SCHOOL OF COMPUTING

DEPARTMENT OF COMPUTER SCIENCE AND ENGINEERING

UNIT – I- CRYPTOCURRENCY TECHNOLOGIES – SCSA 3059

 UNIT- 1

DIGITAL MONEY AND CRYPTOGRAPHY

Physical Money and Digital Money - History of Money: Forms of Money, Fiat Currencies, Currency Pages,
Quantitative Easing - Interbank Payment Mode: Same Bank, Different Bank, Correspondent Bank, Central Bank,
International Payment, Cryptography: Encryption and Decryption, Hashed, Digital Signature.

Money:
The generally accepted academic definition of money usually says that money needs to
fulfill three functions:
• a medium of exchange,
• a store of value,
• a unit of account.
Medium of exchange means it is a payment mechanism—you can use it to pay someone for
something, or to extinguish a debt or financial obligation
Store of value means that in the near term your money will be worth the same as it is today. To
be a good store of value, you need to be reasonably confident that your money will buy you more
or less the same amount of goods and services tomorrow, next month, or next year.
Unit of account means it is something that you can use to compare the value of two items, or to
count up the total value of your assets.

Definition :
Money is a commodity accepted by general consent as a medium of economic exchange. It
is the medium in which prices and values are expressed. It circulates from person to person and country to
country, facilitating trade, and it is the principal measure of wealth.

CBDC : Central Bank Digital Currency

Physical Money:

Definition:
Physical money refers to tangible currency, typically in the form of coins and
banknotes that is issued by a central authority such as a government or central bank.

Characteristics:
1. Physical presence: Physical money exists in a physical form, allowing for direct
exchange between parties.
2. Universally accepted: Physical money issued by a reputable authority is generally
accepted as a medium of exchange within a specific jurisdiction.
3. Limited supply: The supply of physical money is regulated by the issuing
authority, controlling the printing or minting of new currency.

Advantages:
1. Tangibility: Physical money can be physically held and counted, providing a sense
of security and familiarity to some individuals.
2. Widely accepted: In most economies, physical money is accepted as a means of
payment by businesses and individuals.
3. Accessibility: Physical money does not require technological infrastructure or
access to the internet, making it available to a wide range of users.

Disadvantages:
1. Inconvenience: Physical money can be bulky and heavy to carry, especially for
large transactions.
2. Security risks: Physical money can be lost, stolen, or damaged, leading to potential
financial losses.
3. Costly production: The production, distribution, and management of physical
money incur significant costs for governments and central banks.

Digital Money:

Definition: Digital money, also known as electronic money or digital currency, refers to
monetary value stored electronically and typically represented as digital records or entries.

Characteristics:

1. Electronic form: Digital money exists only in electronic or digital format, usually
recorded on computer systems or stored on electronic devices.
 2. Digital transactions: Digital money facilitates electronic transactions, including online
purchases, electronic fund transfers, and mobile payments.
3. Decentralized or centralized: Digital money can be decentralized, like cryptocurrencies,
or centralized, issued and regulated by a central authority like a central bank.

Advantages:
1. Convenience: Digital money enables fast and convenient transactions, often through
online platforms or mobile applications.
2. Security: Digital transactions can be encrypted and authenticated, reducing the risk of
counterfeiting and fraud.
3. Programmability: Some forms of digital money, such as cryptocurrencies, allow for
programmable features like smart contracts and automated transactions.

Disadvantages:
1. Dependency on technology: Digital money relies on technological infrastructure and
connectivity. Outages or technical issues can disrupt transactions.
2. Cybersecurity risks: Digital money is vulnerable to hacking, data breaches, and other
cyber threats, requiring robust security measures.
3. Accessibility: Digital money may not be accessible to individuals without access to
technology, internet connectivity, or digital literacy skills.

It's important to note that digital money can coexist with physical money in an economy, and
various forms of digital currencies are emerging, including central bank digital currencies
(CBDCs) and stablecoins. These developments are reshaping the landscape of money and
payments systems.

History of money:
The history of money is a fascinating journey that spans thousands of years and involves
the development of various forms of currency.

1. Barter System: In the early stages of human civilization, people relied on the barter
system, which involved the exchange of goods and services directly without a
standardized medium of exchange. For example, a farmer might exchange grain for
livestock with another farmer.

