In the spring of 2021, the global cryptocurrency market reached $2.0 trillion for the first time [1]. This is comparable to the capitalization of Apple [2] and the anti-crisis budget of the European Union [3] for 2020. However, the market has now shrunk to $1.6 trillion [4], having lost more than half a trillion dollars in just a couple of months - the capitalization of Alibaba [2] Group. Elena Sinelnikova-Muryleva, PhD in Economics, Senior Researcher at the Center for the Study of Central Banking Problems, IPEI RANEPA, tells about whether crypto can be called a currency at all, why it is impossible to make more than 21 million bitcoins, and what are the advantages and disadvantages of cryptocurrencies. What is cryptocurrency and how it is related to blockchain There is no generally accepted definition of cryptocurrency, and in the scientific community it is defined differently and quite cumbersomely through characteristics and functions. In layman's terms, a cryptocurrency can be defined as a digital code that is transmitted within a distributed ledger system, or blockchain. Blockchain is a system where any information is written in chains of blocks (hence the name - block chain), and it is extremely difficult and hardly practical to rewrite it: to do so would be to rewrite all the blocks formed after the one that is tried to change. This is the main advantage of blockchain: it is impossible to fake any record retroactively. Due to this property, blockchain is used not only for transactions in the crypto-economy, but also, for example, for registering real estate transactions in some countries. Cryptocurrencies and cryptoeconomics are a particular example of blockchain technology. Accordingly, any cryptocurrency is inseparable from the technological platform on which it circulates. What are the differences between cryptocurrency and real money Cryptocurrencies cannot be called money in the classical sense of the term because they do not perform the three functions of money: they are not a common means of payment, a unit of account and a means of saving. In Russia, sellers are legally obliged to accept rubles as payment for goods and services. In addition, the ruble performs the function of the unit of account: all price tags in our country are indicated in rubles. Finally, if you put a stack of banknotes under your pillow now, you will still be able to use it in a year: although the purchasing power of money changes over time, it remains predictable, except in cases of hyperinflation (in which case people lose confidence in national currencies and even give them up). All of this builds trust in national currency and an understanding of its value. And trust in a particular payment instrument is the main criterion for calling this instrument money. Things are different with cryptocurrencies: rates of almost all cryptocurrencies are extremely volatile, which means that it is very inconvenient to set price tags in cryptocurrency: they would have to be changed many times a day (this is the so-called menu costs), and it is absolutely unclear what will happen to its rate in a year. Cryptocurrency price is determined by supply and demand. If nobody wants a new digital coin, there is no trust in it, because you can't buy anything for it tomorrow, it will depreciate quickly. Legally, cryptocurrencies are regulated differently around the world. For example, in Japan it is officially allowed to buy goods and services for cryptocurrencies, but in Russia since January 1, 2020, according to the law on digital financial assets, cryptocurrency can be bought, sold, mined, but cannot be used as a means of payment for goods and services. However, there are economic agents who pay with crypto in various illegal operations (drug trafficking, weapons), but they do not buy and sell goods for cryptocurrencies on a mass scale. Another important difference between cryptocurrency and real money is that transactions using cryptocurrency do not require intermediaries, such as a bank and a payment system, as is the case with card payments. Cryptocurrency transactions are so-called peer-to-peer transactions that take place directly between two counterparties. In theory, this reduces transaction costs and the speed of transactions. The first cryptocurrency, bitcoin, which appeared at the turn of 2008-2009, was called "electronic cash" by its creators under the collective pseudonym of Satoshi Nakamoto, but the term did not catch on just because cryptocurrency is not similar to both real cash and electronic money due to the absence of intermediaries in transactions. Elena Sinelnikova-Muryleva, Ph.D. in Economics, Senior Researcher at the Center for the Study of Central Banking Problems, IPEI RANEPA: - As soon as news appears that China has imposed new restrictions on, say, mining or cryptocurrency transactions by banks, financial intermediaries, and individuals, trust in various tokens drops immediately. Everyone understands: if they impose strict restrictions, cryptocurrency will be of no use to anyone. Cryptocurrency prices always react sharply to such information shocks. Of course, we see something similar in stock markets. But the volume In the spring of 2021, the global cryptocurrency market reached $2.0 trillion for