205 Financial Markets and Banking Operations Unit 1

Introduction to Financial Markets,
Functions and Classification. Money
Market, Capital markets, Bond
markets, Commodity markets, Money
markets, Derivatives markets,
Futures markets, Foreign exchange
markets, Crypto currency market

Introduction to Financial Markets
Financial market is a broad term used for
describing any forum where buyers and sellers
meet to trade assets — usually financial
securities such as stocks, bonds, currencies,
options, and derivatives
They help facilitate capital formation and liquidity
for entrepreneurs and businesses
The centralized location provides transparency for
price and availability, and better subjects the
securities to market force of supply and demand.

Functions of Financial Market
 It mobilises savings by trading it in the most
productive methods.
 It assists in deciding the securities price by
interaction with the investors and depending on
the demand and supply in the market.
 It gives liquidity to bartered assets.
 Less time-consuming and cost-effective as
parties don’t have to spend extra time and money
to find potential clients to deal with securities. It
also decreases cost by giving valuable
information about the securities traded in the
financial market

Types of Financial Markets
 Over the Counter (OTC) Market – They
manage public stock exchange, which is not
listed on the NASDAQ, American Stock
Exchange, and New York Stock Exchange. The
OTC market dealing with companies are usually
small companies that can be traded in cheap
and has less regulation.
 Bond Market – A financial market is a place
where investors loan money on bond as
security for a set if time at a predefined rate of
interest. Bonds are issued by corporations,
states, municipalities, and federal governments
across the world.

Types of Financial Markets
 Money Markets – They trade high liquid and
short maturities, and lending of securities that
matures in less than a year.
 Derivatives Market –They trades securities that
determine its value from its primary asset. The
derivative contract value is regulated by the
market price of the primary item — the
derivatives market securities, including futures,
options, contracts-for-difference, forward
contracts, and swaps.
 Forex Market – It is a financial market where
investors trade in currencies. In the entire world,
this is the most liquid financial market.

Money Market,
Money markets are safe, liquid investments that
are well-suited to the small investor. They
typically invest in steady funds such as treasury
bills and commercial paper.
Money market funds are short-term, so funds are
invested for a limited period of time.
Treasury funds or commercial paper funds last
one year or less and 270 days respectively.
Many money market funds offer the option of
selling the fund usually for a smaller profit than
if the money had stayed in the account until the
term ended

There are several money market instruments,
including treasury bills, commercial paper,
bankers’ acceptances, deposits, certificates
of deposit, bills of exchange, repurchase
agreements, and short-lived mortgage and
asset-backed securities.
The instruments bear differing maturities,
currencies, credit risks, and structure and
thus may be used to distribute exposure.
The core of the money market consists of
interbank lending — banks borrowing and
lending to each other using commercial
paper, repurchase agreements and similar
instruments

CAPITAL MARKETS
The origin of the secondary market i.e., stock
exchanges in India can be traced back to the
later half of 19th century.
After the American Civil War (1860-61) due to the
share mania of the public, the number of
brokers dealing in shares increased.
The brokers organized an informal association in
Mumbai named "The Natic Stock and Share
Brokers Association" in 1875.

Increased activity in trade and commerce during
the First World War and Second War resulted in
an increase in the stock trading.
Stock exchanges were established in different
centers like Chennai, Delhi, Nagpur, Kanpur,
Hyderabad and Banaglore
Securities and Contract Regulation Act 1956 gave
powers to the central government to regulate the
stock exchanges.
The SCR Act recognized the stock exchanges in
Mumbai, Kolkata, Chennai, Ahmedabad, Delhi,
Hyderabad and Indore.
The Bangalore stock exchange was recognized
only in 1963.

At present we have 23 stock exchanges and 21 of
them had hardware and software compliant to
solve Y2K problem.
Till recent past, floor trading took place in all the
stock exchanges.
Bombay stock exchange introduced the screen
based trading system in 1995, which is known
as BOLT (Bombay On-line Trading System).
Madras stock exchange introduced Automated
Network Trading System (MANTRA) on Oct 7th
1996.
Apart from Bombay stock exchange, Vadodara,
Delhi, Pune, Bangalore, Calcutta and
Ahemedabad stock exchanges have introduced
screen based trading.

