Discuss about the Block chain Crypto currency and Financial Market.
Blockchain has been impactful as the Internet. This has been denoting to the next age revolution. As built as the infrastructure underpinning Bitcoin, it has been seen as a separate application of Blockchain technology. This has gone the currencies.
The technology has far-reaching implementations influencing the way people have been interacting with financial markets and the artificial intelligence, technology and computers. The following discussion has been made on Security and Risk Analysis of “blockchain and cryptocurrency” in the commercial market.
The blockchain technology has been the usage of decentralised and distributed ledger to verify and record transactions. Here, the technology has been allowing parties to record receive and send values and data through the peer-to-peer computer networks. Further, blockchain has been having a wide range of implementations beyond the digital currencies or cryptocurrencies. Göbel et al. (2016) stated that this has been including the platform known as smart contracts. The original agreements have been the contracts to transactions that are transferred to the code for facilitating, executing and enforcing various commercial contracts taking place between two and more parties. As demonstrated by Boyd & Carr (2016), the block-chain based kinds of smart contracts has been the efficiency to streamline various financial transactions, counterparty and operational risks related to the enforcing and monitoring of contractual obligations as mentioned by Khan and Salah (2017). At the legal and regulatory side, multiple problems have been raising as per as risks, security and privacy are concerned. This has been vital that the proper balance has been gained between the fast developing of “blockchain technology and various legal stabilities. These have been ensuring regulatory and legal dimensions without hindering the innovation in the area as highlighted by Nugent, Upton and Cimpoesu (2016).
Miscione and Kavanagh (2015) argues that these settlements and removals of economic resources have been the conventional functional for the banking. Essential markets like Japan, Canada and the U.S. have possessed three-day arrangements in place. South Korea, Hong Kong and EU, on the other hand, have moved into the 2-day settlement phases. Federal Reserved issues it as the call to action for every stakeholder at U.S. payments systems for raising various end-to-ends sped of payment among different other things.
The lag that has been present between the time in which the business has been done and the time it takes to settle down has been driving the amount of credit and liquidity risks and presenting substantial scopes regarding developments. Hayes (2017) has indicated that the blockchain has been changing the value along with integrating various components to trade-clear-settlements where the value chain has been active and elegant. In this way the useful applications of blockchain, under the context to clear and settle the trades according to Phillip, Chan and Peiris (2018). The lifecycle has started as the trade has begun as any buyer and selling has been agreeing to trade over any specific security.
In this way, potential applications for Blockchain have been in the context of clearing and settling trades. Further, the lifecycle of trade begins when a buyer and a seller agree to trade particular security. Once the agreement has been reached the two counterparties update their accounts and arrange for the transfer of the security and the associated monies. This has also been known as clearing the trade. Once the process is complete the funds and the safety actually change hands, generally occurring 2 to 3 days after the original agreement has been reached. Miscione and Kavanagh (2015) examined that this simplifies the risk management process. This takes place as businesses now have a single counterparty to their transactions. Besides, a longer settlement cycle may present two main risks.
The first one has been counterparty risk between trade execution and settlement, and associated margin requirements, which leads to a need for clearing members to maintain a prescribed level of capital with the CCP. The second one has been settlement risk, which has been ‘the risk that one leg of the transaction may be completed but not the other’. Through reducing the risk of purchaser default and thus lowering counterparty credit risk, this would help reduce an institution’s balance sheet capital requirements under Dodd-Frank. Further, Miscione and Kavanagh (2015) discusses that distributed ledger technology virtually eliminates credit and liquidity risk by requiring pre-funding, in which the cash and collateral to be traded pre-exist prior to trading.43 Blockchain technology can disrupt the clearing and settlement process by bringing with it decentralization and disintermediation. Again, instance any consortium of clearing members could set up a distributed clearing house, thus eliminating the need for a CCP. Clearing then becomes closer to bilateral clearing however as the contract stipulations through the Blockchain administered through a smart contract44, there have been reduced risk management issues. Moreover, Savelyev (2017) demonstrates that use of Blockchain technology could increase the speed of the entire settlement cycle from days to minutes or even seconds. eventually leading to continuous settlement. Besides every reporting, compliance and collateral management can be handled through the Blockchain, thus reducing back-office costs according to Dwyer (2016).
A closely-related feature has been placing funds in escrow and not allowing them to be released until each party has been satisfied with the performance of the other as reflected in a digital signature. Extra security could be added to a transaction by requiring the name of third or even more parties, who play a role in authenticating performance as per the article by Phillip, Chan and Peiris (2018).
Moreover, not everyone has been approaching Blockchain equally optimistically. Hari and Lakshman (2016) stated that that blockchain had always been going to be more expensive than a central clearer because a multiple of agents has to do the processing job rather than just one, which makes it a premium clearing service especially if delinked from an equity coupon and not a cheaper one according to Dwyer (2016).
