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Crypto 101: Demystifying the world of cryptocurrencies

Cryptocurrencies are a lot like regular money, but the blockchain technologies on which they’re built have the potential to transform the way we do business

The spectacular collapse of cryptocurrency exchange FTX has inspired a lot of interest in the opaque world of cryptocurrencies, blockchain technologies and crypto regulation. But the crypto space is a lot easier to understand when we look at how similar — and how different — it is from traditional currency, says Karim Hamasni, director of crypto asset innovation at RBC Global Asset Management.

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Cryptocurrencies are units of value that are entirely digital. That’s not dissimilar to how Canadians use money today. Most transactions are paid for digitally and the movement of that digital money is tracked on centralized ledgers, usually maintained by commercial banks and other institutions. Cryptocurrencies such as Bitcoin and Ethereum are also tracked, but on decentralized ledgers.

“The Bitcoin ledger is distributed across more than 10,000 computer nodes throughout the world,” Hamasni says. “When we talk about blockchain technology, we’re not talking about the currency, but about the ledger itself. It’s a digital data structure that keeps track of accounts, balances and transactions in such a way that makes decentralization viable.”

However, decentralized blockchain technology overcame significant technological challenges. He likens it to getting a thousand people in the same room to agree to the same statement with 100 per cent accuracy. Under our current monetary system, a single person would announce the message over powerful speakers. But decentralizing that process might devolve into people whispering the message to each other in a game of broken telephone, which is notorious for inaccuracy.

Launched in 2009, Bitcoin and its associated blockchain ledger presented a viable way to communicate messages across a decentralized peer-to-peer network while maintaining accuracy.

“The unique property of the blockchain data structure and processes allows everyone to agree on the same message with no central authority,” Hamasni says.

An exchange of one unit of Ether on Ethereum, another crypto asset blockchain, creates a ledger entry that is distributed to every node of the blockchain system. But that system can also do much more, distributing complex codes that have profound implications for commerce.

Selling tickets to a concert requires a ticket agent to act as intermediary between performers and concertgoers. Blockchain can host smart contracts that generate digital tickets when enough assets are transferred. Having the same code distributed to thousands of computers increases security — everyone agrees that the contract was satisfied — while eliminating the middleman.

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The same model can be applied to many financial applications offered by traditional banks and financial services. In the emerging world of DeFi — decentralized finance — code sets live on blockchains and act as the intermediary between parties.

“Decentralized exchanges will pair sellers of tokens with buyers of tokens and facilitate the transfer without the need of a stock exchange,” Hamasni says. “Decentralized lending protocols will allow people to put up collateral in the form of one token and take out a loan in the form of another. All of this is done without a bank and without traditional financial infrastructure.”

However, creating a framework to regulate the crypto space represents an ongoing global challenge.

Karim Hamasni, director of crypto asset innovation at RBC Global Asset Management

“When a contract lives on the blockchain, there’s no company that typically runs it,” says Hamasni. “Regulators are trying to figure out if they should go after the development team who coded the contract, or find out who the beneficiaries are. Currently, there’s no guidance as to exactly how that should happen.”

In Canada, cryptocurrencies traded on exchanges are regulated as securities and crypto asset exchanges are governed by provincial securities regulators.

“There are still some areas that we’re not certain on, but we’re a step or two ahead of the United States when it comes to crypto regulation,” Hamasni says. “We have more clarity as to how this regulatory landscape is going to evolve.”

In the future, Hamasni sees the crypto/blockchain space evolving similarly to the Internet. Whereas the Internet was initially seen as a new information channel alongside television, radio and newspapers, it’s now become the delivery infrastructure used by those media. In the same way, blockchain technology and distributed ledgers could emerge as the preferred financial infrastructure for far more than crypto assets.

“Blockchains and distributed ledgers could start to log a range of assets, such as cryptocurrencies, crypto commodities, tokenized securities and crypto art,” he says. “We’re even seeing decentralized autonomous organizations starting to emerge — smart contracts that govern organizations and take out the need for human leadership. I see blockchain becoming more of a rail or a backbone to deliver all sorts of assets, contracts, decentralized computing and so much more.”

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Click here to listen to Karim Hamasni discuss cryptocurrency on the RBC Investor Services podcast.

This story was created by Canadian Family Offices’ commercial content division, on behalf of RBC Investor Services, which is a member and content provider of this publication.