Functions
 Maintains Active Trading: Shares are traded
on the stock exchanges, enabling the investors
to buy and sell securities
 Fixation of Prices: Price is determined by the
transactions that flow from investors' demand
and supplier's preferences.
 Ensures Safe and Fair Dealing: The rules,
regulations and by-laws of the stock exchanges'
provide a measure of safety to the investors.

 Aids in Financing the Industry: The negotiability
and transferability of the securities helps the
companies to raise long-term funds.
 Dissemination of Information: They publish the
share prices traded on daily basis along with the
volume traded. Directory of Corporate information is
useful for the investors' assessment regarding the
corporate.
 Performance Induced: The prices of stock reflect
the performance of the traded companies.
 Self-regulating Organization: The stock exchanges
monitor the integrity of the members, brokers, listed
companies and clients.

BOND MARKETS
The bond market (often called the debt market
or credit market) is a financial marketplace
where investors can trade in government-
issued and corporate-issued debt securities.
Governments typically issue bonds in order to
raise capital to pay down debts or fund
infrastructural improvements.
Publicly-traded companies issue bonds when
they need to finance business expansion
projects or maintain ongoing operations

In fact, recorded debt instruments history
back to 2400 B.C; for instance, via a clay
tablet discovered at Nippur, now present-day
Iraq. This artifact records a guarantee for
payment of grain and listed consequences if
the debt was not repaid
Later, in the middle ages, governments began
issuing sovereign debts in order to fund
wars. In fact, the Bank of England, the
world's oldest central bank still in existence,
was established to raise money to re-build
the British navy in the 17th century through
the issuance of bonds

The first U.S. Treasury bonds, too, were
issued to help fund the military, first in the
war of independence from the British crown,
and again in the form of "Liberty Bonds" to
help raise funds to fight World War I.
The corporate bond market is also quite old.
Early chartered corporations such as the
Dutch East India Company (VOC) and the
Mississippi Company issued debt
instruments before they issued stocks.
These bonds, such as the one in the image
below, were issued as "guarantees" or
"sureties" and were hand-written to the
bondholder.

The bond market is segmented into two different
silos.
 Primary market: Transactions occur directly
between the bond issuers and the bond buyers.
In essence, the primary market yields the
creation of brand new debt securities that have
not previously been offered to the public.
 Secondary market: Securities that have
already been sold in the primary market are
then bought and s old at later dates. Bonds are
traded over the counter (OTC)

DERIVATIVES MARKETS
Derivatives as a tool for managing risk first
originated in the commodities markets.
They were then found useful as a hedging tool
in financial markets as well.
In India, trading in commodity futures has
been in existence from the nineteenth
century with organized trading in cotton
through the establishment of Cotton Trade
Association in 1875
Regulatory constraints in 1960s resulted in
virtual dismantling of the commodities
future markets

The emergence of the market for derivative
products, most notably forwards, futures
and options, can be traced back to the
willingness of risk-averse economic agents
to guard themselves against uncertainties
arising out of fluctuations in asset prices.
Locking-in asset prices, derivative products
minimize the impact of fluctuations in asset
prices on the profitability and cash flow
situation of risk-averse investors.

Derivative is a product whose value is derived
from the value of one or more basic
variables, called bases (underlying asset,
index, or reference rate), in a contractual
manner. The underlying asset can be equity,
forex, commodity or any other asset.
For example, wheat farmers may wish to sell
their harvest at a future date to eliminate the
risk of a change in prices by that date. Such
a transaction is an example of a derivative.
The price of this derivative is driven by the
spot price of wheat which is the
“underlying”.

In the Indian context the Securities Contracts
(Regulation) Act, 1956 (SC(R)A) defines
“derivative” to include –
 A security derived from a debt instrument,
share, loan whether secured or unsecured, risk
instrument or contract for differences or any
other form of security.
 A contract, which derives its value from the
prices, or index of prices, of underlying
securities.
Derivatives are securities under the SC(R)A
and hence the trading of derivatives is
governed by the regulatory framework under
the SC(R)A.