Zheng et al. (2016) justified that the payments are cleared and settled through trusted, central third-party intermediaries. Industry experts predict that private, permissioned Blockchains will gain significant volume in the payments space by 2020. The current rate of state laws has been establishing licensing and compliance standards for money transmitters. Apart from this, Miscione and Kavanagh (2015) examined that various operational risks in financial markets. In the financial regulatory world, clearing intermediaries, as well as most payment systems, fall within a category of regulated entities called financial market infrastructures.
The automation of trade clearing or of payment systems through the Blockchain technology could eliminate the need for a trusted intermediary which could in turn also present operational risks. These risks will have to be clearly identified, disclosed and monitored. To develop a smart contract, parts of the terms that make up a traditional deal are coded and uploaded to the Blockchain, producing a decentralized quick arrangement that does not rely on a third party for recordkeeping or enforcement. Contractual clauses are automatically executed when pre-programmed conditions are satisfied as per the article by Phillip, Chan and Peiris (2018). This eliminates ambiguity regarding the terms of the agreement and disagreement concerning the existence of external dependencies. Smart contracts are computer protocols that facilitate, verify, or enforce the negotiation or performance of a deal, or that make a contractual clause unnecessary. Intelligent agreements usually also have a user interface and often emulate the logic of contractual requirements. According to Dwyer (2016) proponents of smart contracts claim that many kinds of contractual clauses might be made in this way. This can be partially or fully self-executing, self-enforcing, or both. Intelligent agreements aim to provide security superior to traditional contract law and to reduce other transaction costs associated with contracting.
One of the most essential characteristics of Blockchains as it relates to smart contracts has been the ability to enter into “trustless” transactions. Trustless transactions are transactions that can be validated, monitored and enforced bilaterally over a digital network without the need for a trusted, third-party intermediary as mentioned by Khan and Salah (2017)y. Multi-signature functionality can be incorporated into smart contracts where the approval of two or more parties has been required before some aspect of the contract can be executed agreed-upon external systems called oracles can be developed to monitor and verify prices, performance, or other real-world events. Financial transactions are one potential use case for smart contracts. According to Dwyer (2016) smart derivatives contracts could be coded such that payment, clearing, and settlement occur automatically in a decentralized manner without the need for a third-party intermediary such as an exchange or clearing house. Margin could be automatically transferred upon margin calls and the contract could terminate itself in the event of a counterparty default. The Blockchain would perform the recordkeeping, auditing and custodial functions traditionally performed by intermediaries, resulting in transactional cost savings for the contracting parties. As As per the article by Phillip, Chan and Peiris (2018) in its recent Discussion Paper on DLT, “Smart contracts, which would sit on top of the ledgers, may help reduce the uncertainty attached to contract terms and increase the automation of the processing of corporate actions, even if their use may be limited to certain types of instruments or contracts for complexity reasons, at least in the short term. Smart arrangements are self-executing codes meant to replicate the terms of a given agreement. They effectively translate contractual terms.
This must be done by starting with answering 3 primary questions. The first one has been what is the possibility of the event happenings. Next, the consequences of the event happening must be determined and after that, the various actions of mitigations from the outcomes of the event is needed to be identified according to Gipp, Kosti and Breitinger (2016). Next the probable mitigating measures are to be determined that has been making differences in the market as mentioned by Khan and Salah (2017). This must be based on the kind of event and the way it has been playing out. At anytime mitigations of actions has been helping the huge scenarios. Here the action poses the new risks.
As the queries are answered, the business can decide whether the event has been worth being created to and having the planning fop mitigating that. Various failures to those queries , individually the ultimate one has been leading to the mind of the people about various silly elements such a zombie apocalypse rampant viral outbreak and nuclear winters zccording to Dwyer (2016).
Thus businesses must everytime be thinking about the possibility of occurrences of the activity along with the outcomes. Then they are to be multiplied, and that retrieves the risks. From the risks, the mitigating techniques are to be developed as mentioned by Khan and Salah (2017). Then the mitigating actions are to be assessed regarding effectiveness and exposure to latest risks. This method is useful and is applicable to every other aspect of life also. Though it has sounded onerous, however, getting used to it is done very quickly.
