A PRIMER ON CRYPTOCURRENCIES By REN CICALESE III, CPA, MST
ALLOY SILVERSTEIN ACCOUNTANTS AND ADVISORS
Over the last several years, the economy has seen the development of new currencies in the national marketplace. Traditionally, a consumer would have to pay with either hard cash or credit when closing a transaction. Those are no longer the only options.
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MARCH/APRIL 2018 | NEW JERSEY CPA
Retailers such as Overstock.com, Microsoft, Shopify and others are now accepting cryptocurrencies as a payment method. Unfamiliar with cryptocurrencies? You’re not alone. You’ll need to become familiar with these types of transactions, as all signs point to them becoming more prominent in the market. BLOCKCHAIN If a transaction is taking place in a virtual currency, it is using blockchain to complete the payment process. Blockchain is essentially a network of computers that maintain a database or ledger listing the transactions taking place. It is a public database that is stored on computers across the world. Blockchain has security built into the database that prevents the alteration of transaction data. In order for data to be altered, the world-wide computer network would need to be attacked at the same time. The inherent security within the database also allows for the easy verification of the data. Blockchain is a decentralized system, meaning there are no authorities maintaining rules or regulations. Every blockchain transaction is encrypted with a private key and a public key. The
private key belongs to the owner of the cryptocurrency, and it is used to encrypt the data flow between the computer networks. The public key is used by the computer network to decrypt the data. The network then uses a digital signature, which is a combination of the private key and transaction data, to verify the authenticity of the transaction. All transaction data is presented in the form of blocks. In order for a transaction to be completed, all the blocks in the blockchain must be present. As you can see, there are many benefits of using blockchain to complete a transaction. Using blockchain establishes an identity in a digital marketplace. The public key is how you are identified in the database, and the private key is protected and provides your consent to a transaction. Also, the transactions are completed in a highly secured, decentralized database. Blockchain is used in most virtual currency transactions, but it is also expanding into other areas in the marketplace. For example, banks are researching and developing methods on how to use blockchain in their businesses. Some banks have even gone so far as to develop new cryptocurrencies that can be used to transact busi-