Types of Derivatives
 Forwards: A forward contract is a customized
contract between two entities, where settlement
takes place on a specific date in the future at
today’s pre-agreed price.
 Futures: A futures contract is an agreement
between two parties to buy or sell an asset at a
certain time in the future at a certain price.
Futures contracts are special types of forward
contracts in the sense that the former are
standardized exchange traded contracts.

 Options: Options are of two types - calls and
puts. Calls give the buyer the right but not the
obligation to buy a given quantity of the
underlying asset, at a given price on or before a
given future date. Puts give the buyer the right,
but not the obligation to sell a given quantity of
the underlying asset at a given price on or
before a given date.
 Warrants: Options generally have lives of up to
one year, the majority of options traded on
options exchanges having a maximum maturity
of nine months. Longer dated options are called
warrants and are generally traded over-the-
counter.

 LEAPS: The acronym LEAPS means Long-
Term Equity Anticipation Securities. These are
options having a maturity of up to three years.
 Baskets: Basket options are options on
portfolios of underlying assets. The underlying
asset is usually a moving average or a basket of
assets. Equity index options are a form of
basket options.

Swaps: Swaps are private agreements between
two parties to exchange cash flows in the future
according to a prearranged formula. They can
be regarded as portfolios of forward contracts.
The two commonly used swaps are:
 Interest rate swaps: These entail swapping
only the interest related cash flows between the
parties in the same currency and
 Currency swaps: These entail swapping both
principal and interest between the parties, with
the cash flows in one direction being in a
different currency than those in the opposite
direction.

Swaptions: Swaptions are options to buy or sell
a swap that will become operative at the expiry
of the options. Thus a swaption is an option on
a forward swap. Rather than have calls and
puts, the swaptions market has receiver
swaptions and payer swaptions. A receiver
swaption is an option to receive fixed and pay
floating. A payer swaption is an option to pay
fixed and receive floating

Features of Derivatives:
Derivatives have a maturity or expiry
date post which they terminate
automatically
Derivatives are of three types i.e.
futures forwards and swaps and these
assets can equity, commodities, foreign
exchange or financial bearing assets.

All the transaction in the derivatives
takes place in a future specified date.
Doing this makes it easier to sell
because an individual can take of
markets and take the position
accordingly because one has more
time in derivatives.
The derivatives market is liquid and
thus the transaction can be effected
easily.

A derivative can be used as leverage
instruments. The value of the
derivative can move exponentially in
comparison to the value of its
underlying.
There are no specified limits on the
number of units that can be transacted
in the derivative market as there are no
physical assets for transactions.

Functions of the Derivative Market:
Risk Management: the prices of the
derivates are related to underlying assets.
Also, the derivates cannot be used to
increase or decrease the risk of owning
an asset.
Price discovery: Most often the future
and the forwards market are used as a
price discovery mechanism.

Operational advantage: the derivatives
market is more liquid than the spot
market. So the transaction costs are
lower in this market. Other related
costs like commissions are also lower
than the spot market.
The derivatives market is much more
efficient on account of risk
management, short-selling, price
discovery and liquidity.

COMMODITY MARKETS
In the eighteenth and nineteenth century,
commodity trade was largely influenced by
the shifts in macro economic patterns, the
changes in government regulations, the
advancement in technology, and other social
and political transformations around the
world.
The 19th century has seen the establishment
of various commodities exchanges, which
paved the way for effective transportation,
financing and warehousing facilities in this
arena.

The National Commodity and Derivatives Exchange
Ltd. (NCDEX) started trading in the following
agricultural commodities – Refined soy oil, mustard
seed, expeller mustard oil, RBD palmolein, crude
palm oil, medium staple cotton and long staple
cotton.
Types of Commodity Markets
 Hard commodity: The commodities that are derived
naturally are known as hard commodities.
Examples: Oil, gold, coal, and more
 Soft commodity: All animal livestock or agricultural
products come under soft commodities. Examples:
Sugar, soybean, maize, wheat, and more.

