follow, could reveal a multitude of sins, including some that are unrelated to the hack.

For example, ASIC has the power to prosecute for insolvent trading, operating a Ponzi Scheme and breaches of financial services legislation. The ATO could investigate whether GST was being paid on trades.

Frustratingly for the customers and investors, seeing the operators punished does not reimburse them for their financial losses. Repaying deposits after a hack depends on whether the operators remain in the jurisdiction and have any funds of their own.

Author: Philippa Ryan, Lecturer in Commercial Equity and Disruptive Technologies and the Law, University of Technology Sydney

Westpac ditches “instant mortgage” plan

From Australian Broker.

Westpac has dropped its plan to offer “instant mortgages” as banks’ lending practices come under increased scrutiny.

The Australian Financial Review reported on 28 January that Westpac confirmed a plan to offer instant mortgages had been abandoned. The project had been active until as recently as late 2017.

The plan would have allowed Westpac to offer clients a nearly instant approval, or provisional approval.

Despite dropping the project, Westpac will continue to streamline its process for mortgage application and improve its turnaround times for housing borrowers, said the report.

The bank will go ahead with plans to extend innovations for its business clients and residential mortgage customers as it works to bolster its mortgage capabilities and protect its market share. These innovations include e-document signing and other technology-based solutions.

A Westpac spokesperson said the bank took its lending duties seriously and that it was always looking for ways to improve its mortgage lending experience for customers while complying with regulatory requirements, according to the report.

ASIC initiated civil proceedings against Westpac in March last year for its alleged failure between December 2011 and March 2015 to properly assess if borrowers could repay their housing loans.

The regulator said in its allegation that the bank relied on a benchmark to help it decide how much to lend to potential borrowers, instead of using actual expenses declared by borrowers.

Westpac has denied ASIC’s claim.

The Australian Financial Review said in its report that the bank was preparing for a courtroom fight with ASIC over this allegation.

Banks’ lending practices are expected to come under further scrutiny as the royal commission kicks off its investigation of misconduct in the banking, superannuation and financial services industry. The commission will hold an initial public hearing on 12 February.

Cryptocurrencies Face Tighter AUSTRAC Rules

AUSTRAC has opened a draft consultation paper that lays out new anti-money laundering and counter-terrorism financing (AML/CTF) regulations, including new rules for digital currency providers. The draft Rules propose adding a new Chapter 76 (Digital Currency Register to the Anti-Money Laundering and Counter-Terrorism Financing Amendment Act.

This via Investor Daily. Currently, the AML/CTF laws apply to authorised deposit-taking institutions (ADIs), banks, building societies, credit unions and other persons or entities specified by AUSTRAC, but the new amendments will seek to extend them to digital currency providers.

Law firm Dentons, which rebranded from Gadens Sydney in December 2016, has outlined the ways in which the AML/CTF laws might apply to digital currency providers.

“Digital currency providers will soon be required to adhere to the AML/CTF standards required for remittance sector providers,” said Dentons.

Providers would be required to adopt and maintain an AML/CTF program, conduct “thorough” identification and due diligence of customers, report on suspicious matters and threshold transactions, and retain the required records according to the AML/CTF regime, according to the note.

“The draft rules mirror the rules as they currently apply to the remittance sector,” it said.

“Providers will be required to register with AUSTRAC under a regime similar to the current registers for the remittance industry.”

Furthermore, when reporting on suspicious transactions, providers will have to provide additional information where the transfer would involve digital currency.

This would include the code of the digital currency as well as the number of digital currency units, the equivalent amount in Australian dollars, a description of the digital currency including details of the backing asset or thing, the IP address of the beneficiary and/or payee, the social media identifiers of the beneficiary and/or payee, the unique identifiers of the beneficiary/payee’s digital currency wallet(s), and the unique device identifiers of the beneficiary and/or payee.

“If you are a digital currency provider, it is time for you to start thinking about how you will manage your new obligations under the AML/CTF regime,” the note said.

“This most importantly includes drafting and maintaining an AML/CTF program and KYC [Know Your Client] policy, in addition to systems and procedures which will identity any AML and CTF risks in your business.”

The consultation period will close 13 February 2018, and the draft rules are expected to come into effect in April 2018.

Why Bitcoin is taken more seriously than Dogecoin

From The Conversation.

As Bitcoin loses value, it may seem like it’s just as useful as the cryptocurrency invented for a joke – Dogecoin.

But there are genuine differences between these cryptocurrencies, and it’s not just because one is “much currency, such volatility”.

There are 1,448 cryptocurrencies around the world, by some counts. For every Bitcoin you have a programmable coin like Ethereum, or a coin that acts like a token for specific services, like Augur.

Some of these coins earn better reputations because of their usefulness, the people who made them, or the tech itself. They are not all taken seriously by investors, researchers and users.

The developers behind these cryptocurrencies are also important as they convince other people to adopt them and write new code for the technology to evolve. This new tech attracts new users into the system.

Different functions

Cryptocurrencies can be divided into several types. Cryptocurrencies like Bitcoin, Litecoin, and Dogecoin only provide basic functions such as transferring value from one party to another.

The next category are smart contract cryptocurrencies like Ethereum, Cardano, NEO, and Waves. These cryptocurrencies can be programmed, and so can become the basis for applications like games and digital markets.

The third type are cryptocurrencies designed to preserve your privacy like Monero and Zcash. These claim to be “untraceable” although transaction records are still available.

Then there are tokens, which are built with smart contracts to serve many purposes. They are often sold to raise funds to build services, and used as tickets for the services (such as Augur and Power Ledger).

Technological differences

The differing technologies in these cryptocurrencies mean that certain coins have more potential than others.

IOTA is used for “Internet of Things” devices (such as a smart kettle). But it has a special kind of blockchain (the technology that tracks transactions) and so can achieve much higher speeds of transaction and quicker confirmation of trades than Bitcoin.

Others like Nxt, and Ardor have built-in features that let users to do other things than just sending coins, such as creating marketplaces and even messaging.

People use cryptocurrencies like Zcash and Monero to settle transactions with “zero-knowledge”. This means the cryptocurrencies hide the information of the real payers and payees, and even the amount of coins transacted.

Monero has largely replaced the use of Bitcoin in exchanges on the dark web.

And smart contracts built with cryptocurrencies like Ethereum have countless potential usecases, from property transactions to digital asset management and fundraising.

The technology also means that one cryptocurrency might use significantly less electricity than another.

Limitations

The major cryptocurrencies, like Bitcoin and Ethereum, are slow because of their inability to handle massive amount of data being sent by users. The technology used to secure the data are expensive and inefficient.

Bitcoin can only handle a maximum of seven transactions per second; Ethereum can handle 15 transactions per second. Compare this with the VISA payment system, which can process up to 56,000 transactions per second.

But new entrants, such as Red Belly from the University of Sydney, might be able to solve this problem, handling up to 660,000 transactions per second.

Smart contracts can also run into problems if they contain bugs. When a decentralised organisation built on Ethereum was hacked in 2016, US$50 million in Ether was stolen.

When something achieves the success of Bitcoin we’re bound to see competitors entering the market, hoping to grab a share.

This explains the explosion in cryptocurrencies since the Bitcoin source code was released under an open licence. Anyone can copy, modify, and release a modified version of Bitcoin.

By looking at the current trend, we will see more cryptocoins in the near future.

But as we can see, “cryptocurrency” is a term that encompasses a wide range of different technologies, communities and uses. It’s all of these factors that inform whether users, investors, developers and researchers take a coin seriously.

Author: Dimaz Wijaya PhD Student, Monash University