Technical Challenges for Cryptocurrency

&
Central Bank Digital Currency

Md. Foysal Hasan

Assistant Professor
Bangladesh Institute of Bank Management(BIBM)
Virtual Currency
Virtual currency is a digital representation of value that can be digitally traded and
functions as
• (1) a medium of exchange; and/or (2) a unit of account; and/or (3) a store of value,
but does not have legal tender status (i.e., when tendered to a creditor, is a valid and
legal offer of payment) in any jurisdiction.
• Digital currency can mean a digital representation of either virtual currency (non-
fiat) or e-money (fiat) and thus is often used interchangeably with the term “virtual
currency”
Virtual Asset
• Virtual asset is a broader term that encompasses any form of digital
representation of value, which can be owned or controlled by an
individual or entity. It includes not only virtual currencies but also
other digital representations, such as tokens, digital securities, in-game
assets, and digital collectibles (also known as non-fungible tokens or
NFTs).
• The main distinction lies in their specific applications: virtual currency
is primarily used as a medium of exchange, whereas virtual assets
encompass a wider range of digital representations of value, including
currencies, tokens, digital securities, and in-game items.
Taxonomy of Virtual Currencies
Virtual Currency (Cont.)

 No Bank Involved: P2P Transfer

 Less Transaction Time and Cost

 Easy Remittance Flow/Business

 No Broker/Bank Required

 Unique: No Conversion Impact

Challenges of Virtual Currencies
 No KYC, Anonymous Account

 No Control of Government and Regulator

 Crypto Currency/Central Bank Digital Currency

 Who will develop? Govt. or Private Sector?

 Hacking of the System

 Who will be the Guarantor of the Money?

 Payment through Gateway

 Money Laundering

 Terrorist Financing
Cryptocurrency and Bitcoin

• Cryptocurrency refers to a math-based, decentralized convertible virtual currency

that is protected by cryptography.—i.e., it incorporates principles of cryptography
to implement a distributed, decentralized, secure information economy.
• Bitcoin, launched in 2009, was the first decentralized convertible virtual currency,
and the first cryptocurrency.
Some Popular Cryptocurrencies are Bitcoin (BTC), Ethereum (ETH), Binance Coin
(BNB), Ripple (XRP), Tether (USDT) etc.
Key Takeaways about Cryptocurrency
(Cont..)
• A cryptocurrency is a form of digital asset based on a network that is
distributed across a large number of computers. This decentralized structure
allows them to exist outside the control of governments and central
authorities.
• Experts believe that blockchain and related technology will disrupt many
industries, including finance and law.
• The advantages of cryptocurrencies include cheaper and faster money
transfers and decentralized systems that do not collapse at a single point of
failure.
• The disadvantages of cryptocurrencies include their price volatility, high
energy consumption for mining activities, and use in criminal activities.
Cryptocurrencies are more vulnerable to
criminal activity and money laundering
What is Blockchain?
• A blockchain is essentially a digital ledger of transactions that is duplicated and
distributed across the entire network of computer systems on the blockchain.
• Each block in the chain contains a number of transactions, and every time a new
transaction occurs on the blockchain, a record of that transaction is added to every
participant’s ledger. The decentralized database managed by multiple participants is
known as Distributed Ledger Technology (DLT).
The blockchain technologies composed of six
key characteristic
• Decentralized The basic feature of blockchain, means that blockchain doesn't have to rely on
centralized node anymore, the data can be record, store and update distributed.
• Transparent. The data's record by blockchain system is transparent to each node, it also transparent on
update the data that is why blockchain can be trusted.
• Open Source. Most blockchain system is open to everyone, record can be check publicly and people
can also use blockchain technologies to create any application they want.
• Autonomy. Because of the base of consensus, every node on the blockchain system can transfer or
update data safely, the idea is to trust form single person to the whole system, and no one can intervene
it.
• Immutable. Any records will be reserved forever, and can't be changed unless someone can take control
more than 51% node in the same time.
• Anonymity. Blockchain technologies solved the trust problem between node to node, so data transfer or
even transaction can be anonymous, only need to know the person's blockchain address.

