Crypto, Blockchain and Mining: Their Effects in Malta

Acknowledgements President: Julia Balzan Social Policy Officer & Policy Paper Leader: Anthea Spiteri S-Cubed Administrative Board: Daniel White, Raisa Grech, Christine Scicluna, Nicole Soundiades. Martina Mangion S-Cubed Executive Board: Dorian Abela, Giulia Marie Tabone, Ryan Mark Debattista, Michela Aquilina, Isaac Grixti, Emma Xuereb Social Policy Subcommittee: Michael Spiteri, Matthew Clark, Christina Stafrace Official Sponsors: PwC Malta, Malta Council for Science and Technology.

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TABLE OF CONTENTS Cryptocurrency ................................................................................................. 4 Introduction ........................................................................................................................................................................... 4 What is Crypto?..................................................................................................................................................................... 4 Buying Cryptocurrency ..................................................................................................................................................... 4 Should one invest in Cryptocurrency .......................................................................................................................... 4 Cryptocurrency and money laundering ..................................................................................................................... 5 Cryptocurrency in Malta ................................................................................................................................................... 5

Mining ...................................................................................................................... 6 Mining and its effects ......................................................................................................................................................... 6

Blockchain ............................................................................................................ 8 What is Blockchain? ............................................................................................................................................................ 8 The Design Principles of Blockchain Technology................................................................................................... 9 Applying Blockchain Technologies in our day-to-day lives ........................................................................... 10

Conclusion ...........................................................................................................12 Bibliography.......................................................................................................12

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CRYPTO Introduction Cryptocurrencies have become the hype over these past few years, especially after the price of Bitcoin rose significantly back in December 2017. Since this massive success and popularity, things have changed. The market has expanded and now sees even the smallest and least experienced investors participating in it. Crypto isn’t just what we call “online money”, it is also what is known as online business transactions, without which banks cannot function as they mostly rely on these transactions and have now moved their business totally online so that it is more accessible.

What is Crypto?

Crypto currency is a medium of exchange created and stored electronically in the blockchain, using encryption techniques to control the creation of monetary units and to verify the transfer of funds.

Bitcoin is the best-known example. It is a decentralised structure, meaning it can be bought, sold and exchanged without the use of an intermediary such as a bank. Satoshi Nakamoto, Bitcoin’s developer, first described the necessity for an “electronic payment system based on cryptographic proof rather than trust.

Buying Cryptocurrency Most bitcoin and other crypto purchases are made through cryptocurrency exchanges. One may buy, sell and hold cryptocurrencies on exchanges and opening an account is similar to opening a brokerage account in that you must authenticate your identity card and offer funding source such as a bank account or debit card. You need a cryptocurrency wallet to store your crypto currencies in. Because cryptocurrency transactions must be validated by miners, each purchase may take 10 to 20 minutes to appear in the account. (https://www.forbes.com/advisor/investing/what-isbitcoin)

Should one invest in cryptocurrency?

Financial experts often warn that cryptocurrency is one of the riskier investment choices. The cryptocurrency market is a volatile one so there can be dramatic swings in prices. Although it is all the rage right now it is still in its infancy, so the recommendation often given by advisors is to keep it as a ‘side investment’ and not too large a portion of one’s portfolio. (https://www.forbes.com/advisor/investing/what-is-bitcoin)

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Cryptocurrency and Money Laundering Cryptocurrencies are still a long way from matching traditional financial channels. They are nevertheless becoming one of the most popular methods for criminals to gather, store and layer their gains. In many jurisdictions cryptocurrencies are either unregulated or underregulated, thereby allowing financial criminals to operate without restriction. According to blockchain analytics firm Ciphertrace, big crypto thefts and frauds totaled $432 million in the first 4 months of 2021. (https:// www.businessinsider.com/us-investors-reported-52-million-crypto-scamlosses-ftc-q1-2021-6%3famp)

Cryptocurrency in Malta In order to determine the best place to sustainably mine cryptocurrency, you must first look at the more sustainable countries and whether or not that country can keep up with the large energy demand. Malta, when compared to the rest of the world, is a sustainable country with a value of 70.7 and a cryptocurrency mining index of 54.5. this results in it being ranked as the 44th most sustainable country for cryptocurrency mining. (Refer to appendix A found in reference 5) In Malta, three bills have been published by the government regarding cryptocurrency: The Malta Digital Innovation Authority Bill, The Technology Arrangements and Services Bill and the Virtual Financial Assets Bill. These are still awaiting parliament approval. The latter would regulate cryptocurrency exchanges in and from Malta.

