A cryptocurrency, crypto-currency, or crypto is a
digital currency designed to work as a
medium of exchange
In economics, a medium of exchange is any item that is widely acceptable in exchange for goods and services. In modern economies, the most commonly used medium of exchange is currency.
The origin of "mediums of exchange" in human societies is ass ...
through a
computer network
A computer network is a set of computers sharing resources located on or provided by network nodes. The computers use common communication protocols over digital interconnections to communicate with each other. These interconnections are ...
that is not reliant on any central authority, such as a
government
A government is the system or group of people governing an organized community, generally a state.
In the case of its broad associative definition, government normally consists of legislature, executive, and judiciary. Government is a ...
or
bank
A bank is a financial institution that accepts deposits from the public and creates a demand deposit while simultaneously making loans. Lending activities can be directly performed by the bank or indirectly through capital markets.
Because ...
, to uphold or maintain it.
It is a decentralized system for verifying that the parties to a transaction have the money they claim to have, eliminating the need for traditional intermediaries, such as banks, when funds are being transferred between two entities.
Individual coin ownership records are stored in a digital
ledger
A ledger is a book or collection of accounts in which account transactions are recorded. Each account has an opening or carry-forward balance, and would record each transaction as either a debit or credit in separate columns, and the ending or ...
, which is a computerized
database
In computing, a database is an organized collection of data stored and accessed electronically. Small databases can be stored on a file system, while large databases are hosted on computer clusters or cloud storage. The design of databases sp ...
using
strong cryptography to secure
transaction records, control the creation of additional coins, and verify the transfer of coin ownership.
Despite their name, cryptocurrencies are not considered to be
currencies
A currency, "in circulation", from la, currens, -entis, literally meaning "running" or "traversing" is a standardization of money in any form, in use or circulation as a medium of exchange, for example banknotes and coins.
A more general def ...
in the traditional sense, and while varying treatments have been applied to them, including classification as
commodities,
securities
A security is a tradable financial asset. The term commonly refers to any form of financial instrument, but its legal definition varies by jurisdiction. In some countries and languages people commonly use the term "security" to refer to any for ...
, and currencies, cryptocurrencies are generally viewed as a distinct asset class in practice. Some crypto schemes use validators to maintain the cryptocurrency. In a
proof-of-stake
Proof-of-stake (PoS) protocols are a class of consensus mechanisms for blockchains that work by selecting validators in proportion to their quantity of holdings in the associated cryptocurrency. This is done to avoid the computational cost of p ...
model, owners put up their tokens as collateral. In return, they get authority over the token in proportion to the amount they stake. Generally, these token stakers get additional ownership in the token over time via network fees, newly minted tokens, or other such reward mechanisms.
Cryptocurrency does not exist in physical form (like paper money) and is typically not issued by a central authority. Cryptocurrencies typically use
decentralized control as opposed to a
central bank digital currency (CBDC). When a cryptocurrency is minted, or created prior to issuance, or issued by a single issuer, it is generally considered centralized. When implemented with decentralized control, each cryptocurrency works through
distributed ledger
A distributed ledger (also called a shared ledger or distributed ledger technology or DLT) is the consensus of replicated, shared, and synchronized digital data that is geographically spread (distributed) across many sites, countries, or institutio ...
technology, typically a
blockchain, that serves as a public financial transaction database. Traditional asset classes like currencies, commodities, and stocks, as well as macroeconomic factors, have modest exposures to cryptocurrency returns.
The first decentralized cryptocurrency was Bitcoin, which was first released as open-source software in 2009. As of March 2022, there were more than 9,000
other cryptocurrencies in the marketplace, of which more than 70 had a
market capitalization
Market capitalization, sometimes referred to as market cap, is the total value of a publicly traded company's outstanding common shares owned by stockholders.
Market capitalization is equal to the market price per common share multiplied by t ...
exceeding $1 billion.
History
In 1983, American
cryptographer
Cryptography, or cryptology (from grc, , translit=kryptós "hidden, secret"; and ''graphein'', "to write", or ''-logia'', "study", respectively), is the practice and study of techniques for secure communication in the presence of adver ...
David Chaum
David Lee Chaum (born 1955) is an American computer scientist, cryptographer, and inventor. He is known as a pioneer in cryptography and privacy-preserving technologies, and widely recognized as the inventor of digital cash. His 1982 dissertatio ...
conceived of a type of cryptographic
electronic money
Digital currency (digital money, electronic money or electronic currency) is any currency, money, or money-like asset that is primarily managed, stored or exchanged on digital computer systems, especially over the internet. Types of digital cu ...
called
ecash Ecash was conceived by David Chaum as an anonymous cryptographic electronic money or electronic cash system in 1983. It was realized through his corporation Digicash and used as micropayment system at one US bank from 1995 to 1998.
Design
Chaum ...
. Later, in 1995, he implemented it through
Digicash, an early form of cryptographic electronic payments. Digicash required user software in order to withdraw notes from a bank and designate specific encrypted keys before it can be sent to a recipient. This allowed the digital currency to be untraceable by a third party.
In 1996, the
National Security Agency
The National Security Agency (NSA) is a national-level intelligence agency of the United States Department of Defense, under the authority of the Director of National Intelligence (DNI). The NSA is responsible for global monitoring, collecti ...
published a paper entitled ''How to Make a Mint: the Cryptography of Anonymous Electronic Cash'', describing a cryptocurrency system. The paper was first published in an
MIT
The Massachusetts Institute of Technology (MIT) is a private land-grant research university in Cambridge, Massachusetts. Established in 1861, MIT has played a key role in the development of modern technology and science, and is one of the m ...
mailing list and later in 1997 in ''The American Law Review''.
In the 1997 book ''
The Sovereign Individual
''The Sovereign Individual: Mastering the Transition to the Information Age'' is a 1997 non-fiction book by William Rees-Mogg and James Dale Davidson. Later republished on 26 August 1999 by Touchstone, it forecasts the development of the twenty ...