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Core Components of Blockchain Architecture
• Node - user or computer within the blockchain architecture (each has an independent copy of
the whole blockchain ledger)
• Transaction - smallest building block of a blockchain system (records, information, etc.) that
serves as the purpose of blockchain
• Block - a data structure used for keeping a set of transactions which is distributed to all nodes
in the network
• Chain - a sequence of blocks in a specific order
• Miners - specific nodes which perform the block verification process before adding anything
to the blockchain structure
• Consensus (consensus protocol) - a set of rules and arrangements to carry out blockchain
operations

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How to Get Consensus?
Consensus function is a mechanism that make all blockchain nodes have
agreement in same message, can make sure the latest block have been added to
the chain correctly, guarantee the message that stored by node was the same one
and won't happened “fork attack", even can protect from malicious attacks.

Proof of Work(PoW): The proof of work consensus algorithm uses

complex problems for miners to solve using high-powered computers.
The problems are solved using trial and error.
Proof of Stake (PoS): With Proof of Stake, the resource that’s compared is the
amount of Bitoin a miner holds - someone holding 1% of the Bitcoin can mine 1%
of the “Proof of Stake blocks”
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Types of Blockchain Architecture

Private Blockchain Public Blockchain

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Smart Contracts
• With a shared database running a blockchain protocol, the smart
contracts auto-execute, and all parties validate the outcome
instantaneously and without need for a third-party intermediary.
• Ethereum is an open source blockchain platform combining Smart
Contract.

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17
Security Issues of Blockchain

• The Majority Attack (51% Attacks)

• Fork Problems (Source Required)

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Components of a Block
Stablecoin
• Stablecoins are a newer breed of cryptocurrency gaining popularity for
their commitment to minimize the price volatility that has limited the
use of Bitcoin (BTC) and other digital currencies as a medium of
exchange.
• Since Tether (USDT) launched in 2014 as the first stablecoin, the list
has grown to include Dai (DAI), USD Coin (USDC), True USD
(USDT), Digix Gold, Havven's Nomin, Paxos Standard, and Binance
USD (BUSD).
Key Takeaways about Stablecoin (Cont..)
• Stablecoins are cryptocurrencies designed to provide stable value
• Stable currencies are more useful as a store of value and medium of
exchange
• Stablecoins minimize typical cryptocurrency volatility by maintaining
collateral in the form of reserves, often of U.S. dollars.
• Algorithmic stablecoins aim to provide steady value by adjusting
supply based on pre-set rules.
Central Bank Digital Currency (CBDC)

• Central bank digital currencies are digital tokens, similar to cryptocurrency, issued
by a central bank. They are pegged to the value of that country's fiat currency.
• Many countries are developing CBDCs, and some have even implemented them.
Because so many countries are researching ways to transition to digital currencies,
it's important to understand what they are and what they mean for society. Countries
like The Bahamas, Nigeria have already started using CBDC.
At present, 87 countries—representing more than
90 percent of global GDP—are exploring CBDCs
• Jamaica’s JAM-DEX launched in June 2022 and is the first CBDC to be ratified
formally as legal tender. It’s a relatively simple offering, with no advanced use cases
(such as cross-border payment for smart contracts). JAM-DEX isn’t blockchain based,
unlike the Bahamas’ Sand Dollar and the Eastern Caribbean Central Bank’s DCash.
• Nigeria, the first African country to roll out a CBDC, launched eNaira in October 2021.
• Sub-Saharan Africa is poised to adopt CBDCs. The widespread use of M-PESA, a
mobile money transfer service, has established a strong social and financial
infrastructure for the potential future use of CBDCs.
• Project Aber is an initiative launched jointly by the central banks of Saudi Arabia and
the United Arab Emirates that tested the use of a jointly issued digital currency as an
instrument for domestic and cross-border settlements between the two countries.
Key Takeaways about CBDC (Cont..)
• A central bank digital currency is the digital form of a country's fiat
currency.
• A CBDC is issued and regulated by a nation's monetary authority or
central bank.
• CBDCs promote financial inclusion and simplify the implementation
of monetary and fiscal policy.
• As a centralized form of currency, they may not anonymize
transactions as some cryptocurrencies do.
• Many countries are exploring how CBDCs will affect their economies,
existing financial networks, and stability
Way forward
• Bringing KYC norms into cryptocurrencies.
• Bringing Japan Model where they are provided with licenses and can be
easily traceable.
• Adhering to FATF guidelines regarding cryptocurrency.
• Need to expand capabilities on ways to probe virtual assets and regulate
virtual asset provides to prevent money laundering.
• A multi-disciplinary agency to work with public and private partnership is
key tackling criminal finances.
• Enforcing new technologies in criminal finance networks.
• Enacting Data Protection Laws, hiring ‘’White Caps’’ and enabling web
audits of money transfer by banks.
 Questions are Welcome

?
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