2. Commodity Money: As societies grew and trade expanded, certain commodities with
intrinsic value began to be used as a medium of exchange. Items such as cowrie shells,
salt, beads, and precious metals like gold and silver emerged as forms of currency. These
commodities were widely accepted due to their usefulness and scarcity.
 3. Precious Metal Coins: The use of precious metals as a medium of exchange evolved
into the minting of coins. Ancient civilizations, including the Greeks, Romans, and
Chinese, started to produce standardized coins with designated weights and purity. This
made trade more efficient, as the value of the coins was guaranteed by the precious metal
content.

4. Paper Money: The introduction of paper money marked a significant milestone in the
history of money. It originated in China during the Tang Dynasty (7th century) and was
initially issued by merchants as receipts for the storage of precious metals. Over time,
paper money began to be issued by governments and gained wider acceptance as a
convenient form of currency.

5. Fiat Currency: Fiat currency is money that has value because a government declares it
as legal tender, rather than being backed by a physical commodity like gold or silver. Fiat
money became widespread during the 20th century, as governments gradually moved
away from the gold standard and adopted a system of centralized control over the money
supply.

6. Electronic Money: With the advancement of technology, electronic forms of money

have become increasingly prevalent. This includes various forms of digital currencies,
such as cryptocurrencies like Bitcoin, which operate on decentralized networks using
cryptography to secure transactions.

The evolution of money has been driven by the need for a more efficient and universally
accepted medium of exchange. The transition from barter to commodity money, then to coins,
paper money, fiat currency, and electronic money reflects the ongoing development and
adaptation of financial systems to meet the needs of expanding economies and changing
societies.

Forms of Money:
There are various forms of money that have been used throughout history and continue to
be used today. They are:

1. Cash: Cash refers to physical currency, such as coins and banknotes, issued by a
government and widely accepted as a medium of exchange. It is tangible and can be
directly exchanged for goods and services. Cash is often used for small transactions and
in situations where electronic payment methods are not available or preferred.

2. Bank Deposits: Bank deposits are funds held in a bank account. When you deposit
money into a bank, it becomes a liability of the bank, and you have a claim on that
 amount. Bank deposits can be accessed through checks, debit cards, or online transfers,
allowing for electronic transactions.

3. Digital Currencies: Digital currencies are forms of money that exist purely in digital or
electronic form. They are typically decentralized and operate on computer networks.
Examples of digital currencies include cryptocurrencies like Bitcoin, Ethereum, and
Litecoin. Digital currencies use cryptographic techniques to secure transactions and
control the creation of new units.

4. Electronic Money: Electronic money, also known as e-money or digital money refers to
money that exists only in electronic form. It can be stored on electronic devices or online
platforms and used for online transactions. Electronic money is often issued and
controlled by financial institutions or electronic payment providers.

5. Traveler's Checks: Traveler's checks are a type of prepaid instrument that can be used as
a convenient and secure alternative to cash while traveling. They are issued by financial
institutions and can be replaced if lost or stolen. Traveler's checks were more commonly
used in the past but have become less popular with the advent of electronic payment
methods.

6. Money Orders: Money orders are payment instruments issued by banks or other
financial institutions. They are typically used for transferring funds or making payments
when the recipient may not have a bank account. Money orders are prepaid and can be
used for secure and reliable transactions.

It's important to note that the forms of money used can vary across different countries and
regions, and the rise of digital and electronic payment methods has significantly transformed the
way we handle and exchange money in recent years.

Fiat Currencies:
Fiat currency is a type of currency that is declared by a government as legal tender and is
not backed by a physical commodity like gold or silver. The value of fiat currency is derived
from the trust and confidence that people have in the issuing government and its ability to
maintain the currency's value.

Key characteristics:

1. Government Declaration: Fiat currencies derive their value from a government's

declaration that they are acceptable as a medium of exchange within a specific
 jurisdiction. The government mandates that these currencies must be accepted for
payment of debts, taxes, and other transactions.

2. Centralized Control: Fiat currencies are typically under the control of a central bank or
monetary authority, which manages the money supply, interest rates, and other monetary
policies to regulate the economy.