'', the authors,
William Rees-Mogg
William Rees-Mogg, Baron Rees-Mogg (14 July 192829 December 2012) was a British newspaper journalist who was Editor of ''The Times'' from 1967 to 1981. In the late 1970s, he served as High Sheriff of Somerset, and in the 1980s was Chairman of t ...
and
James Dale Davidson
James Dale Davidson is an American private investor and investment writer, co-writer of the newsletter ''Strategic Investment'', and co-author with William Rees-Mogg of ''Blood in the Streets: Investment Profits in a World Gone Mad'' (1987), ''The ...
, predict that the currency used in the
information age
The Information Age (also known as the Computer Age, Digital Age, Silicon Age, or New Media Age) is a historical period that began in the mid-20th century. It is characterized by a rapid shift from traditional industries, as established during ...
would be using "mathematical algorithms that have no physical existence", which has led some in the cryptocurrency community to call the book's claim a "prophecy".
In 1998,
Wei Dai
Wei Dai ( zh, c=戴伟) is a computer engineer known for contributions to cryptography and cryptocurrencies. He developed the Crypto++ cryptographic library, created the b-money cryptocurrency system, and co-proposed the VMAC message authent ...
described "b-money", an anonymous, distributed electronic cash system. Shortly thereafter,
Nick Szabo described
bit gold. Like
Bitcoin
Bitcoin ( abbreviation: BTC; sign: ₿) is a decentralized digital currency that can be transferred on the peer-to-peer bitcoin network. Bitcoin transactions are verified by network nodes through cryptography and recorded in a public distr ...
and other cryptocurrencies that would follow it, bit gold (not to be confused with the later gold-based exchange BitGold) was described as an electronic currency system which required users to complete a
proof of work
Proof of work (PoW) is a form of Cryptography, cryptographic proof (truth), proof in which one party (the ''prover'') proves to others (the ''verifiers'') that a certain amount of a specific computational effort has been expended. Verifiers can s ...
function with solutions being cryptographically put together and published.
In January 2009, Bitcoin was created by
pseudonym
A pseudonym (; ) or alias () is a fictitious name that a person or group assumes for a particular purpose, which differs from their original or true name (orthonym). This also differs from a new name that entirely or legally replaces an individua ...
ous developer
Satoshi Nakamoto
Satoshi Nakamoto is the name used by the presumed pseudonymous person or persons who developed bitcoin, authored the bitcoin white paper, and created and deployed bitcoin's original reference implementation. As part of the implementation, Nakam ...
. It used
SHA-256
SHA-2 (Secure Hash Algorithm 2) is a set of cryptographic hash functions designed by the United States National Security Agency (NSA) and first published in 2001. They are built using the Merkle–Damgård construction, from a one-way compressi ...
, a cryptographic hash function, in its
proof-of-work
Proof of work (PoW) is a form of cryptographic proof in which one party (the ''prover'') proves to others (the ''verifiers'') that a certain amount of a specific computational effort has been expended. Verifiers can subsequently confirm this expe ...
scheme.
In April 2011,
Namecoin
Namecoin (Abbreviation: NMC; sign: \mathbb) is a cryptocurrency originally forked from bitcoin software. It uses proof-of-work algorithm. Like bitcoin, it is limited to \mathbb21 million.
Namecoin can store data within its own blockchain ...
was created as an attempt at forming a decentralized
DNS
The Domain Name System (DNS) is a hierarchical and distributed naming system for computers, services, and other resources in the Internet or other Internet Protocol (IP) networks. It associates various information with domain names assigned to ...
. In October 2011,
Litecoin
Litecoin ( Abbreviation: LTC; sign: Ł) is a decentralized peer-to-peer cryptocurrency and open-source software project released under the MIT/X11 license. Inspired by Bitcoin, Litecoin was among the earliest altcoins, starting in October 201 ...
was released which used
scrypt
In cryptography, scrypt (pronounced "ess crypt") is a password-based key derivation function created by Colin Percival in March 2009, originally for the Tarsnap online backup service. The algorithm was specifically designed to make it costly ...
as its hash function instead of SHA-256.
Peercoin
Peercoin, also known as Peer-to-Peer Coin, PP Coin, or PPC is a cryptocurrency utilizing both proof-of-stake and proof-of-work systems.
History
Peercoin is based on an August 2012 paper which listed the authors as Scott Nadal and Sunny King. K ...
, created in August 2012, used a hybrid of proof-of-work and
proof-of-stake
Proof-of-stake (PoS) protocols are a class of consensus mechanisms for blockchains that work by selecting validators in proportion to their quantity of holdings in the associated cryptocurrency. This is done to avoid the computational cost of p ...
.
On 6 August 2014, the UK announced its
Treasury
A treasury is either
*A government department related to finance and taxation, a finance ministry.
*A place or location where treasure, such as currency or precious items are kept. These can be state or royal property, church treasure or i ...
had commissioned a study of cryptocurrencies, and what role, if any, they could play in the UK economy. The study was also to report on whether regulation should be considered.
Its final report was published in 2018, and it issued a consultation on cryptoassets and
stablecoin
Stablecoins are cryptocurrencies where the price is supposed to be pegged to a reference asset, which is either fiat money, exchange-traded commodities (such as precious metals or industrial metals), or another cryptocurrency.
In theory, the p ...
s in January 2021.
In June 2021,
El Salvador
El Salvador (; , meaning " The Saviour"), officially the Republic of El Salvador ( es, República de El Salvador), is a country in Central America. It is bordered on the northeast by Honduras, on the northwest by Guatemala, and on the south b ...
became the first country to accept Bitcoin as
legal tender
Legal tender is a form of money that courts of law are required to recognize as satisfactory payment for any monetary debt. Each jurisdiction determines what is legal tender, but essentially it is anything which when offered ("tendered") in pa ...
, after the
Legislative Assembly had voted 62–22 to pass a bill submitted by President
Nayib Bukele
Nayib Armando Bukele Ortez (; born 24 July 1981) is a Salvadoran politician and businessman who is the 43rd president of El Salvador, serving since 1 June 2019. He is the first president since José Napoleón Duarte (1984–1989) not to have ...
classifying the cryptocurrency as such.
In August 2021,
Cuba
Cuba ( , ), officially the Republic of Cuba ( es, República de Cuba, links=no ), is an island country comprising the island of Cuba, as well as Isla de la Juventud and several minor archipelagos. Cuba is located where the northern Caribbea ...
followed with Resolution 215 to recognize and regulate cryptocurrencies such as Bitcoin.
