Startups, businesses, and other organizations are increasingly favouring the introduction of the digital decentralized based network to track and strengthen their digital assets and transactions – blockchain. Quite a mouthful; so imagine a distributed database that maintains a shared list of records (like Excel) where the records in this case are called blocks. Each block is encrypted and it holds all the data (history) from previous blocks, forming a chain.
Blockchain is made up of two components; a decentralized network to verify secure transactions which cannot be tampered with by any organization (such as banks) and a fixed cryptographic ledger where records or digital asset cannot be changed, corrupted or hacked.
So why opt for Blockchain? Blockchain gives a constant - Digital assets and transactions cannot be accessed or copied. Data is mined into a block by using a time-stamped link defined as a hash, chaining blocks together on a network of nodes. The greater the distribution of nodes, the stronger the trusted network. Whilst blockchain verifies each transaction through the Proof-of-Work – hashing blocks together to verify transactions into the ledger – it ensures that cryptocurrency isn’t spent more than once. Hence, making it secure, unique and trackable.
However, fraud and breaches have been reported due to organizations trying to centralize a decentralized system. Hence, vulnerabilities lie in the systems that are connected to blockchain and not blockchain itself.
Cryptocurrency. To understand how blockchain technology works, one needs to be familiar with cryptocurrency. Bitcoin, the most widely used cryptocurrency is a public blockchain, operating on a peer-to-peer network. In layman's terms, two users exchanging goods without a 3rd party interaction. Another cryptocurrency is Ethereum, however, unlike Bitcoin, Ethereum is a private blockchain which uses blockchain-as-a-service (BaaS). Instead of mining for bitcoin, the miners work to earn tokens called Ether. Ether is used by application developers to pay for transaction fees and services on the Ethereum network which is done through smart contracts. Smart contracts turn blockchain as the middleman to process legal contracts, business agreements, and automated data exchange.
What is ICO? Initial Coin Offering is an innovative way companies are offering shares through digital assets called tokens - such as Bitcoin or Ethereum. An ICO is launched by ‘crowdfunding’, through the presale of cryptocurrency or tokens to fund the development of crypto-projects. This is where an Ethereum smart contract is issued through an application code. Investors are offered tokens that can be traded on all cryptocurrency exchanges. When investors register, they are given an Ethereum wallet address so that the tokens will be automatically distributed. If a project is not successfully funded, funds are safely returned back to the distributor.
The purpose of ICO is to connect tokens with the application and to leverage smart contracts to add more value to the tokens, which could later be sold or traded for other cryptocurrencies in demand.
Is ICO changing the Fintech Industry? ICO’s work by bypassing intermediaries, lowering costs and favouring end users. Hence, ICO tokens are a tool that can radically change currency and the financial institution, in terms of shares, securities, stock creation and trade.
However, due to lack of regulation, investors are concerned with the increased risk of fraud and money laundering. Also, since it is currently unregulated, investors can face large losses as well as large profits. Volatility is a trait that does not attract risk-conscious clients.
Blockchain in Malta. Malta has been one of the first countries in Europe to promote Blockchain technology. The Cabinet has recently also accepted the first draft of the national strategy to promote Bitcoin & Blockchain technology. Aware of its lack of regulation, Malta needs to develop an appropriate legal regulatory framework, the right tax system and a sustainable infrastructure to support its growth.
What about cryptocurrencies in the iGaming industry? Since Malta’s iGaming industry keeps booming, being on the front-line of accepting blockchain technology can result in growth to the island’s fintech industry. The MGA has already pledged support to government’s initiative on blockchain technology in Malta and have revealed plans on regulating use of cryptocurrencies in the gaming industry.
Up until late last year, the MGA had taken a cautionary approach to Bitcoin gambling licenses requests due to its unregulated risk. Recognising the challenges to regulate and protect players and their reputation, the MGA’s recent white paper stated that the MGA will now be regulating cryptocurrencies in the gaming industry due to its fast and cost effective alternative to traditional payment methods. This change has been brought about due to competitive gambling jurisdictions, placing Malta at a favourable place within the iGaming sector since Isle of Man and Antigua have already accepted Bitcoin deposits. Implementing a regulatory framework and licensing Blockchain technology will keep on attracting investment to the Maltese islands thus strengthening the financial and IT industry.
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Written by the Konnekt IT & iGaming Recruitment Team