3. Legal Tender: Fiat currencies are considered legal tender, which means they must be
accepted as payment for goods and services within the jurisdiction where they are issued.
However, private businesses are generally free to establish their own policies regarding
accepted forms of payment.

4. Value Determination: The value of fiat currencies is primarily determined by factors

such as supply and demand, economic conditions, government policies, and investor
sentiment. Exchange rates between different fiat currencies can fluctuate based on these
factors.

Examples of fiat currencies:

1. United States Dollar (USD): The USD is the currency of the United States and is one of
the most widely accepted and traded fiat currencies globally.

2. Euro (EUR): The Euro is the currency used by many countries within the Eurozone,
including Germany, France, Italy, and Spain. It was introduced in 1999 as an electronic
currency and later as physical notes and coins.

3. British Pound Sterling (GBP): The GBP is the currency of the United Kingdom and is
one of the oldest fiat currencies in the world.

4. Japanese Yen (JPY): The JPY is the currency of Japan and is known for its use in carry
trades and as a safe-haven currency.

5. Chinese Yuan (CNY): The CNY, also known as the Renminbi (RMB), is the currency of
China and is managed by the People's Bank of China.

These examples represent just a few of the numerous fiat currencies in circulation
around the world. The value and stability of fiat currencies can vary based on economic and
political factors, and governments employ various measures to manage and stabilize their
respective currencies.
Currency Peg :
A currency peg is when the government or monetary authority of a country fixes a
specific exchange rate with a foreign country’s currency. A currency peg could also be with
reference to a set of currencies or with reference to other widely traded commodities.

A currency peg is typically used to ensure the stability of the exchange rate between
two countries, especially those that frequently trade with each other. A common example is the
dollar peg, which over 50 countries have adopted since the dollar is one of the more stable
currencies globally.

Advantages of a Currency Peg :

1. A currency peg prevents excessive volatility in a country’s currency due to market
conditions and hence prevents a potential currency crisis.
2. Investments and trading also become easier between the two countries when their
currencies are pegged.
3. Businesses benefit from a stable exchange rate, as their international customers do not
need to hedge for forex risk.
4. A currency peg maintains the competitiveness of a country’s exports (for example,
Vietnam) for major importing destinations, such as the US and EU, as sourcing costs
remain fixed.
5. Similarly, weaker countries benefit from currency pegs as their imports from countries,
such as the US or the EU, remain at a constant price.
6. It disciplines the monetary authority in a country.

Disadvantages of a Currency Peg:

1. In the case of sizeable fluctuations in the reference currency or commodity, the domestic
currency also experiences significant volatility.
2. If a currency is pegged at an overly low exchange rate, it deprives domestic customers the
purchasing power of buying foreign goods.
3. If a currency is pegged at too high a rate, domestic companies will import more than they
produce.
4. A currency peg can leave a country at risk to speculators, who can short the currency and
hence drive down its value.

Quantitative Easing:
Quantitative easing (QE) is an unconventional monetary policy tool
implemented by central banks to stimulate economic growth and counter deflationary pressures.
It involves the central bank creating new money electronically and using it to purchase financial
assets, typically government bonds or other securities, from commercial banks or the open
market. The goal is to increase the money supply, lower interest rates, and encourage lending and
investment.

Key aspects and implications of quantitative easing:

1. Expanding the Money Supply: Through QE, central banks inject new money into the
economy. By purchasing financial assets from banks, the central bank effectively
increases the reserves held by these banks, thereby expanding the money supply available
for lending and economic activity.

2. Lowering Interest Rates: One of the aims of QE is to reduce interest rates on loans and
other forms of credit. The increased demand for financial assets resulting from the central
bank's purchases drives up their prices and lowers their yields (interest rates). This, in
turn, lowers borrowing costs for businesses and individuals, encouraging investment and
spending.

3. Boosting Asset Prices: QE can have an impact on asset prices, particularly bonds and
other securities that the central bank purchases. The increased demand for these assets
tends to drive up their prices, leading to lower yields. This can incentivize investors to
seek higher returns in riskier assets such as stocks and real estate, potentially leading to
asset price inflation.