In September 2021, the
government of China
The Government of the People's Republic of China () is an authoritarian political system in the People's Republic of China under the exclusive political leadership of the Chinese Communist Party (CCP). It consists of legislative, executive, m ...
, the single largest market for cryptocurrency, declared all cryptocurrency transactions illegal. This completed a crackdown on cryptocurrency that had previously banned the operation of intermediaries and miners within China.
On 15 September 2022, the world second largest cryptocurrency at that time,
Ethereum
Ethereum is a decentralized, open-source blockchain with smart contract functionality. Ether (Abbreviation: ETH; sign: Ξ) is the native cryptocurrency of the platform. Among cryptocurrencies, ether is second only to bitcoin in market capita ...
transitioned its
consensus mechanism from
proof-of-work
Proof of work (PoW) is a form of cryptographic proof in which one party (the ''prover'') proves to others (the ''verifiers'') that a certain amount of a specific computational effort has been expended. Verifiers can subsequently confirm this expe ...
(PoW) to
proof-of-stake
Proof-of-stake (PoS) protocols are a class of consensus mechanisms for blockchains that work by selecting validators in proportion to their quantity of holdings in the associated cryptocurrency. This is done to avoid the computational cost of p ...
(PoS) in an upgrade process known as "the Merge". According to the Ethereum Founder, the upgrade can cut Ethereum's energy use by 99.9% and carbon-dioxide emissions by 99.9%.
Formal definition
According to Jan Lansky, a cryptocurrency is a system that meets six conditions:
# The system does not require a central authority; its state is maintained through distributed consensus.
# The system keeps an overview of cryptocurrency units and their ownership.
# The system defines whether new cryptocurrency units can be created. If new cryptocurrency units can be created, the system defines the circumstances of their origin and how to determine the ownership of these new units.
# Ownership of cryptocurrency units can be proved exclusively cryptographically.
# The system allows transactions to be performed in which ownership of the cryptographic units is changed. A transaction statement can only be issued by an entity proving the current ownership of these units.
# If two different instructions for changing the ownership of the same cryptographic units are simultaneously entered, the system performs at most one of them.
In March 2018, the word ''cryptocurrency'' was added to the ''
Merriam-Webster Dictionary
''Webster's Dictionary'' is any of the English language dictionaries edited in the early 19th century by American lexicographer Noah Webster (1758–1843), as well as numerous related or unrelated dictionaries that have adopted the Webster's ...
''.
Altcoins
Tokens, cryptocurrencies, and other digital assets other than Bitcoin are collectively known as alternative cryptocurrencies, typically shortened to "altcoins" or "alt coins", or disparagingly "shitcoins". Paul Vigna of ''The Wall Street Journal'' also described altcoins as "alternative versions of Bitcoin" given its role as the model protocol for altcoin designers.
Altcoins often have underlying differences when compared to Bitcoin. For example,
Litecoin
Litecoin ( Abbreviation: LTC; sign: Ł) is a decentralized peer-to-peer cryptocurrency and open-source software project released under the MIT/X11 license. Inspired by Bitcoin, Litecoin was among the earliest altcoins, starting in October 201 ...
aims to process a block every 2.5 minutes, rather than Bitcoin's 10 minutes, which allows Litecoin to confirm transactions faster than Bitcoin. Another example is
Ethereum
Ethereum is a decentralized, open-source blockchain with smart contract functionality. Ether (Abbreviation: ETH; sign: Ξ) is the native cryptocurrency of the platform. Among cryptocurrencies, ether is second only to bitcoin in market capita ...
, which has smart contract functionality that allows decentralized applications to be run on its blockchain. Ethereum was the most used blockchain in 2020, according to Bloomberg News. In 2016, it had the largest "following" of any altcoin, according to the ''New York Times''.
Significant rallies across altcoin markets are often referred to as an "altseason".
Stablecoins
Stablecoin
Stablecoins are cryptocurrencies where the price is supposed to be pegged to a reference asset, which is either fiat money, exchange-traded commodities (such as precious metals or industrial metals), or another cryptocurrency.
In theory, the p ...
s are cryptocurrencies designed to maintain a stable level of
purchasing power
Purchasing power is the amount of goods and services that can be purchased with a unit of currency. For example, if one had taken one unit of currency to a store in the 1950s, it would have been possible to buy a greater number of items than would ...
. Notably, these designs are not foolproof, as a number of stablecoins have crashed or lost their peg. For example, on 11 May 2022,
Terra
Terra may often refer to:
* Terra (mythology), primeval Roman goddess
* An alternate name for planet Earth, as well as the Latin name for the planet
Terra may also refer to: Geography Astronomy
* Terra (satellite), a multi-national NASA scienti ...
's stablecoin UST fell from $1 to 26 cents. The subsequent failure of
Terraform Labs
Terra is a blockchain protocol and payment platform used for algorithmic stablecoins. The project was created in 2018 by Terraform Labs, a startup co-founded by Do Kwon and Daniel Shin. It is most known for its Terra stablecoin and the associ ...
resulted in the loss of nearly $40B invested in the Terra and Luna bitcoins. In September 2022, South Korean prosecutors requested the issuance of an
Interpol Red Notice
An Interpol notice is an international alert circulated by Interpol to communicate information about crimes, criminals, and threats by police in a member state (or an authorised international entity) to their counterparts around the world. The in ...
against the company's founder,
Do Kwon
Kwon Do-Hyung (), more commonly known as Do Kwon, is the South Korean co-founder and CEO of Singapore-based Terraform Labs, the parent company of crashed stablecoin TerraUSD and cryptocurrency Luna. TerraUSD and Luna collapsed in May 2022, wipi ...
.
Architecture
Cryptocurrency is produced by an entire cryptocurrency system collectively, at a rate which is defined when the system is created and which is publicly stated. In centralized banking and economic systems such as the US
Federal Reserve System
The Federal Reserve System (often shortened to the Federal Reserve, or simply the Fed) is the central banking system of the United States of America. It was created on December 23, 1913, with the enactment of the Federal Reserve Act, after a ...