the first time [1]. This is comparable to the capitalization of Apple [2] and the anti-crisis budget of the European Union [3] for 2020. However, the market has now shrunk to $1.6 trillion [4], having lost more than half a trillion dollars in just a couple of months - the capitalization of Alibaba [2] Group. Elena Sinelnikova-Muryleva, PhD in Economics, Senior Researcher at the Center for the Study of Central Banking Problems, IPEI RANEPA, tells about whether crypto can be called a currency at all, why it is impossible to make more than 21 million bitcoins, and what are the advantages and disadvantages of cryptocurrencies. What is cryptocurrency and how it is related to blockchain There is no generally accepted definition of cryptocurrency, and in the scientific community it is defined differently and quite cumbersomely through characteristics and functions. In layman's terms, a cryptocurrency can be defined as a digital code that is transmitted within a distributed ledger system, or blockchain. Blockchain is a system where any information is written in chains of blocks (hence the name - block chain), and it is extremely difficult and hardly practical to rewrite it: to do so would be to rewrite all the blocks formed after the one that is tried to change. This is the main advantage of blockchain: it is impossible to fake any record retroactively. Due to this property, blockchain is used not only for transactions in the crypto-economy, but also, for example, for registering real estate transactions in some countries. Cryptocurrencies and cryptoeconomics are a particular example of blockchain technology. Accordingly, any cryptocurrency is inseparable from the technological platform on which it circulates. What are the differences between cryptocurrency and real money Cryptocurrencies cannot be called money in the classical sense of the term because they do not perform the three functions of money: they are not a common means of payment, a unit of account and a means of saving. In Russia, sellers are legally obliged to accept rubles as payment for goods and services. In addition, the ruble performs the function of the unit of account: all price tags in our country are indicated in rubles. Finally, if you put a stack of banknotes under your pillow now, you will still be able to use it in a year: although the purchasing power of money changes over time, it remains predictable, except in cases of hyperinflation (in which case people lose confidence in national currencies and even give them up). All of this builds trust in national currency and an understanding of its value. And trust in a particular payment instrument is the main criterion for calling this instrument money. A smart contract is a contractual condition that is digitally recorded in blockchain. The parties who sign it must exchange certain assets, such as currency, stocks, etc., when it is executed. This decision cannot be revoked or tampered with. The software tracks the fulfillment of the conditions automatically, so people are not involved or in control of the process. In other words, smart contracts are executed directly and intermediaries are eliminated. Cryptocurrencies have great potential in crowdfunding and attracting investment through the ICO (Initial Coin Offering), when investors are offered to buy a fixed amount of new cryptocurrency. Another promising development of the crypto-economy is decentralized finance, which gives users full control over their money, without the involvement of governments and banks. Now it is a small world in the financial sector, which is sort of built on top of cryptocurrencies, and so far it is not affected by regulation. The main and significant disadvantage of cryptocurrencies is long transactions: in the bitcoin network, for example, it takes an average of 8-10 minutes to complete a transaction. To solve this problem, the so-called forks of bitcoin were conducted - these are offshoots, which are based on the code base of the software project, but a new one is created on its basis. These are, for example, Litecoin (where transaction time was reduced to 2 minutes 40 seconds) [5], Bitcoin Cash [6], with which transactions are faster. Therefore, it is more convenient to use these systems for payments than for speculation. The next weak point is reliability. Despite the complexity of the system, hypothetically the cryptocurrency blockchain can be rewritten. This is called a 51 percent attack: if more than half of the players in any cryptocurrency market join together, they could create a parallel longest chain and rewrite all the information in the blockchain. But this problem is hardly relevant for bitcoin, because there are many players in its market who hold savings in this cryptocurrency, and they are not interested in destroying it. Finally, common hacker attacks, including on cryptocurrency exchanges, also pose a threat. As a result of such attacks, participants' funds are withdrawn from exchanges, which cannot always be recovered. And no one guarantees the safety of cryptocurrency. In addition, it is possible to lose the "wallet" itself, that is, the information to enter it: to forget a password or ID, to lose a smartphone. However, in this case, no one will ever use the lost cryptocurrency. What