4. Inflation and Deflation Concerns: QE is often employed in response to deflationary

pressures or a sluggish economy. By increasing the money supply and stimulating
economic activity, central banks aim to prevent deflation (a sustained decrease in general
price levels) and promote inflation within a target range. However, excessive or
prolonged QE can raise concerns about potential inflationary effects.

5. Unconventional Policy Tool: QE is considered an unconventional monetary policy tool

because it involves direct intervention in financial markets by the central bank. It is
typically used when more conventional tools, such as adjusting interest rates, have
become less effective or exhausted.

6. Exit Strategy: Central banks need to carefully manage the exit strategy from QE once
the economy has sufficiently recovered. If not unwound properly, the sudden withdrawal
of liquidity and reduction in central bank asset holdings can have disruptive effects on
financial markets.
Quantitative easing:
Central banks use quantitative easing (QE) to boost the money supply by
purchasing government bonds and other securities. Lowering interest rates is achieved through
increasing the availability of money.

Definition :
Quantitative easing is a monetary strategy in which a central bank acquires
specified amounts of government bonds or other financial assets to pump money into the
economy in an attempt to stimulate economic growth.
Interbank payment mode:
Interbank payment refers to the transfer of funds between two or more banks. It
allows for seamless transactions and settlements between different financial institutions. There
are various interbank payment modes or systems that facilitate these transfers.

Some commonly used interbank payment modes are:

1. Real-Time Gross Settlement (RTGS): RTGS systems enable real-time and irrevocable
settlement of funds on a transaction-by-transaction basis. It involves the immediate
transfer of funds from one bank to another in real-time, often with high-value
transactions. RTGS systems are typically used for large-value transfers and are operated
by central banks or other designated financial entities.

2. Automated Clearing House (ACH): ACH systems are widely used for batch processing
of interbank payments, where transactions are accumulated and settled periodically,
usually on the same day or the next business day. ACH transfers are used for various
purposes, including direct deposits, payroll, bill payments, and electronic funds transfers.

3. SWIFT (Society for Worldwide Interbank Financial Telecommunication): SWIFT is

a messaging network used by financial institutions worldwide for secure communication
and interbank transfers. Banks exchange payment instructions and other financial
messages through SWIFT, facilitating international and cross-border transactions.

4. Central Bank Payment Systems: Central banks often operate payment systems that
facilitate interbank transfers and settlements. These systems provide a secure and reliable
infrastructure for financial institutions to transfer funds between accounts held at the
central bank.

5. Payment Card Networks: Payment card networks, such as Visa, Mastercard, and
American Express, enable interbank payments through credit and debit card transactions.
When a cardholder makes a purchase, the payment is processed through the card
network, involving the transfer of funds between the cardholder's bank (issuing bank) and
the merchant's bank (acquiring bank).

6. Peer-to-Peer (P2P) Payment Systems: P2P payment systems allow individuals to

transfer funds directly between their bank accounts or digital wallets. These systems
typically leverage mobile apps or online platforms and enable individuals to send money
to each other using their bank account details or email addresses.
 The availability and specific interbank payment modes may vary by country and
region. The choice of payment mode depends on factors such as transaction size, urgency,
geographical scope, and regulatory requirements. Financial institutions and central banks
collaborate to ensure the smooth functioning of interbank payment systems and promote efficient
and secure fund transfers between banks.

Same bank :
When making payments within the same bank, there are several methods that are
commonly available to facilitate transfers of funds between accounts held within the institution.

Some common options for intra-bank transfers:

1. Internal Transfers: Most banks offer internal transfer services that allow customers to
move funds between their own accounts held within the same bank. This can typically be
done through online banking, mobile banking apps, or by visiting a branch of the bank.
Internal transfers are usually free of charge and can be processed instantly.

2. Online Banking: Banks provide online banking platforms that enable customers to
manage their accounts and perform various transactions, including intra-bank transfers.
Through the bank's online portal or website, customers can log in to their account, select
the transfer option, choose the accounts involved, and specify the transfer amount. The
transfer is processed electronically within the bank's system.

3. Mobile Banking Apps: Many banks offer mobile banking apps that allow customers to
access their accounts and conduct transactions from their smartphones or tablets. These
apps typically provide a user-friendly interface where customers can initiate intra-bank
transfers by selecting the desired accounts and entering the transfer details.