, corporate boards or governments control the supply of currency. In the case of cryptocurrency, companies or governments cannot produce new units, and have not so far provided backing for other firms, banks or corporate entities which hold asset value measured in it. The underlying technical system upon which cryptocurrencies are based was created by
Satoshi Nakamoto
Satoshi Nakamoto is the name used by the presumed pseudonymous person or persons who developed bitcoin, authored the bitcoin white paper, and created and deployed bitcoin's original reference implementation. As part of the implementation, Nakam ...
.
Within a
proof-of-work
Proof of work (PoW) is a form of cryptographic proof in which one party (the ''prover'') proves to others (the ''verifiers'') that a certain amount of a specific computational effort has been expended. Verifiers can subsequently confirm this expe ...
system such as Bitcoin, the safety, integrity and balance of
ledger
A ledger is a book or collection of accounts in which account transactions are recorded. Each account has an opening or carry-forward balance, and would record each transaction as either a debit or credit in separate columns, and the ending or ...
s is maintained by a community of mutually distrustful parties referred to as
miners
A miner is a person who extracts ore, coal, chalk, clay, or other minerals from the earth through mining. There are two senses in which the term is used. In its narrowest sense, a miner is someone who works at the rock face; cutting, blasting, ...
. Miners use their computers to help validate and timestamp transactions, adding them to the ledger in accordance with a particular timestamping scheme.
In a
proof-of-stake
Proof-of-stake (PoS) protocols are a class of consensus mechanisms for blockchains that work by selecting validators in proportion to their quantity of holdings in the associated cryptocurrency. This is done to avoid the computational cost of p ...
blockchain, transactions are validated by holders of the associated cryptocurrency, sometimes grouped together in stake pools.
Most cryptocurrencies are designed to gradually decrease the production of that currency, placing a cap on the total amount of that currency that will ever be in circulation. Compared with ordinary currencies held by financial institutions or kept as
cash
In economics, cash is money in the physical form of currency, such as banknotes and coins.
In bookkeeping and financial accounting, cash is current assets comprising currency or currency equivalents that can be accessed immediately or near-imm ...
on hand, cryptocurrencies can be more difficult for
seizure
An epileptic seizure, informally known as a seizure, is a period of symptoms due to abnormally excessive or synchronous neuronal activity in the brain. Outward effects vary from uncontrolled shaking movements involving much of the body with l ...
by law enforcement.
Blockchain
The validity of each cryptocurrency's coins is provided by a
blockchain. A blockchain is a continuously growing list of
records
A record, recording or records may refer to:
An item or collection of data Computing
* Record (computer science), a data structure
** Record, or row (database), a set of fields in a database related to one entity
** Boot sector or boot record, ...
, called ''blocks'', which are linked and secured using cryptography.
Each block typically contains a
hash pointer as a link to a previous block,
a
timestamp
A timestamp is a sequence of characters or encoded information identifying when a certain event occurred, usually giving date and time of day, sometimes accurate to a small fraction of a second. Timestamps do not have to be based on some absolut ...
and transaction data.
By design, blockchains are inherently resistant to modification of the data. It is "an open,
distributed ledger
A distributed ledger (also called a shared ledger or distributed ledger technology or DLT) is the consensus of replicated, shared, and synchronized digital data that is geographically spread (distributed) across many sites, countries, or institutio ...
that can record transactions between two parties efficiently and in a verifiable and permanent way".
For use as a distributed ledger, a blockchain is typically managed by a
peer-to-peer
Peer-to-peer (P2P) computing or networking is a distributed application architecture that partitions tasks or workloads between peers. Peers are equally privileged, equipotent participants in the network. They are said to form a peer-to-peer n ...
network collectively adhering to a protocol for validating new blocks. Once recorded, the data in any given block cannot be altered retroactively without the alteration of all subsequent blocks, which requires collusion of the network majority.
Blockchains are
secure by design
Secure by design, in software engineering, means that software products and capabilities have been designed to be foundationally secure.
Alternate security strategies, tactics and patterns are considered at the beginning of a software design, ...
and are an example of a distributed computing system with high
Byzantine fault tolerance.
Decentralized
Decentralization or decentralisation is the process by which the activities of an organization, particularly those regarding planning and decision making, are distributed or delegated away from a central, authoritative location or group.
Conce ...
consensus has therefore been achieved with a blockchain.
Nodes
A ''node'' is a computer that connects to a cryptocurrency network. The node supports the cryptocurrency's network through either relaying transactions, validation, or hosting a copy of the blockchain. In terms of relaying transactions, each network computer (node) has a copy of the blockchain of the cryptocurrency it supports. When a transaction is made, the node creating the transaction broadcasts details of the transaction using encryption to other nodes throughout the node network so that the transaction (and every other transaction) is known.
Node owners are either volunteers, those hosted by the organization or body responsible for developing the cryptocurrency blockchain network technology, or those who are enticed to host a node to receive rewards from hosting the node network.
Timestamping
Cryptocurrencies use various timestamping schemes to "prove" the validity of transactions added to the blockchain ledger without the need for a trusted third party.
The first timestamping scheme invented was the
proof-of-work
Proof of work (PoW) is a form of cryptographic proof in which one party (the ''prover'') proves to others (the ''verifiers'') that a certain amount of a specific computational effort has been expended. Verifiers can subsequently confirm this expe ...
scheme. The most widely used proof-of-work schemes are based on SHA-256 and
scrypt
In cryptography, scrypt (pronounced "ess crypt") is a password-based key derivation function created by Colin Percival in March 2009, originally for the Tarsnap online backup service. The algorithm was specifically designed to make it costly ...
.
Some other hashing algorithms that are used for proof-of-work include
CryptoNight,
Blake
Blake is a surname which originated from Old English. Its derivation is uncertain; it could come from "blac", a nickname for someone who had dark hair or skin, or from "blaac", a nickname for someone with pale hair or skin. Another theory, presuma ...
,
SHA-3
SHA-3 (Secure Hash Algorithm 3) is the latest member of the Secure Hash Algorithm family of standards, released by NIST on August 5, 2015. Although part of the same series of standards, SHA-3 is internally different from the MD5-like struc ...
, and
X11
The X Window System (X11, or simply X) is a windowing system for bitmap displays, common on Unix-like operating systems.