The cryptocurrencies are the digital resources that have been using cryptographies along with techniques of encryptions regarding securities. They are mainly used for buying and selling services and goods. However, many new cryptocurrencies have been functioning to deliver various set of rules for the holders. According to Gipp, Kosti and Breitinger (2016) they have been possessing no intrinsic values and has been not redeemable for various other commodities like gold. Thus unlike conventional currencies, they ate not be issues from the central authority. Further, as per the article by Phillip, Chan and Peiris (2018)they have been not regarded as the legal tender. Here, the cryptocurrencies have been largely restricted to various early adopters. For instance, there have been about 10 million holders of bitcoins that have been half amount of holding the bitcoin totally for investments. Thus objectively the cryptocurrencies have been needed for government-backed currencies that have been functioning sufficiently. According to Dwyer (2016) most of the adopters have been taking benefits fo the cryptocurrencies theoretically. Thus, the main adopting has been coming as there is a notable tangible advantage to use the cryptocurrencies.
In order to buy services and goods with cryptocurrencies have been occurring over the Internet and has never disclosing of identities. Besides, a misconception regarding cryptocurrency has been that they have ben warning entirely anonymous transactions according to Gipp, Kosti and Breitinger (2016). This is known as psedoanomyoty that is almost the near-anonymous state. Here, they have been allowing consumers for completing purchases instead of providing various personal data to vendors. Further, from the perspectove of law enforcement, the transactions can be traced back to any entity or individual. However various concerns have been rising interns of privacy and theft as per Dwyer (2016). Thus cryptocurrencies have been offering benefits to their users.
Savelyev (2017) demonstrates that this has been lying one of the most significant benefits. They have not been including economic institution intermediates. Here, the merchants have lacked the middleman lowering cost of transactions. Here for the customers, there have high benefits as the financial systems get hacked, and the user does not trust the conventional methods. Here for the sale of comparison, the database of banks has been damaged or cut the banks get a dependence on the chips entirely to restore the missing data. With the help of cryptocurrencies, that portion gets compromised as mentioned by Khan and Salah (2017). However, according to Gipp, Kosti and Breitinger (2016) the rest parts continue to be able to confirm those transactions. However, the cryptocurrencies have not been immune to entirely towards the security threat.
Particular currencies have been conforming various advantages to the holders. It has been including restricted ownership and rights to the site. Here for example the cryptocurrency has been including rights to vote in the code for cryptocurrencies of software according to Dwyer (2016). The cryptocurrencies have also been including interest of ownerships in physical resources like real estate or art.
Most of the popularity and security advantages of cryptocurrencies have been described from the groundbreaking innovation of technologies.
Blockchain technology underlies Bitcoin and many other cryptocurrencies. It relies on public, continuously updating ledger to record all transactions that take place. The blockchain is groundbreaking because it allows transactions to be processed without a central authority—such as a bank, the government, or a payments company as mentioned by Khan and Salah (2017). The buyer and seller interact directly with each other, removing the need for verification by a trusted third-party intermediary. It thus cuts out costly intermediaries and allows businesses and services to be decentralised.
Here another unfortunate feature of the blockchain told has been its accessibility to various involved parties. According to Gipp, Kosti and Breitinger (2016) with the help of blockchain similar ledger of transactions can be viewed as mentioned by Khan and Salah (2017). This has not been managed and operating over consensus, and both of them has been needing the approval and verification of transactions to add that to the chain. Here, the chain has also been secured with cryptography and significantly one of the changes in the string after the fact.
According to Dwyer (2016) as seen from a technical point of view, the blockchain has been using consensus algorithms and various records in various nodes apart from one single server. The node is the computer connected to blockchain networks that download the copy of blockchain on joining the system. To make the transaction valid every node are required to be one agreement.
Though blockchain technology was conceived as part of Bitcoin in 2009, there may be many other applications. Technology consulting firm CB Insights has identified 27 ways it can fundamentally change processes as diverse as banking, cybersecurity, voting, and academics as mentioned by Khan and Salah (2017). The Swedish government, for example, is testing the use of blockchain technology to record land transactions, which are currently registered on paper and transmitted through physical mail. The World Economic Forum estimates that by 2027, 10% of global GDP will be stored on blockchain technology.
According to Gipp, Kosti and Breitinger (2016) it refers to a step whereby two things occur: Cryptocurrency transactions are verified, and new units of the cryptocurrency are created. Useful mining requires both powerful hardware and software. When it comes to verification, Savelyev (2017) demonstrates that an individual computer isn’t powerful enough to profitably mine cryptocurrencies because you’d run up your power bill. To address this, miners often join pools to increase collective computing power, allocating miner profits to participants. According to Dwyer (2016) groups of miners compete to verify pending transactions and reap the benefits, leveraging specialised hardware and cheap electricity. This competition helps to ensure the integrity of operations.The largest pools include AntPool, F2Pool, and BitFury, with AntPool alone controlling over 19% of all mining as mentioned by Khan and Salah (2017). Most mining pools are located in China, comprising more than 70% of total Bitcoin mining. China manufactures most cryptocurrency mining equipment and leverages the country’s low electricity prices.