4. Telephone Banking: Some banks provide telephone banking services, allowing

customers to make intra-bank transfers over the phone. Customers can contact the bank's
customer service or automated telephone banking system, follow the prompts, and
provide the necessary information to complete the transfer.

5. In-Person Transactions: For customers who prefer face-to-face interactions, intra-bank

transfers can be conducted by visiting a branch of the bank. Customers can speak with a
bank representative or teller, provide the account details, and request the transfer. The
bank staff will process the transaction on the customer's behalf.
 The availability and specific features of intra-bank transfer methods may vary
depending on the bank and the region. It's advisable to check with your bank to understand the
options they provide for making payments within the same institution.

Different bank:
When making payments between different banks, there are several common
methods available to facilitate transfers of funds from one bank account to another. These
methods enable individuals or businesses to transfer money between accounts held at different
financial institutions.
Some common options for interbank transfers:

1. Bank Wire Transfer: Bank wire transfers are a traditional method for transferring funds
between different banks. The sender provides their bank with the recipient's bank account
details, including the bank name, account number, and routing number or SWIFT code.
The funds are then transferred electronically from the sender's bank account to the
recipient's bank account. Wire transfers can be initiated in person at a bank branch or
through online or mobile banking platforms.

2. Automated Clearing House (ACH) Transfer: ACH transfers are widely used for
interbank payments within the same country. They are typically used for non-urgent or
recurring transfers, such as payroll, bill payments, or direct deposits. ACH transfers batch
process multiple transactions together and settle them at a designated time. Customers
can initiate ACH transfers through online or mobile banking platforms by providing the
recipient's bank account details.

3. Online and Mobile Banking: Many banks offer online banking platforms and mobile
banking apps that allow customers to initiate interbank transfers. Customers can add
external accounts held at different banks, provide the necessary account details, and
transfer funds between their accounts. This can usually be done by providing the
recipient's bank account number, routing number or SWIFT code, and other required
information.

4. Peer-to-Peer (P2P) Payment Apps: Various P2P payment apps enable users to transfer
money between different bank accounts. Examples include Venmo, PayPal, Zelle, and
Cash App. These apps often require both the sender and recipient to have accounts with
the app and may involve linking their bank accounts. The sender initiates the transfer
through the app, and the recipient can then withdraw the funds into their bank account.

5. Check Payments: Although less common in today's digital age, individuals and
businesses can still make interbank payments by writing and depositing checks. The
 sender writes a check from their bank account, specifying the recipient's name and the
amount. The recipient deposits the check into their bank account, and it is processed for
clearance and funds transfer.

It's important to note that specific features, availability, and fees associated with
interbank transfers may vary between banks and regions. It is advisable to check with your bank
or financial institution to understand the options and procedures they provide for transferring
funds to accounts held at different banks.

Correspondent bank:
A correspondent bank is a financial institution that provides services on behalf of
another financial institution in a different location or country. Correspondent banking
relationships are established between banks to facilitate various financial transactions and
services.
When making a payment through a correspondent bank, it involves using an
intermediary financial institution that has a relationship with both the sending bank and the
recipient bank. Correspondent banks facilitate transactions between banks that do not have a
direct relationship or presence in each other's countries.

How the payment process typically works:

1. Initiation of Payment: The sender, often referred to as the "originator," initiates the
payment from their bank. They provide the necessary information, such as the recipient's
bank account details, the amount to be transferred, and any additional instructions.

2. Sender's Bank: The sender's bank, also known as the "originating bank," is the financial
institution from which the payment is initiated. The bank processes the payment request
and sends it to the correspondent bank.

3. Correspondent Bank: The correspondent bank acts as an intermediary between the

sender's bank and the recipient bank. It receives the payment instructions from the
sender's bank and verifies the information provided.

4. Funds Transfer: The correspondent bank transfers the funds to the recipient bank based
on the payment instructions received. This transfer may involve various mechanisms,
such as wire transfers, Automated Clearing House (ACH) systems, or other interbank
payment networks.
 5. Recipient Bank: The recipient bank, also known as the "beneficiary bank," receives the
funds from the correspondent bank. It credits the recipient's account with the transferred
amount based on the payment instructions received.