X provides the basic framework for a GUI environment: drawing and moving windows on the display device and interacting wi ...
.
Another method is called the
proof-of-stake
Proof-of-stake (PoS) protocols are a class of consensus mechanisms for blockchains that work by selecting validators in proportion to their quantity of holdings in the associated cryptocurrency. This is done to avoid the computational cost of p ...
scheme. Proof-of-stake is a method of securing a cryptocurrency network and achieving distributed consensus through requesting users to show ownership of a certain amount of currency. It is different from proof-of-work systems that run difficult hashing algorithms to validate electronic transactions. The scheme is largely dependent on the coin, and there's currently no standard form of it. Some cryptocurrencies use a combined proof-of-work and proof-of-stake scheme.
Mining
On a blockchain, ''mining'' is the validation of transactions. For this effort, successful miners obtain new cryptocurrency as a reward. The reward decreases
transaction fees
A fee is the price one pays as remuneration for rights or services. Fees usually allow for overhead, wages, costs, and markup. Traditionally, professionals in the United Kingdom (and previously the Republic of Ireland) receive a fee in contra ...
by creating a complementary incentive to contribute to the processing power of the network. The rate of generating hashes, which validate any transaction, has been increased by the use of specialized machines such as
FPGAs and
ASICs running complex hashing algorithms like SHA-256 and
scrypt
In cryptography, scrypt (pronounced "ess crypt") is a password-based key derivation function created by Colin Percival in March 2009, originally for the Tarsnap online backup service. The algorithm was specifically designed to make it costly ...
.
This
arms race
An arms race occurs when two or more groups compete in military superiority. It consists of a competition between two or more states to have superior armed forces; a competition concerning production of weapons, the growth of a military, and t ...
for cheaper-yet-efficient machines has existed since Bitcoin was introduced in 2009.
With more people venturing into the world of virtual currency, generating hashes for validation has become more complex over time, forcing miners to invest increasingly large sums of money to improve computing performance. Consequently, the reward for finding a hash has diminished and often does not justify the investment in equipment and cooling facilities (to mitigate the heat the equipment produces), and the electricity required to run them. Popular regions for mining include those with inexpensive electricity, a cold climate, and jurisdictions with clear and conducive regulations. By July 2019, Bitcoin's electricity consumption was estimated to be approximately 7 gigawatts, around 0.2% of the global total, or equivalent to the energy consumed nationally by Switzerland.
Some
miners pool resources, sharing their
processing power
In computing, computer performance is the amount of useful work accomplished by a computer system. Outside of specific contexts, computer performance is estimated in terms of accuracy, efficiency and speed of executing computer program instruction ...
over a network to split the reward equally, according to the amount of work they contributed to the probability of finding a
block
Block or blocked may refer to:
Arts, entertainment and media Broadcasting
* Block programming, the result of a programming strategy in broadcasting
* W242BX, a radio station licensed to Greenville, South Carolina, United States known as ''96.3 ...
. A "share" is awarded to members of the mining pool who present a valid partial proof-of-work.
, the Chinese Government has halted trading of virtual currency, banned initial coin offerings and shut down mining. Many Chinese miners have since relocated to Canada and Texas. One company is operating data centers for mining operations at Canadian oil and gas field sites, due to low gas prices. In June 2018,
Hydro Quebec
Hydro from Ancient Greek word ὕδωρ (húdōr), meaning ''water''.
Hydro may also refer to:
Energy technologies
* Water-derived power or energy:
** Hydropower, derived from water
** Hydroelectricity, in electrical form
* "Hydro", AC mains ...
proposed to the provincial government to allocate 500 megawatts of power to crypto companies for mining. According to a February 2018 report from ''
Fortune
Fortune may refer to:
General
* Fortuna or Fortune, the Roman goddess of luck
* Luck
* Wealth
* Fortune, a prediction made in fortune-telling
* Fortune, in a fortune cookie
Arts and entertainment Film and television
* ''The Fortune'' (1931 film) ...
'', Iceland has become a haven for cryptocurrency miners in part because of its cheap electricity.
In March 2018, the city of
Plattsburgh, New York
Plattsburgh ( moh, Tsi ietsénhtha) is a city in, and the seat of, Clinton County, New York, United States, situated on the north-western shore of Lake Champlain. The population was 19,841 at the 2020 census. The population of the surrounding ...
put an 18-month
moratorium on all cryptocurrency mining in an effort to preserve natural resources and the "character and direction" of the city. In 2021,
Kazakhstan
Kazakhstan, officially the Republic of Kazakhstan, is a transcontinental country located mainly in Central Asia and partly in Eastern Europe. It borders Russia to the north and west, China to the east, Kyrgyzstan to the southeast, Uzbeki ...
became the second-biggest crypto-currency mining country, producing 18.1% of the global hash rate. The country built a compound containing 50,000 computers near
Ekibastuz
Ekibastuz ( kk, Екібастұз, translit=Ekıbastūz, , ەكئباستۇز; russian: Экибастуз) is a city in Pavlodar Region, northeastern Kazakhstan. The population was Ekibastuz is served by Ekibastuz Airport.
History
The history ...
.
GPU price rise
An increase in cryptocurrency mining increased the demand for
graphics cards
A graphics card (also called a video card, display card, graphics adapter, VGA card/VGA, video adapter, display adapter, or mistakenly GPU) is an expansion card which generates a feed of output images to a display device, such as a computer moni ...
(GPU) in 2017. The computing power of GPUs makes them well-suited to generating hashes. Popular favorites of cryptocurrency miners such as Nvidia's
GTX 1060
The GeForce 10 series is a series of graphics processing units developed by Nvidia, initially based on the Pascal (microarchitecture), Pascal microarchitecture announced in March 2014. This design series succeeded the GeForce 900 series, and is su ...
and
GTX 1070 graphics cards, as well as AMD's RX 570 and RX 580 GPUs, doubled or tripled in priceor were out of stock. A GTX 1070 Ti which was released at a price of $450 sold for as much as $1,100. Another popular card, the GTX 1060 (6 GB model) was released at an
MSRP
The list price, also known as the manufacturer's suggested retail price (MSRP), or the recommended retail price (RRP), or the suggested retail price (SRP) of a product is the price at which its manufacturer notionally recommends that a retailer ...
of $250, and sold for almost $500. RX 570 and RX 580 cards from
AMD
Advanced Micro Devices, Inc. (AMD) is an American multinational semiconductor company based in Santa Clara, California, that develops computer processors and related technologies for business and consumer markets. While it initially manufactur ...
were out of stock for almost a year. Miners regularly buy up the entire stock of new GPU's as soon as they are available.