These are the sites where people buys, sells and exchanges them against digital currencies or conventional currencies. Here, the exchanges can convert cryptocurrencies to main currencies that are backed by governments. Savelyev (2017) demonstrates that some of the largest exchanges include Poloniex, Bitfinex, Kraken, and GDAX, which can trade more than $100 million per day. Almost every transaction is subject to government anti-money laundering regulations, and customers are required to provide proof of identity when opening an account. Apart from the exchanges, Göbel et al. (2016) stated that the people have been at many times using P-2-P transactions through various sites such as LocalBitcoins. They have been using the vendors in avoiding the disclosure personal data. Here the participants have been trading multiple cryptocurrencies in transactions through software instead of involving any extra intermediary.
They are needed for users for sending and receiving various digital currencies and monitoring the balance. These are the software or hardware and that are regarded to be more secure. Here, for instance, the ledger wallet has been looking like the USB thumb system connecting to the USM ports. As these transactions and balances for bitcoins counts have been actual;, the recorded blockchain as mentioned by Khan and Salah (2017). Here the private keys used have been signing latest sales that are saved within the wallet. As one tries to develop new transactions, the machines ask for portfolios for signing that, and then they broadcast the blockchain. As the private key has never been leaving the wallet of hardware the bitcoins get safe through the computer gets hacked.
However, Göbel et al. (2016) stated that there is any backup, the closing of the wallet results in a loss of the resources of the holders. This, in contrast, has been the software wallet like Coinbase wallet has been virtual. Here, these kinds of software devices are placed in the account holder’s funds over the Internet to possess the purse provide that adds risks. Here for a deeper dive to the technology powering the cryptocurrencies. Here as per the experts in the industry, there has been one supreme digital currency. Thos types of crypto-pluralism have been taking the hold. Though the Ethereum and Bitcoin have comprise the most of the cryptocurrencies marketing sharing that emergence and growth of various new technologies. This has been in fact the reason that there have been over 1000 cryptocurrencies that have been existing at now.
Within the financial regulatory scenario, the clearing of intermediaries has been falling under the category of different regulated entities known financial market infrastructures. The operations risk are the deficiencies within information systems or various internal processes, various human errors, the failures of management and multiple disruptions from external events have been resulting on breakdown, deterioration and reduction of services supplied by the economic market infrastructures as mentioned by Khan and Salah (2017). Moreover, the deficiencies within information systems or various internal processes have seen including days to errors within processing, system outages improper capacity, data loss and frauds and leakages. Nugent, Upton and Cimpoesu (2016) discusses that the software has comprised of various bugs, and the software has been vulnerable to attack. Here the software has been ever-changing through new releases. Further, some of the people have been able to understand it has even worked.
Although all software has bugs, it could be valuable to compare the bugs in existent central clearing software against those present in Blockchain software mentiones Nugent, Upton and Cimpoesu (2016). Since software is vulnerable to attack the effects of such an attack could be to revise recently settled transactions on the Blockchain and to prevent current and future transactions from being completed” Göbel et al. (2016) stated that any ability to tamper with it or to manipulate its creation is highly damaging to the reliability of the system, and therefore to its credibility. The evolving nature of software through new releases may be a bigger problem for decentralised than it is for more centralized as Savelyev (2017) demonstrates. Since controversial new releases of software may be unevenly adopted, there would seem to be potential for periodic forks in the network when consensus cannot be found amidst the parties in the network. As per the article by Phillip, Chan and Peiris (2018) on a centralised FMI, however, or even in permitted Blockchains new releases of software can likely be implemented more easily as Nugent, Upton and Cimpoesu (2016) mentions , since adopting the new version can be mandated on participants, perhaps through the contract that allows participation in the permission Blockchain.” Finally, “the fact that only an insufficient portion of the population truly understands how it operates gives rise to systemic operational risks. Göbel et al. (2016) stated that this is because it requires the people to put extreme amounts of trust in the skill and integrity of the people making decisions about the Blockchain code and network. The larger the system becomes, with more ‘Blockchain’ companies using the Blockchain network to accomplish their tasks, the more pressure that is put on this small group of experts to make popular policy choices that they implement accurately and safely into the code as mentioned by Khan and Salah (2017).
Thus it can be said that the financial technology startups have been continuously developing various smart contracts regarding financial transactions, derivatives and various securities. This has been ultimately required to formulate the approach regarding regulating the uses. Various regulators have signalled the intention for examining the applications of blockchain technologies within the financial sectors and various smart contracts that have been potentially attractive for the regulators. This is because they were rising difficult the regulatory and legal challenges. They have been certainly needing to various global technological and different commercial blockchains standards. This is to create the enhancing various coherent developments and preventing various effective misuses of the digital currencies and blockchain technologies.
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