WHAT IS DIGITAL CURRENCY?
Digital currency, also described as cryptocurrency, is a
peer-to-peer electronic cash system where people can
engage in financial transactions without a centralized
server or intermediary financial institution, 1 for example,
sending currency electronically without going through
a bank. In other words, digital currency is a digital
asset in the form of an electronic payment.
Moreover, the value of this digital currency is not tied
to that of a particular country or other currency, but is
instead determined by the market principals of supply
and demand.
HOW DOES DIGITAL
CURRENCY WORK?
There are companies across the world known as “mining
companies” or “miners” that maintain the “block chain”
ledger of transactions that is publicly available and
decentralized. Block chain is basically a decentralized
shared public ledger or list of entries of all confirmed
digital currency transactions. Once a transaction has
been recorded, the ledger cannot be unilaterally altered,
and can only be adjusted by the agreement of involved
parties. Miners are incentivized to maintain the block
chain through the awarding of newly created digital
currency, transaction fees (also in the form of digital
currency), or some combination of the two.
The miner companies will often sell the digital currency
to specialty brokers in the industry. The brokers will
then sell to individuals, often times through a local or
international cryptocurrency exchange. One such digital
currency is bitcoin; and while bitcoin is only one of many
different digital currencies in the market, it is currently
the most well known and most traded.
SO HOW DOES BITCOIN WORK?
In simple terms, the first step for an individual to
purchase bitcoin, or other digital currencies, is to set up
a bitcoin wallet online with a cryptocurrency exchange
that accepts the investor’s local country currency.
That individual then purchases the digital currency
using the local currency. The miner companies collect
information related to this transaction and add it to the
ledgers, which maintain all historic information about
actual transfer amounts and dates, but not the names
of the individual buyers and sellers.
This ledger and its information is public and cannot
be altered, but the individuals remain anonymous.
101 EB5 INVESTORS M AGAZINE
Once the investor’s bitcoin wallet has been funded, the
investor can instantly transfer the bitcoin electronically
to another bitcoin buyer or exchange. 2 The investor then
electronically sends the bitcoin to a cryptocurrency
exchange in the U.S. and then exchanges or sells the
bitcoin for its equivalent in U.S. dollars.
This effectively avoids the need to go through a
standard bank or financial institution where currency
exchange and transfer limitations would be imposed.
The investor can then have the U.S. dollars transferred
to an EB-5 project for investment in a job creating
enterprise. 3 Private individuals also have the ability to
initiate a sale or transfer of digital currency between
each other without going through an exchange. To do
so they would "broadcast a transaction," i.e., publish on
the block chain general ledger that they are transferring
X amount of bitcoins.
PROBLEMS WITH USING BITCOIN
OR OTHER DIGITAL CURRENCIES
Unfortunately, the reality of using digital currency is not
so simple. While some countries such as Japan and
South Korea are easing government restrictions, other
countries such as China are increasing restrictions on the
purchase and exchange of digital currency. In September,
the government of China issued a new rule prohibiting all