Cryptocurrency: an introduction

We are all familiar with regular cash currency, but in recent years so-called cryptocurrency has also started to emerge. These imaginary coins consist of a unique sequence of digits. They can be used and traded on the internet. It will not be long before these transactions will be subject to regulations and oversight, just like conventional transactions. Before you make any serious cryptocurrency transactions, make sure to familiarise yourself with the ins and outs of this new form of currency.

Crypto coins

Hundreds of different cryptocurrencies now exist, of which Bitcoin (BTC) is now the best-known. Another big name in cryptocurrency is Ether (ETH), which is a token (access right) that allows for the creation of smart contracts.

What is cryptocurrency?

Cryptocurrencies exist on a large network of computers that constantly perform cryptographic calculations to ensure that all digital currencies are immutable and securely stored in the network. The remarkable thing is that this currency cannot be counterfeited or broken. Each currency unit in the network has a password that only the owner owns. With the password, the owner can use their currency units to pay, transfer, or redeem. Paying with cryptocurrency is much like sending an email containing a password, which the recipient can then use to access the coins. Like euros, cryptocurrency can be divided into smaller units like pennies, up to 8 decimal places. The modern technology that supports the network of computers performing complicated calculations is called blockchain technology (in Dutch).

How do you pay with crypto?

Paying with crypto is easy. To pay online, all you need is a payment program or app. To pay with crypto in a shop or restaurant, for example, you need a smartphone. Cryptocurrency is stored in a digital wallet. These digital wallets come in many different shapes and sizes. If you have a digital wallet, you can receive, transfer, and hold cryptocurrencies. You can buy cryptocurrencies online or pay other users for them with cash, based on the current crypto rate.

Cryptocurrency as a means of payment

EU finance ministers will not allow cryptocurrencies as a means of payment until the risks, rules, and oversight have been properly identified and addressed. They do admit that ‘stablecoins’ (linked to the dollar or euro exchange rate) offer opportunities for cheap and fast payments, especially when trading across borders. But the ministers believe that without proper regulation, cryptocurrency poses a great risk to consumers and investors, as well as to financial and monetary stability. That is why they advocate a coordinated, comprehensive approach from the European Central Bank (ECB) and national and European regulators.

What are the benefits?

  • Transactions between sender and receiver happen instantly, without requiring an intermediary.
  • The technology is always available ’in the cloud’. Useful in international trade.
  • The data is reliable because all transactions are verified decentrally. The system is also more resistant to cyberattacks because the information is stored in different locations on the network.

What are the drawbacks?

  • The decentralised nature of the network makes participants' responsibilities unclear: no single party is accountable if something goes wrong.
  • The technology is still evolving; for example, more standardisation is needed so that the new systems can work together.
  • If traditional financial institutions or transaction processors decide to fully or partially adopt the new technology, they will face operational risks in terms of robustness, security, and infrastructure.
  • The rates of cryptocurrencies are highly volatile, which means that the value of these virtual coins can undergo strong and rapid fluctuations. Many owners of these coins use them for speculative investment purposes, which makes them risky.

Registration

Since 21 May 2020, crypto companies have been under the supervision of the Dutch Central Bank ('De Nederlandsche Bank', DNB). This is due to the government's new approach to preventing money laundering and terrorist financing. Any company offering cryptocurrency and fiduciary currency exchange services and/or custodial wallets in or from the Netherlands needs to be registered with DNB. After receiving the required information, DNB will process the registration application.

More information

Dutch Authority for the Financial Markets (AFM, in Dutch)

The Dutch Central Bank (DNB)

Call an advisor at the KVK Financing Desk: 0800 10 14


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