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MINING Mining and its effects Mining is the process in which new bitcoins are put into circulation which is carried out by solving computational problems around every ten minutes. The computational problems themselves do not require any high levels of mathematical or computer knowledge to work out but rather consists of guesswork; the first minor to come up with a sixty-four-digit hash that is equal to or less than the target hash. The first miner that solves the problem is rewarded with a block of bitcoins and the process repeats itself.

Mining can be carried out alone or in pools. Each have their advantages and disadvantages. Mining alone is increasingly difficult, time consuming and rewards are less likely, but the rewards are kept by the single miner. Mining in a pool/network results in a higher probability of reward as more people are working to solve the computational problem, however, the reward must then be split between all miners taking part. Miners are also responsible for verifying transactions which helps to prevent the problem of double spending. This is the process by which someone is able to spend the same token more than once by creating a copy of the original.

In order to mine, one must invest in powerful equipment such as a graphics processing unit or an application-specific integrated circuit. These are usually quite costly and brings to light the financial risk that is posed by mining; a miner could purchase this equipment but receive no rewards through mining. In this case joining a mining pool is beneficial.

Mining also poses numerous environmental concerns with the main form of pollution being air pollution. The act of mining requires a large number of computers all working at the same time.

Mining bitcoin is responsible for around 13000kg of carbon dioxide emissions per bitcoin mined and the annual electricity consumption for mining bitcoin is around 124.6 TWh which is greater than the consumption of Pakistan or Norway (5). And it is predicted that this consumption will continue to increase. Moreover, mining rigs also produce a substantial amount of heat which would need appropriate cooling systems and in turn more electricity is being consumed. There have been some proposals whereby the heat generated from these rigs would be used to heat up households etc.

A summary of advantages and disadvantages of mining cryptocurrency; • Advantages o Full control over one’s money unlike the normal banking system (decentralized system without government regulations) o The block reward o Very difficult to counterfeit

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o Identity theft is made very difficult as miners are kept anonymous • Disadvantages o energy and time consuming o contributes greatly to carbon emissions o Hardware/equipment expenses o Scams and frauds o The volatility and unpredictability of the cryptocurrency market poses financial and economic risks. o Ultimately cryptocurrencies are still not widely accepted and thus cannot be relied on as your only currency

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BLOCKCHAIN What is Blockchain?

Revolutionary concepts such as cryptocurrencies are, more often than not, built on an underlying technological platform. For crypto, this platform is known as the blockchain. Before looking into blockchains, it is important to understand how the blocks making up the blockchain system are built and set in place.

First, we must define the term ‘node’; a node is one of the many computers that are part of a cryptocurrency network. The current top cryptocurrency networks, namely Bitcoin and Ethereum, are made up of thousands of nodes and these play a key role in the transfer of information within the network. At any given moment, each node may be connected with up to 6 other nodes forming a two-way exchange system.

When a transaction is made across the network, nodes will start to record the transaction details as well as to conduct a list of checks. One of these requirements is checking whether the sender has sufficient funds to make the transfer. Each node will contact 6 other nodes to pass on the new information obtained. Each of the six nodes will continue passing on the information to six different nodes until, after 5 or 6 subsequent rounds, the information about the transaction made will have reached every node in the system. For example: in the Bitcoin network there are currently around 13,000 active nodes. Every node has certainly been reached after 6 hops are completed because: 1.

2.

3.

4.

5.

6.

1 node x 6 6 nodes x 6 36 nodes x 6 216 nodes x 6 1296 nodes x 6 7776 nodes x 6

= 6 nodes = 36 nodes = 216 nodes = 1296 nodes = 7776 nodes = 46656 nodes… therefore surpassing the total number of nodes.

Furthermore, any preceding nodes in this chain will also check with their subsequent nodes for any new information to update themselves. The different nodes are connected through a randomised process, hence enhancing unpredictability, and minimising the risk of any information being hacked. This algorithm in which nodes communicate between themselves is called the ‘gossip protocol’.

Following this process, which only takes a couple of seconds, the transaction is next sent over to the miners so that they can place it in a block. Each block is made up of several transactions and miners would construct these blocks and solve them through mining, which is a computational and mathematical process. After legitimising these blocks of transactions, the miners tie the block to the preceding and subsequent ones in the chain, thus building up the blockchain system.

Thousands of transactions are stored in every block and one block is mined approximately every 10 minutes. Every transaction that ever took place through cryptocurrencies can be searched by its 8

block number; within its assigned block it would be listed by the TXID which is an identification system for these types of transactions.

The Design Principles of Blockchain Technology Now that we have understood what a blockchain system is, it is important to highlight the following underlying principles which make up the foundations for an ethical backbone in blockchain technology.