Characteristics of Commodity Market:
(1) It is an association of state individuals. There are rules
and regulations for membership depending on the
constitution of the association.
(2) In an exchange where either one or more than one
commodity can be dealt in, though the farmer is more
common.
(3) There are same fixed rules and regulations far trading
which are determined by the association itself. Those
rules permit future trading including speculation.
(4) Transactions can take place only among matters.
(5) It has great similarity with a stock exchange. On the
whole a commodity market is a kind of organised
market.

Functions of Commodity Market:
1. A commodity market provides a definite place
where the traders can do their transactions under
some standard rules and regulations.
2. The commodity markets far different commodities
make the adjustment between the demand for and
supply of the respective commodities which is
necessary in the interests of industries and trade.
3. The markets provide regular information about the
prices of the commodities prevailing in the markets
as well as their future trends. This is essential for
taking decisions in the business world.

Functions of Commodity Market:
4. In every market there are rules fear
transactions as well as rules for membership. All
these lead to uniformity in the dealings.
5. In every market there is a separate committee
to settle disputes among the members by
arbitration.
6. Those carnality markets which deal in
commodities of international importance provide
opportunities for exportable markets.

FUTURES MARKETS
Futures are widely used in various markets to
hedge against price volatility, and by
speculators who want to take advantage of
price movements. A futures contract gives a
buyer or seller the right to buy or sell a
particular asset at a specific future price.
There are many types of futures, in both the
financial and commodity segments. Some of the
types of financial futures include stock, index,
currency and interest futures. There are also
futures for various commodities, like
agricultural products, gold, oil, cotton, oilseed,
and so on

 Stock Futures: Index futures first appeared
in India in the year 2000. These were
followed by individual stock futures a couple
of years later.
 Index Futures: Index futures can be used to
speculate on the movements of indices, like
the Sensex or Nifty, in the future.
 Currency Futures : This futures contract
allows you to buy or sell a currency at a
specific rate vis-à-vis another currency
(Euro vs USD, etc.) at a predetermined date
in the future.

 Commodity Futures: Commodity futures
allow hedging against price changes in the
future of various commodities, including
agricultural products, gold, silver, petroleum
etc. Speculators also use them to bet on
price movements.
 Interest rate futures: It’s a contract to buy or
sell a debt instrument at a specified price on
a predetermined date. The underlying assets
are government bonds or treasury bills. You
can trade these on the NSE and the BSE.

FOREIGN EXCHANGE MARKETS
The foreign exchange market (also known as
forex or currency trading market or fx) is a
market in which participants can buy, sell,
exchange and speculate on currencies.
It is the most liquid market in the world, as
cash is the most liquid of assets.
It is also the largest financial market with over
$5 trillion in daily transactions, which is
more than the futures and equity markets
combined.

There is no central location, instead money is
traded through a network of international
dealers and brokers.
There are many factors that contribute to a
change in exchange rate: monetary policy,
political stability, interest rates, and imports
and exports

Types of Foreign Exchange Market
 Spot Market : In this market, the quickest
transaction of currency occurs.
 Forward Market: . In this type of market, there
is an agreement to do a trade at some future
date, at a defined price and quantity.
 Future Markets: Future markets work on
similar lines and basic philosophy as the
forward markets.

 Option Market: An option is a contract that
allows (but is not as such required) an investor
to buy or sell an instrument that is underlying
like a security, ETF, or even index at a
determined price over a definite period of time.
Buying and selling ‘options’ are done in this type
of market.
 Swap Market: A swap is a type of derivative
contract through which two parties exchange
the cash flows or the liabilities from two different
financial instruments. Most swaps involve these
cash flows based on a principal amount.

Functions of Foreign Exchange Market
 Transfer Function: The basic and the most
obvious function of the foreign exchange
market is to transfer the funds or the foreign
currencies from one country to another for
settling their payments. The market basically
converts one’s currency to another.
 Credit Function: The FOREX provides short-
term credit to the importers in order to
facilitate the smooth flow of goods and
services from various countries. The
importer can use his own credit to finance
foreign purchases.

Functions of Foreign Exchange Market
 Hedging Function: The parties in the foreign
exchange are often afraid of the fluctuations
in the exchange rates, which means the
price of one currency in terms of another
currency. This might result in a gain or loss
to the party concerned.

