October 11, 2016

An Introduction to Cryptocurrency

An Introduction to Cryptocurrency

By Carlo Guaia, January 2015

  1. What is cryptocurrency?

A Cryptocurrency is a “mathematical” form of money: a tool used – in various degrees – as unit of account, medium of exchange and store of value. We speak about “crypto” because stable and secure mathematical currencies are mostly structured through advanced cryptographic techniques.

  1. Who uses cryptocurrency? Where can it be used?

Cryptocurrencies are used by different kind of users, the core group of users is mostly tech-savy and demographically is similar to other early adopters of innovations. Anyhow, the popularity of the most important Cryptocurrency, Bitcoin, is spreading across geographical, cultural and age segments.

Cryptocurrencies are generally not-territorial and global in nature, most of them could be used anywhere in the world.

  1. How did you become interested in cryptocurrency?

I was always interested in technological innovation and its social and political implications. In the 90’s I was also involved interested in cryptography and the hacker culture, meaning the curiosity and cultural attitude aimed at “opening the box” of technologies and discover potential unexpected potentialities.

I discovered Bitcoin in 2011, I was initially sceptical because the economic history is full of failed experiments of complementary and digital currencies. When I was at the NASA Ames Research Park in Mountain View for the Singularity University Graduate Studies program I had a series of conversations that make me understand better the core technology – the blockchain – and the technological discontinuity. The Bitcoin network was a true innovation in comparison with other weak and unstable virtual currencies.

  1. What are the advantages of cryptocurrency?

There are hundreds of cryptocurrencies, each with its specific set of pros and cons.

Broadly speaking, the most interesting Cryptocurrencies are radically decentralized and do not require – at least in theory – a centralized “ruler” (a central bank or a single centralized “trusted” database) to validate transactions. They are global in nature and generally operate trough Internet based peer to peer networks, some cryptocurrencies promoted diverse gradients of anonymity or pseudonymity. Good cryptocurrencies are secure, enable transaction between parties without previous trust and are generally based on open source code. Bitcoin, the most important Cryptocurrency as today, also demonstrated an enormous resilience / antifragility and survived shocks (price fluctuations, crash of the most important exchanges and marketplaces) that could have killed most of the other digital currencies.

  1. What are the most popular forms of cryptocurrency? What are the most valuable? 

The most important is Bitcoin, now showing ad total market capitalization of $ 6 Billion.

Other very promising projects are: Ehtereum, a universal platform for running decentralized applications on the blockchain; Ripple, a payment protocol and settlement system targeting the major financial institutions; Litecoin, a project derived from Bitcoin that improves several aspects of the system with a lean approach; Dash, a new cryptocurrency focused on radical privacy/anonymity.

You can compare cryptocurrencies with this website, Coinmarketcap.

  1. Why in the last year a fair share of professionals in mainstream finance are making the move into the cryptocurrency industry? 

Because the potential is enormous. There is a broader fintech revolution going on, based on the 3 “D”s of digitalization, disintermediation and decentralization. But the blockchain and cryptocurrencies are adding a new layer of disruption. We could see in financial services the same thing that happened to the publishing and the music industry, a radical change in business models and industry players.

  1. Should governments treat Bitcoin as money?

Treating Bitcoin like traditional money will impose a draconian set of regulations and will decrease the rate of innovation. Legislation for cryptocurrencies/blockchain technologies should be lean and allow space for experimentation.

  1. Should it be regulated under standard money services and financial crimes laws?

Yes and no. Companies managing financial services related to cryptocurrencies will probably have to obey some adaptation of existing regulatory frameworks, such as the know your customer and anti-money laundering regulation. For instance, this is happening now in New York through the “Bitlicense” legislative framework. Nevertheless, it will be wise for policymakers to implement very lean regulations in order to allow the startups and developer communities to innovate and explore this new technological paradigm.

  1. What’s the future of Bitcoin and Crypto Finance? And what kind of threats will it face? 

It is not possible to give exact prediction, we are still inside an “infrastructure building” phase with different paradigms and no clear winners. Despite the constant criticism and periodic announcements of its death, the Bitcoin network is still extremely robust and effective. New paradigms are emerging, for instance Ethereum is the more promising one. In 2014-15 there was a shift from the traditional cryptocurrency services – miners, exchanges, etc. – to the more general space of decentralized applications through the blockchains – prediction markets, decentralized ecommerce, decentralized messaging platforms, decentralized collaboration softwares, etc.  For those applications there are still several paradigms (for instance, sidechains on the Bitcoin blockchain or the Ethereum network.).

Regarding the threats for the Bitcoin network there are several critical areas: new forms of “recentralization”, deep disagreements in the community about the future of the project, concentration of miners in a single country, inequality and path dependence and much more. On the other hand, Bitcoin is evolving and improving over time, it could experience radical forms of morphing or gemmate new projects with improved scalability potential or better decentralized infrastructure.

The future is still open and dynamic, anyone with enough passion and intellectual curiosity could contribute.

  1. What advice would you give to young start-uppers who want to venture in this new field?

At first, I will give the advice that I could provide to all people launching startups: choose the right co-founders, focus on users, iterate quickly. In the specific cryptocurrency space, be aware of the huge potential regulatory and legal implications of anything involving finance and financial markets. If you are working in the Bitcoin space, don’t get involved in the flames and “holy wars” among paradigms (like the last one regarding the block size) and try to evaluate dispassionately the technical options. Remember that the rate of innovation in this space is super-fast and that it is much more multi-polar in comparison with other startup segments (such as the consumer internet one, where most innovations can scale effectively only from the Silicon Valley). Look at the stars: cryptocurrencies and the blockchain could reshape the world for the long run, the financial system is now hackable and you could be part of that change.

Raffaele Mauro, Ph.D.

Raffaele Mauro is a venture capital professional with a passion for disruptive technology, policy challenges and global finance.  Now the Head of Finance for Innovation & Entrepreneurship at Intesa Sanpaolo, he is focused on high-tech companies and Bitcoin / blockchain technologies.  Raffaele co-founded three startups, spent the last years at Harvard University and was Venture Strategy advisor at P101 Ventures.  Previously he was Senior Associate at Annapurna Ventures, a venture capital firm focused on early stage investments in web services and mobile applications, and advised OltreVenture, the leading Italian impact investing fund.

Raffaele holds an MPA from Harvard University, a Ph.D. from Bocconi and attended the Singularity University Graduate Studies Program at NASA Ames. In the past he also collaborated with Bocconi University, Collegio di Milano, Harvard Business Review-Italian Edition and various branches of Confindustria, developing projects related to innovation, entrepreneurship and finance.

He writes for Aspenia, the policy review of the Aspen Institute – Italy, and LIMES, the major Italian journal of geopolitics. He is co-founder of the social think tank “Lo Spazio della Politica” and became part of the “Young European Leaders – 40 under 40” cohort of 2011. He is also advisor at the Harvard Innovation Lab, member of the scientific committee at Blockchainlab.it, Junior Fellow at the Aspen Institute and member of the advisory board at the Global Shapers Hub – Milano, a World Economic Forum community.