6. Notification and Confirmation: Throughout the process, banks involved in the payment
may exchange notifications and confirmations to ensure that the transaction is
successfully completed. This includes acknowledgment of receipt, updates on the status
of the payment, and any necessary follow-up actions.

Payments through correspondent banks are commonly used for international

transactions or when there is no direct relationship between the sending and receiving banks.
Correspondent banks provide a trusted and efficient mechanism for facilitating cross-border
payments and ensuring that funds are transferred securely and in compliance with regulatory
requirements.

It's important to note that the use of a correspondent bank in payment transactions
may involve additional fees, processing time, and potential currency conversion if the sending
and receiving currencies differ. The specific procedures, requirements, and fees associated with
payments through a correspondent bank can vary based on the banks involved and the specific
circumstances of the transaction. It's advisable to consult with your bank or financial institution
to understand the process and any associated costs for payments through a correspondent bank.

Central Bank :
Central banks do not typically serve as a direct payment mode for individuals or
businesses. Instead, central banks primarily focus on implementing monetary policy, regulating
the financial system, and maintaining stability in the economy. However, central banks play a
crucial role in overseeing and operating the payment systems that facilitate financial transactions
within a country.

Some key aspects related to payment modes and central banks are:

1. Central Bank-Operated Payment Systems: Central banks often establish and operate
payment systems that facilitate the transfer of funds between banks and other financial
institutions. These systems provide a safe and efficient infrastructure for interbank
transfers, clearing and settling payments, and managing liquidity in the financial system.
Examples include Real-Time Gross Settlement (RTGS) systems and Automated Clearing
House (ACH) systems.

2. Oversight and Regulation: Central banks have a responsibility to ensure the safety,
efficiency, and integrity of payment systems within their jurisdiction. They set rules and
 regulations governing the operation of payment systems and monitor compliance with
these standards. Central banks also oversee payment service providers and work to
mitigate risks associated with payment activities, such as fraud, cybersecurity, and
systemic risks.

3. Wholesale and Retail Payments: Central banks typically focus on wholesale payment
systems that handle large-value and time-critical transactions between financial
institutions. These systems facilitate the settlement of interbank transfers, securities
transactions, and other high-value transactions. Retail payment systems, on the other
hand, cater to the needs of individuals and businesses for everyday payments, such as
card payments, direct debits, and electronic fund transfers.

4. Central Bank Digital Currency (CBDC): Some central banks are exploring the concept
of Central Bank Digital Currency, which would be a digital form of fiat currency issued
and regulated by the central bank. CBDCs could potentially provide a new payment mode
directly controlled by the central bank, enabling secure and efficient digital transactions.
However, CBDCs are still in the experimental stage in many countries.

It's important to note that individual consumers and businesses typically interact with
payment modes provided by commercial banks, payment service providers, and other financial
institutions rather than directly with the central bank. Commercial banks and payment service
providers offer various payment methods, including cash, checks, debit and credit cards,
electronic fund transfers, and mobile payments, among others.

International Payment:
International payments refer to financial transactions that involve the transfer of
funds across borders, typically between individuals, businesses, or financial institutions located
in different countries. These payments are necessary for various purposes such as trade,
investments, remittances, and cross-border transactions.

Some common methods for making international payments are:

1. Bank Wire Transfer: Bank wire transfers are a widely used method for international
payments. The sender provides their bank with the recipient's bank account details,
including the bank name, account number, and SWIFT code (or other relevant codes).
The funds are then transferred electronically from the sender's bank account to the
recipient's bank account. Wire transfers can be initiated through online or mobile banking
platforms, or in person at a bank branch.
 2. International Money Transfer Services: There are specialized money transfer services
that focus on facilitating international payments. Companies such as Western Union,
MoneyGram, and TransferWise provide options for individuals to send money
internationally. These services often offer competitive exchange rates and convenient
transfer methods, including online platforms and mobile apps.

3. Online Payment Platforms: Online payment platforms like PayPal, Stripe, and Skrill
enable individuals and businesses to send and receive payments internationally. These
platforms allow users to link their bank accounts or credit cards and make secure
transactions across borders. They often offer currency conversion services and provide
additional features for e-commerce and online business transactions.

