The Problem With Exchanges

Virtual Currency Reality Manipulation

Within the digital currency universe there exists two forms of medium of exchange: cryptocurrencies, which are either derived from (in the case of tokens) or a part of themselves (in the case of coins), a technological protocol called a Blockchain, and virtual currencies, which are visually represented on a piece of software and derived from the imagination of the issuer. In the case of cryptocurrencies, the medium of exchange is decentralised. This means that the way in which the medium of exchange is configured is done in such a way that no one person or entity can manipulate the source of value ascription that is the core utility of the medium of exchange — that being its supply.

In the case of virtual currencies, the opposite is the case: virtual currencies are highly-centralised. In fact, virtual currencies depend upon a centralised form of governance in order to operate. Today a paradox exists which may be serving to undermine the nature of evolution of the digital currency market.

That paradox is this: whereas nearly all digital currencies are cryptographic decentralised mediums of exchange, when they are traded on “cryptocurrency exchanges” they most often immediately become units of virtual centralised exchange, subject to the absolute control and power of the governors of the exchange.

To understand this more clearly, let’s look at how a typical cryptocurrency exchange operates. In Fig. 1, the difference between decentralised cryptocurrencies and centrally-issued virtual currency units is easy to see. First of all, a cryptocurrency holder sends in a cryptocurrency to the exchange’s “storage wallet”. Once inside the storage wallet (often ascribed variously with what look like individual addresses so that the virtualisation of the cryptocurrency is masked), someone running the exchange (often manually) ascribes the unit of virtual currency to the appropriate account holder’s virtual currency wallet.

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