Features of Foreign Exchange Market
1. High Liquidity : The traders in this market are
free to buy or sell the currencies anytime as per
their own choice.
2. Market Transparency: There is much clarity in
this market. The traders in the foreign exchange
market have full access to all market data and
information. This will help to monitor different
countries’ currency price fluctuations through
the real-time portfolio.

Features of Foreign Exchange Market
3. Dynamic Market: The foreign exchange
market is a dynamic market structure. In these
markets, the currency values change every
second and hour.
4. Operates 24 Hours: The Foreign exchange
markets function 24 hours a day. This provides
the traders the possibility to trade at any time.

CRYPTO CURRENCY MARKET
The prefix crypto- stands for "cryptography,"
which is a technology that keeps information
safe and hidden from attackers.
You may have heard of cryptography in history
class — it was used to send and receive secret
messages by the Allied Forces in World War II.
In present day, computer technicians put
cryptography to use in many different ways.
One of those ways is cryptocurrency!

Cryptocurrency as "an electronic money created
with technology controlling its creation and
protecting transactions, while hiding the
identities of its users.“
The terms “cryptocurrency” and “virtual currency,”
have generally been applied to tokens that not
only represent a store of value, but that can be
used as a medium of exchange.
The terms have also been applied more broadly,
to encompass digital assets, whether value is
derived as a potential medium of exchange,
store of value, utility function, or otherwise.

“Utility tokens” refer to coins that serve a non-
incidental functional purpose, or give the owner
a right to access goods, services, licenses, etc.
Some utility tokens may constitute securities,
while others do not. “Securities tokens,”
sometimes referred to as “investment tokens,”
are tokens that represent a security interest,
based on a transaction that constitutes a
securities transaction under the Howey Test.
Classification of various digital assets as
“securities” is the subject of ongoing analysis
with an uncertain future.

Cryptocurrency Market Size and Technology
The cryptocurrency market cap has been
projected to reach as high as $1-2 trillion in
2018.
The market cap of Bitcoin exceeded $70 billion,
with peak trading volumes around $3 billion per
day.
Technology consulting firm CB Insights has
identified 27 ways blockchain can fundamentally
change processes as diverse as banking,
cybersecurity, voting, and academics.

Cryptocurrency Market Size and Technology
The World Economic Forum estimates that by
2027, 10% of global GDP will be stored on
blockchain technology.
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 cheap electricity prices.

SIGNIFICANT TANGIBLE BENEFIT OF USING A
CRYPTOCURRENCY.
1. Buying goods and services with cryptocurrencies takes
place online and does not require disclosure of
identities
2. Peer-to-Peer Purchasing: They do not involve
financial institution intermediaries. For merchants, the
lack of a “middleman” lowers transaction costs
3. Programmable, “Smart” Capabilities:
cryptocurrency-funded organization can include voting
rights in the currency’s software code.
Cryptocurrencies could also include fractional
ownership interests in physical assets such as art or
real estate.

Cryptocurrency Technology
Blockchain technology underlies Bitcoin and many
other cryptocurrencies. It relies on a public,
continuously updating ledger to record all
transactions that take place.
Blockchain is groundbreaking because it allows
transactions to be processed without a central
authority—such as a bank, the government, or a
payments company.
The Swedish government, for example, is testing the
use of blockchain technology to record land
transactions, which are currently recorded 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.

Cryptocurrency Mining : “Mining” refers to a
step whereby two things occur: Cryptocurrency
transactions are verified and new units of the
cryptocurrency are created. Effective mining
requires both powerful hardware and software.
The largest pools include AntPool, F2Pool, and BitFury,
with AntPool alone controlling over 19% of all mining.
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 cheap electricity
prices.

Cryptocurrency Exchanges
Cryptocurrency exchanges are websites where individuals
can buy, sell, or exchange cryptocurrencies for other
digital currency or traditional currency.
The exchanges can convert cryptocurrencies into major
government-backed currencies, and can convert
cryptocurrencies into other cryptocurrencies.
Some of the largest exchanges include Poloniex, Bitfinex,
Kraken, and GDAX, which can trade more than $100
million (equivalent) per day.
Almost every exchange is subject to government anti-
money laundering regulations, and customers are
required to provide proof of identity when opening an
account.