Nvidia
Nvidia CorporationOfficially written as NVIDIA and stylized in its logo as VIDIA with the lowercase "n" the same height as the uppercase "VIDIA"; formerly stylized as VIDIA with a large italicized lowercase "n" on products from the mid 1990s to ...
has asked retailers to do what they can when it comes to selling GPUs to gamers instead of miners. Boris Böhles, PR manager for Nvidia in the German region, said: "Gamers come first for Nvidia."
Wallets
A
cryptocurrency wallet
A cryptocurrency wallet is a device, physical medium, program or a service which stores the public and/or private keys for cryptocurrency transactions. In addition to this basic function of storing the keys, a cryptocurrency wallet more often al ...
is a means of storing the
public and private "keys" (address) or seed which can be used to receive or spend the cryptocurrency. With the private key, it is possible to write in the public ledger, effectively spending the associated cryptocurrency. With the public key, it is possible for others to send currency to the wallet.
There exist multiple methods of storing keys or seed in a wallet. These methods range from using paper wallets (which are public, private or seed keys written on paper), to using hardware wallets (which are hardware to store your wallet information), to a digital wallet (which is a computer with a software hosting your wallet information), to hosting your wallet using an exchange where cryptocurrency is traded, or by storing your wallet information on a digital medium such as plaintext.
Anonymity
Bitcoin is
pseudonymous
A pseudonym (; ) or alias () is a fictitious name that a person or group assumes for a particular purpose, which differs from their original or true name ( orthonym). This also differs from a new name that entirely or legally replaces an individu ...
, rather than
anonymous; the cryptocurrency in a wallet is not tied to a person, but rather to one or more specific keys (or "addresses"). Thereby, Bitcoin owners are not immediately identifiable, but all transactions are publicly available in the blockchain. Still,
cryptocurrency exchanges
A cryptocurrency exchange, or a digital currency exchange (DCE), is a business that allows customers to trade cryptocurrencies or digital currencies for other assets, such as conventional fiat money or other digital currencies. Exchanges may acce ...
are often required by law to collect the personal information of their users.
Some cryptocurrencies, such as
Monero
Monero (; Abbreviation: XMR) is a decentralized cryptocurrency. It uses a public distributed ledger with privacy-enhancing technologies that obfuscate transactions to achieve anonymity and fungibility. Observers cannot decipher addresses t ...
,
Zerocoin,
Zerocash, and
CryptoNote
CryptoNote is an application layer protocol designed for use with cryptocurrencies that aims to solve specific problems identified in Bitcoin. Namely:
* Traceability of transactions
* The proof-of-work function (see Bitcoin network)
* Irregul ...
, implement additional measures to increase privacy, such as by using
zero-knowledge proofs
In cryptography, a zero-knowledge proof or zero-knowledge protocol is a method by which one party (the prover) can prove to another party (the verifier) that a given statement is true while the prover avoids conveying any additional information a ...
.
Economics
Cryptocurrencies are used primarily outside banking and governmental institutions and are exchanged over the Internet.
Block rewards
Proof-of-work cryptocurrencies, such as Bitcoin, offer block rewards incentives for miners. There has been an implicit belief that whether miners are paid by block rewards or transaction fees does not affect the security of the blockchain, but a study suggests that this may not be the case under certain circumstances.
The rewards paid to miners increase the supply of the cryptocurrency. By making sure that verifying transactions is a costly business, the integrity of the network can be preserved as long as benevolent nodes control a majority of computing power. The verification algorithm requires a lot of processing power, and thus electricity in order to make verification costly enough to accurately validate public blockchain. Not only do miners have to factor in the costs associated with expensive equipment necessary to stand a chance of solving a hash problem, they further must consider the significant amount of electrical power in search of the solution. Generally, the block rewards outweigh electricity and equipment costs, but this may not always be the case.
The current value, not the long-term value, of the cryptocurrency supports the reward scheme to incentivize miners to engage in costly mining activities. Some sources claim that the current Bitcoin design is very inefficient, generating a welfare loss of 1.4% relative to an efficient cash system. The main source for this inefficiency is the large mining cost, which is estimated to be US$360 Million per year. This translates into users being willing to accept a cash system with an inflation rate of 230% before being better off using Bitcoin as a means of payment. However, the efficiency of the Bitcoin system can be significantly improved by optimizing the rate of coin creation and minimizing transaction fees. Another potential improvement is to eliminate inefficient mining activities by changing the consensus protocol altogether.
Transaction fees
Transaction fees for cryptocurrency depend mainly on the
supply
Supply may refer to:
*The amount of a resource that is available
**Supply (economics), the amount of a product which is available to customers
**Materiel, the goods and equipment for a military unit to fulfill its mission
*Supply, as in confidenc ...
of network capacity at the time, versus the
demand
In economics, demand is the quantity of a good that consumers are willing and able to purchase at various prices during a given time. The relationship between price and quantity demand is also called the demand curve. Demand for a specific item ...
from the currency holder for a faster transaction. The currency holder can choose a specific transaction fee, while network entities process transactions in order of highest offered fee to lowest. Cryptocurrency exchanges can simplify the process for currency holders by offering priority alternatives and thereby determine which fee will likely cause the transaction to be processed in the requested time.
For
Ether
In organic chemistry, ethers are a class of compounds that contain an ether group—an oxygen atom connected to two alkyl or aryl groups. They have the general formula , where R and R′ represent the alkyl or aryl groups. Ethers can again be c ...
, transaction fees differ by computational complexity, bandwidth use, and storage needs, while Bitcoin transaction fees differ by transaction size and whether the transaction uses
SegWit
Segregated Witness, or SegWit, is the name used for an implemented soft fork change in the transaction format of Bitcoin.