cryptocurrencies are There are several types of cryptocurrencies. The first is the traditional cryptocurrencies, let's say, the first generation, the market leaders, for example, bitcoin. They are mostly used as speculative assets, but can also be a means of payment, though not always in the legal market. Such cryptocurrencies are inseparable from the payment system, from the blockchain in which they circulate. The second type is cryptocurrencies of payment systems, say Ripple. The latter is very convenient for institutional players who need to quickly and at minimal cost to transfer, for example, one currency to another, but unattractive for individuals because of the complicated "know your customer" (KYC, know your customer) procedure and the need for identification. The third type is cryptocurrencies, which are used as a basis for smart contracts based on blockchain technology: as soon as the contract conditions are met, funds are automatically transferred. The fourth type is stablecoin. While bitcoin, ether (Etherium) and ripal are volatile, stablecoin, on the other hand, has a stable and predictable value. Its rate is tied to some fiat currency, to oil, to a basket of currencies or to a portfolio of assets. For example, Tether, one of the top ten cryptocurrencies by capitalization, is pegged to the dollar at a 1:1 ratio. The participants of cryptocurrency exchanges themselves are also calculated using stablecoin - for them stablecoin plays the role of an internal payment instrument. The fifth type is, conventionally speaking, crowdfunding currencies. They are created for ICOs to raise money. The issuer offers investors either a share in the project, or so-called utility-tokens for some goods and services, which will be created after the project is realized. There are a lot of such ICOs, and a significant part of them are fraudulent schemes. How cryptocurrencies are mined and what is mining Bitcoins can be mined. To do this, miners solve a mathematical problem, the purpose of which is to add a new block of information to the cryptocurrency blockchain. The more cryptocurrency in the blockchain, the more complex the cipher that miners need to solve to make an entry. Consequently, they need to invest in processing power and electricity to mine each successive unit of currency. For a successful solution, they receive a reward (usually units of currency mined), but the more often the miners' efforts turn out to be successful, the lower the reward. A smart contract is a contractual condition that is digitally recorded in blockchain. The parties who sign it must exchange certain assets, such as currency, stocks, etc., when it is executed. This decision cannot be revoked or tampered with. The software tracks the fulfillment of the conditions automatically, so people are not involved or in control of the process. In other words, smart contracts are executed directly and intermediaries are eliminated. Cryptocurrencies have great potential in crowdfunding and attracting investment through the ICO (Initial Coin Offering), when investors are offered to buy a fixed amount of new cryptocurrency. Another promising development of the crypto-economy is decentralized finance, which gives users full control over their money, without the involvement of governments and banks. Now it is a small world in the financial sector, which is sort of built on top of cryptocurrencies, and so far it is not affected by regulation. The main and significant disadvantage of cryptocurrencies is long transactions: in the bitcoin network, for example, it takes an average of 8-10 minutes to complete a transaction. To solve this problem, the so-called forks of bitcoin were conducted - these are offshoots, which are based on the code base of the software project, but a new one is created on its basis. These are, for example, Litecoin (where transaction time was reduced to 2 minutes 40 seconds) [5], Bitcoin Cash [6], with which transactions are faster. Therefore, it is more convenient to use these systems for payments than for speculation. The next weak point is reliability. Despite the complexity of the system, hypothetically the cryptocurrency blockchain can be rewritten. This is called a 51 percent attack: if more than half of the players in any cryptocurrency market join together, they could create a parallel longest chain and rewrite all the information in the blockchain. But this problem is hardly relevant for bitcoin, because there are many players in its market who hold savings in this cryptocurrency, and they are not interested in destroying it. Finally, common hacker attacks, including on cryptocurrency exchanges, also pose a threat. As a result of such attacks, participants' funds are withdrawn from exchanges, which cannot always be recovered. And no one guarantees the safety of cryptocurrency. In addition, it is possible to lose the "wallet" itself, that is, the information to enter it: to forget a password or ID, to lose a smartphone. However, in this case, no one will ever use the lost cryptocurrency. What cryptocurrencies are There are several types of cryptocurrencies. The first is the traditional cryptocurrencies, let's say, the first generation, the market leaders, for example, bitcoin. They are mostly used