Cryptocurrency is a double-edged sword depending on whom you talk to, or at least read about online and in print. Some are getting a virtual high with cryptocurrencies, while others are brushing it off as nothing but a digital nuisance that will eventually crash.
It has been referred to as gold 2.0 by some devotees. “Bitcoin is a technological tour de force,” according to Microsoft founder, Bill Gates. Peter Thiel, the co-founder of PayPal, on the other hand, believes that it “has the potential to do something like changing the world.”
Even the former U.S. Vice President, Al Gore, weighed in on the matter. “I think the fact that within the bitcoin universe an algorithm replaces the functions of [the government] … is pretty cool. I am a big fan of Bitcoin.”
But others are not so impressed with this so-called modern-day gold rush. J.P. Morgan Chase’s CEO, Jamie Dimon, is skeptical. "It's just not a real thing. Eventually, it will be closed," he claims.
There one too many sides to the same coin, but if there’s one crucial factor that cannot be denied, it’s this: the potential of cryptocurrency is very interesting.
To be clear, we’re not here to give you any advice regarding cryptocurrency trading or how to be a crypto miner. We’re here to give you an insight or two about the following:
- The nature of cryptocurrency
- The role that surety bonds play in the cryptocurrency world
What is Cryptocurrency?
It is a digital currency that uses cryptography – hence “crypto” + “currency.” That is just one of the many formal definitions of cryptocurrency.
Being the first cryptocurrency and the most used, Bitcoin is often used as the generic term for the cryptocurrency, but it is not the only cryptocurrency in circulation. It is just one of the many.
There are more than 800 cryptocurrencies on the market today. Every type that came after Bitcoin is referred to as an altcoin or alternative coin. To name a few, there’s Ethereum, Ripple, Litecoin, Dash, etc.
The Transaction Process
Let’s further dissect cryptocurrency to its most basic form. First off, it’s not a coin, but a group of numbers that are specific to the owner.
It is a P2P (peer-to-peer) transaction without using any banks or third parties, much like a physical exchange of money from one friend to another. No one else is involved except for the two friends. Now, the exchange between two friends is a private one.
With cryptocurrency, the exchange is made public for everyone to see, excluding the sender and recipient’s personal information. The entire transaction is handled by a network, and each transaction is placed in a digital ledger called a blockchain.
Cryptography secures the blockchain by putting a lock on the data being transferred. Only the owner who has the key can unlock it.
What kind of key is it?
Each owner is assigned a private and public key. The purpose of this private key is to identify the rightful owner of the cryptocurrency. The owner will use this every time he or she will make a transaction.
The public key is for receiving bitcoins. These are kept in a special cryptocurrency wallet (ex. Bitcoin Wallet).
For example, Person X wants to transfer 30 bitcoins to Person Y as a personal loan. She will do this via her Bitcoin wallet.
Person X will transfer her bitcoins by creating a message that will include Person Y’s public key or address.
The transaction will be revealed in the cryptocurrency network, signaling everyone that the new owner of the bitcoins that Person X has just transferred is Person Y.
Cryptocurrency Surety Bond
Cryptocurrencies have a lot of benefits that have become answered prayers for the adherents. One is the seamless and secure transaction that it provides. Eliminating identity theft is another. And since there are no third parties involved, you don’t have to pay for any expensive fees, or wait days for approval, or worry about your cryptocurrency being seized.
However, it’s not a perfect system. The risk of abusing its flaws is highly probable. For one, the recovery of fraud is nearly impossible in a cryptocurrency transaction. There are no charge-backs that can be done or any viable recovery options.
In some states, the money transmitter regulation has been modified to include the transmission of cryptocurrency or virtual currency specifically.
As part of the regulation, those who will engage in the transmission should obtain a surety bond with a sufficient amount to protect the money transmitter clients.
States that require a surety bond for cryptocurrency transactions
Upon applying for a license, money transmitters will be asked to disclose if they will be involved in the transmission of virtual currency or not. Those that will be required by the Commissioner to obtain an additional surety bond specific for the transfer of virtual currency.
Bond amount: Varies
Aside from submitting a surety bond, Senate Bill 680 emphasizes the need for additional insurance to cover cybersecurity risks that the money transmitter may face.
Bond amount: $150,000 – $250,000
The Superintendent of Financial Services subjects businesses that deal with cryptocurrencies to apply for a license and procure a surety bond for the benefit of its customers.
Under Section 200.9 of the New York Codes, Rules, and Regulations, a trust must be maintained by a licensee through a qualified custodian as well.
Bond amount: Varies
Cryptocurrency is defined in Senate Bill 5031, and its inclusion in the Uniform Money Services Act clarified. Money transmitters are now mandated to “hold like-kind virtual currencies in the same volume obligated to consumers.”
Also, a virtual currency money transmitter is required to provide a third-party security audit of their electronic systems.
Bond amount: $10,000 – $50,000
Though slowly moving, many states are taking a determined, methodological, and educated approach towards cryptocurrency.
Bear in mind that the thriving industry is still in its infancy, and different states and governmental agencies are treading the regulation issue carefully. But, it is safe to say that more regulation will happen shortly.
Need more information about this surety bond? Call us at 800-333-7800!