The formal title "Segregated Witness (Consensus layer)" had Bitcoin Improvement Proposal number BIP141. The declared purpo ...
. In September 2018, the median transaction fee for Ether corresponded to $0.017, while for Bitcoin it corresponded to $0.55.
Some cryptocurrencies have no transaction fees, and instead rely on
client-side
Client-side refers to operations that are performed by the client in a client–server relationship in a computer network.
General concepts
Typically, a client is a computer application, such as a web browser, that runs on a user's local comput ...
proof-of-work as the transaction prioritization and anti-spam mechanism.
Exchanges
Cryptocurrency exchange
A cryptocurrency exchange, or a digital currency exchange (DCE), is a business that allows customers to trade cryptocurrencies or digital currencies for other assets, such as conventional fiat money or other digital currencies. Exchanges may acc ...
s allow customers to trade cryptocurrencies for other assets, such as conventional
fiat money
Fiat money (from la, fiat, "let it be done") is a type of currency that is not backed by any commodity such as gold or silver. It is typically designated by the issuing government to be legal tender. Throughout history, fiat money was sometime ...
, or to trade between different digital currencies.
Crypto marketplaces do not guarantee that an investor is completing a purchase or trade at the optimal price. As a result, many investors take advantage of this by using
arbitrage
In economics and finance, arbitrage (, ) is the practice of taking advantage of a difference in prices in two or more markets; striking a combination of matching deals to capitalise on the difference, the profit being the difference between the ...
to find the difference in price across several markets.
Atomic swaps
Atomic swaps are a mechanism where one cryptocurrency can be exchanged directly for another cryptocurrency, without the need for a trusted third party such as an exchange.
ATMs
Jordan Kelley, founder of
Robocoin, launched the first
Bitcoin ATM Bitcoin ATMs (Automated Teller Machine) are kiosks that allows a person to purchase Bitcoin and other cryptocurrencies by using cash or debit card. Some Bitcoin ATMs offer bi-directional functionality enabling both the purchase of Bitcoin as well ...
in the United States on 20 February 2014. The kiosk installed in Austin, Texas, is similar to bank ATMs but has scanners to read government-issued identification such as a driver's license or a passport to confirm users' identities.
Initial coin offerings
An
initial coin offering
An initial coin offering (ICO) or initial currency offering is a type of funding using cryptocurrencies. It is often a form of crowdfunding, although a private ICO which does not seek public investment is also possible. In an ICO, a quantity of cr ...
(ICO) is a controversial means of raising funds for a new cryptocurrency venture. An ICO may be used by startups with the intention of avoiding regulation. However, securities regulators in many jurisdictions, including in the U.S., and Canada, have indicated that if a coin or token is an "investment contract" (e.g., under the Howey test, i.e., an investment of money with a reasonable expectation of profit based significantly on the entrepreneurial or managerial efforts of others), it is a security and is subject to securities regulation. In an ICO campaign, a percentage of the cryptocurrency (usually in the form of "tokens") is sold to early backers of the project in exchange for legal tender or other cryptocurrencies, often Bitcoin or Ether.
According to
PricewaterhouseCoopers
PricewaterhouseCoopers is an international professional services brand of firms, operating as partnerships under the PwC brand. It is the second-largest professional services network in the world and is considered one of the Big Four accounting ...
, four of the 10 biggest proposed initial coin offerings have used
Switzerland
). Swiss law does not designate a ''capital'' as such, but the federal parliament and government are installed in Bern, while other federal institutions, such as the federal courts, are in other cities (Bellinzona, Lausanne, Luzern, Neuchâtel ...
as a base, where they are frequently registered as non-profit foundations. The Swiss regulatory agency
FINMA
The Swiss Financial Market Supervisory Authority (FINMA) is the Swiss government body responsible for financial regulation. This includes the supervision of banks, insurance companies, stock exchanges and securities dealers, as well as other ...
stated that it would take a "balanced approach" to ICO projects and would allow "legitimate innovators to navigate the regulatory landscape and so launch their projects in a way consistent with national laws protecting investors and the integrity of the financial system." In response to numerous requests by industry representatives, a legislative ICO working group began to issue legal guidelines in 2018, which are intended to remove uncertainty from cryptocurrency offerings and to establish sustainable business practices.
Price trends
The
market capitalization
Market capitalization, sometimes referred to as market cap, is the total value of a publicly traded company's outstanding common shares owned by stockholders.
Market capitalization is equal to the market price per common share multiplied by t ...
of a cryptocurrency is calculated by multiplying the price by the number of coins in circulation. The total cryptocurrency market cap has historically been dominated by Bitcoin accounting for at least 50% of the market cap value where altcoins have increased and decreased in market cap value in relation to Bitcoin. Bitcoin's value is largely determined by speculation among other technological limiting factors known as blockchain rewards coded into the architecture technology of Bitcoin itself. The cryptocurrency market cap follows a trend known as the "halving", which is when the block rewards received from Bitcoin are halved due to technological mandated limited factors instilled into Bitcoin which in turn limits the supply of Bitcoin. As the date reaches near of a halving (twice thus far historically) the cryptocurrency market cap increases, followed by a downtrend.
By June 2021, cryptocurrency had begun to be offered by some wealth managers in the US for
401(k)s.
Volatility
Cryptocurrency prices are much more volatile than established financial assets such as
stock
In finance, stock (also capital stock) consists of all the shares by which ownership of a corporation or company is divided.Longman Business English Dictionary: "stock - ''especially AmE'' one of the shares into which ownership of a company ...
s. For example, over one week in May 2022, Bitcoin lost 20% of its value and Ethereum lost 26%, while
Solana and
Cardano lost 41% and 35% respectively. The falls were attributed to warnings about inflation. By comparison, in the same week, the
Nasdaq
The Nasdaq Stock Market () (National Association of Securities Dealers Automated Quotations Stock Market) is an American stock exchange based in New York City. It is the most active stock trading venue in the US by volume, and ranked second ...
tech stock index fell 7.6 per cent and the
FTSE 100
The Financial Times Stock Exchange 100 Index, also called the FTSE 100 Index, FTSE 100, FTSE, or, informally, the "Footsie" , is a share index of the 100 companies listed on the London Stock Exchange with (in principle) the highest market ...
was 3.6 per cent down.