4. Foreign Exchange (Forex) Brokers: Forex brokers specialize in currency exchange and
provide services for individuals and businesses to convert one currency into another.
They offer competitive exchange rates and can facilitate international payments by
converting funds and transferring them to the recipient's bank account in the desired
currency.

5. Letters of Credit and Bank Drafts: In international trade transactions, letters of credit
and bank drafts are commonly used. Letters of credit are issued by banks and guarantee
payment to the exporter once certain conditions are met. Bank drafts are similar to checks
and can be used to make secure international payments.

6. Cryptocurrencies: Cryptocurrencies, such as Bitcoin and Ethereum, have gained

popularity as a decentralized and borderless method of transferring value. Individuals and
businesses can use cryptocurrency wallets and exchanges to send and receive payments
globally, bypassing traditional banking systems. However, it's important to note that
cryptocurrencies can be subject to price volatility and regulatory considerations.

When making international payments, it's important to consider factors such as

exchange rates, fees, speed of transfer, and the security of the chosen method. Different payment
methods may have varying costs and processing times, so it's advisable to compare options and
choose the most suitable method for your specific needs. Additionally, compliance with relevant
regulations, such as anti-money laundering (AML) and know-your-customer (KYC)
requirements, is essential when making international payments.

Cryptography:
Cryptography is a method of protecting information and communications
through the use of codes, so that only those for whom the information is intended can read and
process it.
Objective of Cryptography:
1. Confidentiality. The information cannot be understood by anyone for whom it was
unintended.
2. Integrity.The information cannot be altered in storage or transit between sender and
intended receiver without the alteration being detected.
3. Non-repudiation. The creator/sender of the information cannot deny at a later stage their
intentions in the creation or transmission of the information.
4. Authentication. The sender and receiver can confirm each other's identity and the
origin/destination of the information.

Types of cryptography:
1. Single-key or symmetric-key encryption algorithms create a fixed length of bits
known as a block cipher with a secret key that the creator/sender uses to encipher data
(encryption) and the receiver uses to decipher it.
Example: Advanced Encryption Standard (AES)

2. Public-key or asymmetric-key encryption algorithms use a pair of keys, a public key

associated with the creator/sender for encrypting messages and a private key that only the
originator knows (unless it is exposed or they decide to share it) for decrypting that
information.
Example: Rivest-Shamir-Adleman (RSA)
Benefits of Encryption :
The primary purpose of encryption is to protect the confidentiality of digital data stored on
computer systems or transmitted over the internet or any other computer network.

Disadvantages of Encryption :

While encryption is designed to keep unauthorized entities from being able to understand the
data they have acquired, in some situations, encryption can keep the data's owner from being
able to access the data as well.
Key management is one of the biggest challenges of building an enterprise encryption
strategy because the keys to decrypt the cipher text have to be living somewhere in the
environment, and attackers often have a pretty good idea of where to look.

Key management deals with entire key lifecycle as depicted in the following
illustration −

HASHING :
Hashing is a mathematical algorithm that converts plaintext to a unique
text string or a ciphertext.
Hashing works by converting a readable text into an unreadable text of
secure data. Hashing is efficiently executed but extremely difficult to reverse.

Encryption Vs Hashing :
Encryption is a two-way function. The plaintext can be encrypted into
ciphertext and decrypted back into plaintext using a unique key. The difference
between encryption and hashing is that encryption is reversible while hashing is
irreversible.
Hashing takes the password a user enters and randomly generates a hash
using many variables (text and numbers). When you input your password to
log in, it is matched to the hash password. This is because the input is the
same as the output.

Purpose of hashing:

 To verify data integrity.

 Authentication.
 To store sensitive data.

A hash function is an algorithm that transforms data of arbitrary size into a fixed size
output. The output is a ciphered text called a hash value or a digest. The main
objective of a cryptographic hash function is verifying data authenticity.
Properties of a hash function:
 Deterministic - The output will be the same for a given outcome.
 Not reversible – We can’t reverse a hash function back to the original
password.
 Collision resistant – Two inputs do not result in the same output.
 Non-predictable – A hash function randomly generates a unique hash value
that is not predictable.
 Compression – The hash function’s output is much smaller than the input size.

Characteristics of a hash function:

 Secure – A hash function is irreversible. It is a one-way function.