Firstly, the principle of networked integrity will guarantee a high level of trust in the system. Every bitcoin in the blockchain is validated by referring to its own history and that of the blockchain.

Thus it is very difficult for anyone to commit double-spending. Furthermore, through the input of the different nodes, and the two-way exchange of information between them, any transactions or activities can be verified without the need for interference from third parties, intermediaries, or governments. This significantly reduces the risk of having such parties tamper with data and information.

Secondly, the blockchain system is built on the concept of decentralisation of power. The records of the whole system are not stored on a single, central server which may be more vulnerable to cyber-attacks. Instead, the power is distributed amongst thousands of nodes leading to the mass collaboration of recording and safe-keeping of the data. The latter introduces a number of benefits that are worth mentioning; thanks to mass collaboration, social problems can be targeted more effectively. In addition, it could also lead us to reinstill confidence in the institutions of the state

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by shifting the power to the people, consequently creating real opportunities for long-term prosperity.

Thirdly, blockchain networks are also the answer to the problems of security and privacy. The secure design and transparency of the system allow us to decide for ourselves which of our data and how much of our identity we want to share with anybody else. This can help prevent malicious activities such as identity theft, fraud, and cyberbullying from ever taking place. Furthermore, it inhibits anyone from making use of our online activity for private commercial benefits.

Finally, maintaining a certain standard of inclusion is the key for such innovative projects to grow.

As we know, most of the working class nowadays is still excluded from many economic opportunities and technological advancements, resulting in the ever-growing issue of social inequality. However, when it comes to blockchain systems, lower barriers to entry are supporting entrepreneurship and encouraging participation in global trade. This final point can be enhanced further through the spread of education and awareness about how blockchains work, their potential, the benefits they introduce but also any disadvantages that they might have.

Applying Blockchain Technologies in our day-to-day lives The term ‘blockchain’ is generally associated with cryptocurrencies and digital currencies. In fact, the main use of blockchain systems is that of transferring money and carrying out transactions online. Nevertheless, this underlying technology can be modified and used in several aspects of our lives. Why? Because essentially, blockchain networks are made up of the transfer, validation and recording of data, and this need not be financial data alone.

One innovative use of blockchain systems is that of managing international humanitarian aid. In the wake of humanitarian crises such as the 2010 Haiti earthquake, the conflict in Yemen, or the Syrian crisis, millions of people from around the world come together and donate millions to help those who are most in need. However, unfortunately, many of these funds are often stolen by intermediaries and corrupt officials, depleting the resources before they ever reach their intended source.

Blockchains can play an important role in the distribution of these funds, aiding organisations such as the Red Cross and UNICEF. People would be able to make their donation through the blockchain, monitor its journey through the network and eventually know how each part of it was used at its destination. This removes the need for an intermediary and holds aid groups accountable if any theft takes place. Vulnerable individuals would be able to sign up for certain benefits through the distributed ledger. Double spending is also avoided by keeping track of who received financial aid and who didn’t, thus making sure that the benefits of aid are spread more equitably.

Another great example of the use of internet technologies that are similar to and compatible with blockchain technologies can be found all throughout Estonia. Over the past decade or so the country has made ambitious yet fruitful strides in transforming many of its public sectors into

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digital platforms. As a result, it is widely considered to be one of the world leaders when it comes to digital government.

The activities and systems set up on these technologies include the electronic ID card which gives access to many government and EU services. Accessing bank services, banking transactions, land registry in the real estate market, personal health records, accessing school curriculum, assignments, and grades (e-school) and even voting during elections (i-voting) are all carried out digitally thanks to the application of the basic concepts of blockchain systems.

The benefits of operating on such a system are countless. The use of the Keyless Signature Infrastructure blockchain in Estonia ensures verification, transparency, and accountability without having to rely on humans and their integrity. Thus, cybersecurity is being given priority above all else. Records and data do not lie in a single super-database, hence minimising the risk of this data being hacked. Another advantage is that of reducing the consumption of paper, especially in light of the growing issue of climate change. Unnecessarily long waiting times are also cut short as seen with the example of land transfers which previously used to take up to 3months to be fully completed and are now generally managed in just over a week.

The use of blockchain networks in Estonia is concrete proof that blockchain technologies can not only be used by corporations, with the main aim being to raise, but they can also be utilised by public institutions.

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CONCLUSION With the general election fast approaching, the fact that blockchain, mining, and cryptocurrency were not given any significant importance in any party's manifesto should raise alarm among voters. Large strides still need to be taken from both larger parties and even smaller ones with regards to this sector. The Government of Malta can introduce new policies regarding blockchain considering that it is one of the biggest and fastest growing industries which is yet to be sufficiently regulated.

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