as speculative assets, but can also be a means of payment, though not always in the legal market. Such cryptocurrencies are inseparable from the payment system, from the blockchain in which they circulate. The second type is cryptocurrencies of payment systems, say Ripple. The latter is very convenient for institutional players who need to quickly and at minimal cost to transfer, for example, one currency to another, but unattractive for individuals because of the complicated "know your customer" (KYC, know your customer) procedure and the need for identification. The third type is cryptocurrencies, which are used as a basis for smart contracts based on blockchain technology: as soon as the contract conditions are met, funds are automatically transferred. The fourth type is stablecoin. While bitcoin, ether (Etherium) and ripal are volatile, stablecoin, on the other hand, has a stable and predictable value. Its rate is tied to some fiat currency, to oil, to a basket of currencies or to a portfolio of assets. For example, Tether, one of the top ten cryptocurrencies by capitalization, is pegged to the dollar at a 1:1 ratio. The participants of cryptocurrency exchanges themselves are also calculated using stablecoin - for them stablecoin plays the role of an internal payment instrument. The fifth type is, conventionally speaking, crowdfunding currencies. They are created for ICOs to raise money. The issuer offers investors either a share in the project, or so-called utility-tokens for some goods and services, which will be created after the project is realized. There are a lot of such ICOs, and a significant part of them are fraudulent schemes. How cryptocurrencies are mined and what is mining Bitcoins can be mined. To do this, miners solve a mathematical problem whose goal is to add a new block of information to the cryptocurrency blockchain. The more cryptocurrency in the blockchain, the more complex the cipher that miners need to solve to make an entry. Consequently, they need to invest in processing power and electricity to mine each successive unit of currency. For a successful solution, they receive a reward (usually units of currency mined), but the more often the miners' efforts turn out to be successful, the lower the reward. For example, on the bitcoin network, 50 bitcoins were initially given for one new block. For the next 210,000 - 25 bitcoins, and so on. That is, the creators of bitcoin provided that the reward will decrease exponentially and when the reward for one block will fall below one bitcoin, their number will reach 21 million units. The creators of bitcoin predetermined this figure when they decided that for every new 210,000 blocks, the reward would decrease by half [7]. Another way to mine bitcoin is to validate transactions between blockchain counterparties and receive a certain amount of bitcoins as commission. Sometimes new cryptocurrencies are just handed out to everyone. Cryptocurrency can also be bought. The method of purchase depends on the specific cryptocurrency. For example, bitcoin is sold on a cryptocurrency exchange at market price. Today there are about 300 of such exchanges, though active and reliable there are not more than some tens. Admittedly, this is not a regular exchange like Wall Street - it is just a platform where players can meet and trade. A cryptocurrency exchange does not act as a guarantor of transactions, but it does keep accounts and conduct transactions, for which it charges a commission, playing the role of a financial intermediary. The buyer gets an electronic wallet on such an exchange and buys bitcoins for fiat currency. When will cryptocurrencies be legalized and will we be able to pay only with them? There are two ways to legalize cryptocurrency. The first way is to put it into law by answering the question of whether it is a currency, a financial asset or an intangible asset. Depending on the solution of this problem, the rules of accounting on the company's balance sheet, currency control, and tax regime are determined. This is the path taken by the United States and Germany. The second way is to write new legislation for cryptocurrencies, because they are perceived as a fundamentally new phenomenon. This, for example, is the way of France. In any case, in many countries, revenues from the capitalization and sale of bitcoins are already taxed. In Russia, the Central Bank is very cautious about cryptocurrencies. The use of cryptocurrencies by the population requires high financial literacy, so our regulator seeks to protect people from risks. Anyway, most likely, we will never switch completely to cryptocurrencies, abandoning traditional, fiat money. All monetary systems evolved along the path of centralization, and sooner or later they had a regulator (although central banks in developed countries are a little over 100-120 years old). The regulator does what the market cannot do, and at the same time protects the interests of local agents, as well as takes into account the peculiarities of the monetary system of the country. Therefore, there is no reason why suddenly everyone will stop trusting their central banks, refuse to use national currencies and switch to unsecured, including by force of law, international cryptocurrency.