Cryptocurrency Wallets
Cryptocurrency wallets are necessary for users to
send and receive digital currency and monitor
their balance. Wallets can be either hardware or
software, though hardware wallets are
considered more secure.
For example, the Ledger wallet looks like a USB
thumb drive, and connects to a computer’s USB
port. While the transactions and balances for a
bitcoin account is recorded on the blockchain
itself, the private key used to sign new
transactions is saved inside the Ledger wallet

TYPES OF WALLETS
• Wallets are of different types. They are;
• Online wallets,
• Desktop wallets,
• Mobile wallets, and
• Hardware wallets.
• Wallet services are usually offered by the crypto
exchanges and the promoters of different coins.

CRYPTOCURRENCY…….
• Jan Lansky, an active researcher and writer in
cryptocurrency has given six requirements for
considering a particular currency as cryptocurrency.
• One is that the currency system does not require a central
authority.
• Secondly, the system keeps an overview of cryptocurrency
units and their ownership.
• The third requirement is that the system defines whether new
cryptocurrency units can be created, defines the
circumstances of their origin and how to determine the
ownership of these new units.
• The fourth requirement is that the ownership of
cryptocurrency units must be proved exclusively using
cryptography.
• The fifth one is that the system must allow the owners of
cryptocurrency units to frequently change their identity
which is maintained in the system using cryptography.
• And finally, if two different instructions for changing the
ownership of the same cryptographic units are
simultaneously entered, the system performs at most one of
them.

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A to B
50
B to C
2
0
BTC
10
B
The Economic
Benefit for
maintaining the
super computing
power to solve the
math problem is
new Bitcoin

A
D C
A to B
50
B to C
25
BTC
50
BTC
25
A to B
50
B to C
25
A to B
50
B to C
Broadcas
ting
Mine
rs
Private Address:
Public Address:
A to B
50
B to C
2
1
BTC
10
B
Solving the
math
problem is
called
Proof of
Work
Mining

A
D C
A to B
50
B to C
25
BTC
50
BTC
25
A to B
50
B to C
25
A to B
50
B to C
Broadcas
ting
Mine
rs
Private Address:
Public Address:
A to B
50
B to C
2
2
BTC
10
B
Proof of work
Mining
The minor with the
who has the PoW
can add the
broadcasted
transaction into the
the blockchain
network

A
D C
A to B
50
B to C
25
BTC
50
BTC
25
A to B
50
B to C
25
A to B
50
B to C
Broadcas
ting
Mine
rs
Private Address:
Public Address:
A to B
50
B to C
2
3
BTC
10
B
Proof of
Work
Mining
B to D
10
The Minor
will add
the block
in the
blockchain

MINERS AND TRANSACTION VALIDATION
• Miners are computer nodes in the network with super
computing power
• The minors will compete to solve a system generated
cryptographic puzzle to get a turn to add a transaction block
into the bitcoin blockchain.
• The first miner solving the cryptographic puzzle or math
problem will get the turn.
• So, whenever a transaction is broadcasted in the bitcoin
network, the miners themselves will engage in a competition
to solve the puzzle to get a turn for transaction validation.
• This is done by them for getting some economic benefit or
reward.
• The reward for miners in the bitcoin network is Bitcoin.

PROOF OF WORK
MINING
• The process of solving the crypto puzzle or math
problem is called Proof of Work Mining.
• A very important point to be noted here is that
new bitcoin coins are created in the bitcoin
network only through proof of work mining.
• So Bitcoin mining has a two-fold purpose. It allows
for the creation of new coins and facilitates the
processing of transactions in the network.
• To become a Bitcoin miner, a person first needs a
computer and mining software. Moreover, the
person must be part of the bitcoin network with a
digital wallet.

WHAT IS WRONG WITH MINING?
• Mining can be a very lucrative job.
• However, the non-stop attempts by miners for
solving the puzzles by constantly running their
computers require loads of electricity.
• Moreover, the cost of mining hardware is very high.
• So, proof of work mining is very
expensive, labour intensive and
environmentally unfriendly.
• The heavyuse of electricity for mining
makes the process environmentally
unfriendly.