 Unique – Two different datasets cannot produce the same digest.

 Fixed-size – The hash function gives a fixed size digest.

Types of hashing algorithms :

1. Message digest 5 (MD5) :

Message digest 5 (MD5) is a one-way cryptographic hash algorithm.
It generates a 128-bit string value as the hash value or the digest. MD5 is often used to
verify data integrity.

2. Secure hashing algorithm 1 (SHA1)

This is a cryptographic hash algorithm, that generates a 160-bit string
value as the hash value. This hashing algorithm was developed by the National
Security Agency (NSA). SHA1 is commonly used in security and data integrity
applications.

3. Secure hashing algorithm 256 (SHA256)

This is a cryptographic hash algorithm that creates a 256-bit (32 bytes)
string value as the hash value. SHA256 often checks the data integrity for hash
authentication and digital signatures.
Applications of hashing :
1. Password storage :
Hashing protects how passwords are stored and saved. Instead of
keeping a password, in the form of a plaintext. It is stored as a hash value or a digest.
The hash values are stored in a hash table.
An intruder can only see the hash values and cannot log into a system
using the hash value.

2. Password verification
Hashing is used for password verification every time you login into an
application, account, or system. A password verifies if you are the actual user of that
account. If the password you enter matches the hash value on the server-side, you get
authorization.

3. Checking of data integrity

Hashing checks for data integrity. It gives the user assurance that no data
has been modified and the data is correct. It also assures the user that the data is
original.

DIGITAL SIGNATURE:
Digital Signature in Cryptography is a value calculated from the data
along with a secret key that only the signer is aware of. The receiver needs to be
assured that the message belongs to the sender. This is crucial in businesses as the
chances of disputes over data exchange are high.

Digital Signature Algorithms:

There are three algorithms at work in Digital Signatures. They are as
follows:
1. Key Generation Algorithms
Key Generation Algorithms help ensure authenticity and integrity or it
would be very easy to tamper with the data. They also prevent anyone from
pretending to be the sender.
2. Signing Algorithms
Signing Algorithms make one-way hashes of the data that has to be
signed. Then they encrypt the hash value using the signature key. The encrypted
hash along with the other information is the Digital Signature.

3. Signature Verification Algorithms

Signature Verification Algorithms help process the Digital Signature
and the verification key to generate some values. The algorithm also processes the
same hash function on the data received and creates a hash value.

Importance of Digital Signature

1. Message Authentication
The private key is only known to the sender. The verifier can use the public
key of the sender to validate that the Digital Signature was created by the
sender.

2. Data Integrity
If at any time the data is attacked, there will be a discrepancy in the hash
value and the verification algorithm as they won’t match. Due to this, the
receiver will end up rejecting the message and declaring a data breach.

3. Non-repudiation
The signer is the only one who is aware of the signature key so, naturally,
they are the only ones who can create a specific signature. Whenever there is
a dispute, the data along with the Digital Signature can be presented as
evidence.
Types of Digital Signature

1. Simple Digital Signature

Simple Digital Signatures aren’t protected by any encryption
methods. The email signature we add at the end of our emails is an example
of Simple Digital Signatures. Since there is no encryption involved, the
signer’s identity cannot be traced nor the changes made in the document
after being signed. Simple Digital Signatures are very easy to replicate and
don’t hold any legal power.

2. Basic Digital Signature

Basic Digital Signatures are not much different than Simple Digital
Signatures. What makes Basic Digital Signatures different, is the fact that
they can show the changes in the document after it was signed. This
signature cannot refer to a verified identity and hence, it cannot guarantee
identity security. The documents with Basic Digital Signatures do not hold
any legal power.

3. Advanced & Qualified Digital Signature

Advanced & Qualified Digital Signatures are the safest Digital
Signatures. They hold as much legal power as a signature on paper. These
are created with asymmetric cryptography and public key infrastructure.
Advanced and Qualified Digital Signatures can show where, when, and what
devices should be used during the signing process. They also show all the
changes made to the document post-signing.

Advanced & Qualified Digital Signatures are required to impose a two-

factor authentication before the signing. These could be OTPs, biometric
scans using mobiles, etc. The signatories have a unique electronic certificate
attached to their identities.