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What is blockchain and cryptocurrency?

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Blockchain is simply a method of accounting that can be done by a distributed network rather than a centralised processing centre. Records are compiled into batches called blocks and then verified by one of the computers on the network. The first computer to verify the records in a block as being valid cryptographically sign the block and distribute it to the rest of the network.

Upon receiving this new block, the rest of the network confirms the validity of the records and the block as a whole. If the checks pass, then each computer accepts that block as the most recent changes to the ledger and then proceeds to work on validating the next batch. This linked chain of batched records is what is referred to as a blockchain.

The computer that was able to validate and distribute the next block of records before anyone else and have it accepted by the network is receives a reward which is what incentivises the distributed network to participate.

All records in a block are amendments to the existing ledger and it is not possible to delete or directly update a record from a previous block. This gives blockchains a perfect level of audibility compared to a lot of centralised systems and the difference can be visuallised as such.

A traditional accounting ledger is mostly like a spreadsheet.



If Alice wants to send 2 bananas to Bob, in a centralised and trusted processing system we would simply update the values in the spread sheet to reflect the change because we accept our system is acting in good faith.



A blockchain works more like a spreadsheet workbook with multiple tabs.



If Alice wants to send 2 bananas to Bob using a blockchain, instead of altering the existing record, we would open a new tab and record only what information has changed.


Block 1Block 2

This means there is no longer a single record where an account balance is store, but Bob’s current balance of bananas is instead calculated by inspecting the blockchain and calculating how many banans bob has received and subsequently sent. If a third transaction were to occur, we would simply open a third tab (or block) and again record the changes, and so on.

This method provides a robust framework for creating a perfectly audit-able ledger of records and combined with some of the other cryptographic inherent to blockchain provide a safe and secure method to allow decentralised validation of transactions without the possibility of fraudulent records entering the ledger unnoticed.

This style of publicly validated transaction ledger was invented by the person (or persons) operating under the pseudonym of Satoshi Nakamoto in 2009. The first application of blockchain technology was as an accounting ledger for the digital currency Bitcoin.

Bitcoin is a blockchain based digital currency otherwise referred to as cryptocurrency. Cryptocurrencies use digital cryptographic signatures to prove ownership over coins which exist on the public blockchain hence the term.

As an owner of cryptocurrency, you never physically have a file on your computer which is the cryptocurrency tokens as such. What you do have on your computer instead are cryptographic keys which grant you access to transfer cryptocurrency tokens which exist on the public blockchain. Using the magic of cryptography, this transfer can be independently validated as originating by the owner of the tokens by a third party without needing to reveal any information which could lead to the third party gaining access to the tokens. This proof system is commonly known as public key cryptography and is extremely well understood proven as sound.

Most blockchains today are focused on being ledgers for value transactions of cryptocurrencies. However it is not the only purpose that a blockchain can serve. Some blockchains are used to record logistics information, manage decentralised services, voting systems with many more uses being researched and developed all the time.

Other Resources

IRD Guidance

The Inland Revenue has released more information on their position on cryptocurrency and tax

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Employee Schemes

Inland Revenue is extending its guidance on cryptocurrencies to cover their use in employee share schemes

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Industry Opinion

Scott Mason from Findex unpacks the Inland Revenue guidance on cryptocurrency taxation

Read More

Taxoshi is a New Zealand startup with the vision of bringing deeper compliance to the blockchain ecosystem globally. Join us on the journey.

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