Types of Cryptocurrencies
Currently, there are two major categories of
cryptocurrencies: those utilized for the purchase
of goods and services and those that allow for
the creation of “smart contracts,” which are
agreements that enforce themselves via code
rather than courts.
There won’t be one supreme digital currency…A
kind of crypto-pluralism is taking hold.” Though
Bitcoin and Ethereum comprise the majority of
the cryptocurrency market share

there are over 1,000 cryptocurrencies in existence
right now (called “altcoins”); over 600 have
market capitalizations of over $100,000.
Bitcoin : Released in 2009 by someone under the
alias Satoshi Nakamoto, Bitcoin is the most well
known of all cryptocurrencies. Despite the
complicated technology behind it, payment via
Bitcoin is simple. In a transaction, the buyer and
seller utilize mobile wallets to send and receive
payments. The list of merchants accepting Bitcoin
continues to expand, including merchants as
diverse as Microsoft, Expedia, and Subway, the
sandwich chain. Other currencies like Bitcoin
include Litecoin, Zcash and Dash, which claim to
provide greater anonymity.

Ether and Ethereum
Ether and currencies based on the Ethereum
blockchain have become increasingly popular. In
August 2017, its market capitalization was around
$28 billion. At one point, financial analysts had
anticipated that Ether’s market capitalization would
surpass that of Bitcoin (the “flippening”). However,
issues with Ethereum technology have since
caused declines in value. Ethereum has seen its
share of volatility. Like Bitcoin, in mid-January 2018,
the price of ethereum also experienced a plummet
from close to $1,400 to under $1,000 within a few
day’s time.

Other Popular Cryptocurrencies
Litecoin: Launched in 2011, Litecoin functions
similarly to Bitcoin in that is also open sourced,
decentralized, and backed by cryptography.
However, it was intended to serve in a
complementary role to Bitcoin, “the silver to
Bitcoin’s gold.” Litecoin has a faster block generate
rate and faster transaction confirmation.
Dash: Released in 2014 as “Darkcoin,” Dash has
since re-branded and offers more anonymity for its
users due to its decentralized mastercode network.
It utilizes something called a “Masternode” network
which has a more robust foundation than Bitcoin.

Zcash: Released in October 2016, Zcash is a
relative newcomer in the space. However, there
are claims that it is the first truly anonymous
cryptocurrency in existence due to its
employment of zero knowledge SNARKS, which
involves no transaction records whatsoever. The
technology ensures that, despite all the
information being encrypted, it is still correct
and that double spending is impossible.

Monero: Monero possesses unique privacy
properties. For example, Monero enables complete
privacy by leveraging a technique called “ring
signatures.” It’s become popular in the dark web
black market, where users purchase everything
from drugs to firearms.
Ripple: Released in 2012, Ripple offers instant and
low-cost international payments. Ripple utilizes a
consensus ledger as its method of verification and
doesn’t require mining—which distinguishes it from
Bitcoin and other cryptocurrencies. It thus requires
less computing power.

Japan Is the First to Take an Unambiguous,
Encouraging Regulatory Approach : Japan
has also mandated that by October 1, any
Bitcoin or “alternative coin” must be registered
with the Japan Financial Services Agency and
be subjected to annual audits. Though the
registration is expensive and demanding
(including a three-year business plan and anti-
money laundering requirements), many parties
are rushing to get registered because they
recognize that the handsome reward includes
“voracious” Japanese retail investors

 US regulators have been less than keen about the rise
of virtual currencies. Take initial coin offerings (ICOs) for
example
 China. China has banned ICOs, called on local
exchanges to stop trading in cryptocurrencies, and
limited mining. Bitcoin and other cryptocurrency trading
are still permitted to be traded, but only via over-the-
counter (OTC) markets, which is a slower process that
may increase credit risk.
 South Korea. South Korea has become a hub for
crypto trading, for housewives and students alike. South
Korea’s won accounted for over 10% of Bitcoin trades in
the second half of 2017 and was the top currency for
transactions in Ethereum until late in the year.

205 Financial Markets and Banking Operations Unit 1

205 Financial Markets and Banking Operations Unit 1

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