In the longer term, of the
10 leading cryptocurrencies identified by the total value of coins in circulation in January 2018, only four (Bitcoin, Ethereum, Cardano and
Ripple
Ripple may refer to:
Science and technology
* Capillary wave, commonly known as ripple, a wave traveling along the phase boundary of a fluid
** Ripple, more generally a disturbance, for example of spacetime in gravitational waves
* Ripple (electri ...
(XRP)) were still in that position in early 2022. The total value of all cryptocurrencies was $2 trillion at the end of 2021, but had halved nine months later. The Wall Street Journal has commented that the crypto sector has become “intertwined” with the rest of the capital markets and “sensitive to the same forces that drive tech stocks and other risk assets”, such as inflation forecasts.
Databases
There are also ''centralized'' databases, outside of blockchains, that store crypto market data. Compared to the blockchain, databases perform fast as there is no verification process. Four of the most popular cryptocurrency market databases are CoinMarketCap, CoinGecko, BraveNewCoin, and Cryptocompare.
Social and political aspects
According to Alan Feuer of ''
The New York Times
''The New York Times'' (''the Times'', ''NYT'', or the Gray Lady) is a daily newspaper based in New York City with a worldwide readership reported in 2020 to comprise a declining 840,000 paid print subscribers, and a growing 6 million paid ...
'',
libertarian
Libertarianism (from french: libertaire, "libertarian"; from la, libertas, "freedom") is a political philosophy that upholds liberty as a core value. Libertarians seek to maximize autonomy and political freedom, and minimize the state's e ...
s and
anarcho-capitalist
Anarcho-capitalism (or, colloquially, ancap) is an anti-statist, libertarian, and anti-political philosophy and economic theory that seeks to abolish centralized states in favor of stateless societies with systems of private property enfo ...
s were attracted to the philosophical idea behind Bitcoin. Early Bitcoin supporter
Roger Ver
Roger Keith Ver (born 27 January 1979) is an early investor in Bitcoin, Bitcoin-related startups and an early promoter of Bitcoin. Ver has sometimes been referred to as "Bitcoin Jesus". He now primarily promotes Bitcoin Cash as Ver sees it as fu ...
said: "At first, almost everyone who got involved did so for philosophical reasons. We saw Bitcoin as a great idea, as a way to separate money from the state." Economist
Paul Krugman
Paul Robin Krugman ( ; born February 28, 1953) is an American economist, who is Distinguished Professor of Economics at the Graduate Center of the City University of New York, and a columnist for ''The New York Times''. In 2008, Krugman was th ...
argues that cryptocurrencies like Bitcoin are "something of a cult" based in "paranoid fantasies" of government power.
Nigel Dodd argues in ''The social life of Bitcoin'' that the essence of the Bitcoin ideology is to remove money from both social and governmental control. Dodd discusses the ''"Declaration of Bitcoin's Independence"'', a message of crypto-anarchism with the words: "Bitcoin is inherently anti-establishment, anti-system, and anti-state. Bitcoin undermines governments and disrupts institutions because Bitcoin is fundamentally humanitarian."
David Golumbia says that the ideas influencing Bitcoin advocates emerge from right-wing extremist movements such as the
Liberty Lobby
Liberty Lobby was a far-right think tank and lobby group founded in 1958 by Willis Carto. Carto was known for his promotion of antisemitic conspiracy theories, white nationalism, and Holocaust denial.
The organization produced a daily five-mi ...
and the
John Birch Society
The John Birch Society (JBS) is an American right-wing political advocacy group. Founded in 1958, it is anti-communist, supports social conservatism, and is associated with ultraconservative, radical right, far-right, or libertarian ide ...
and their anti-Central Bank rhetoric, or, more recently,
Ron Paul and
Tea Party
A tea party is a social gathering event held in the afternoon. For centuries, many societies have cherished drinking tea with a company at noon. Tea parties are considered for formal business meetings, social celebrations or just as an afternoon ...
-style libertarianism.
Steve Bannon
Stephen Kevin Bannon (born November 27, 1953) is an American media executive, political strategist, and former investment banker. He served as the White House's chief strategist in the administration of U.S. president Donald Trump during t ...
, who owns a "good stake" in Bitcoin, sees cryptocurrency as a form of disruptive populism, taking control back from central authorities.
Bitcoin's founder,
Satoshi Nakamoto
Satoshi Nakamoto is the name used by the presumed pseudonymous person or persons who developed bitcoin, authored the bitcoin white paper, and created and deployed bitcoin's original reference implementation. As part of the implementation, Nakam ...
has supported the idea that cryptocurrencies go well with libertarianism: "It's very attractive to the libertarian viewpoint if we can explain it properly." Nakamoto said in 2008.
According to the
European Central Bank
The European Central Bank (ECB) is the prime component of the monetary Eurosystem and the European System of Central Banks (ESCB) as well as one of seven institutions of the European Union. It is one of the world's Big Four (banking)#Intern ...
, the decentralization of money offered by Bitcoin has its theoretical roots in the
Austrian school of economics, especially with
Friedrich von Hayek
Friedrich August von Hayek ( , ; 8 May 189923 March 1992), often referred to by his initials F. A. Hayek, was an Austrian–British economist, legal theorist and philosopher who is best known for his defense of classical liberalism. Hayek ...
in his book ''Denationalisation of Money: The Argument Refined'', in which Hayek advocates a complete
free market
In economics, a free market is an economic system in which the prices of goods and services are determined by supply and demand expressed by sellers and buyers. Such markets, as modeled, operate without the intervention of government or any o ...
in the production, distribution and management of money to end the monopoly of
central banks
A central bank, reserve bank, or monetary authority is an institution that manages the currency and monetary policy of a country or monetary union,
and oversees their commercial banking system. In contrast to a commercial bank, a central ba ...
.
Increasing regulation
The rise in the popularity of cryptocurrencies and their adoption by financial institutions has led some governments to assess whether regulation is needed to protect users. The
Financial Action Task Force
The Financial Action Task Force (on Money Laundering) (FATF), also known by its French name, ''Groupe d'action financière'' (GAFI), is an intergovernmental organisation founded in 1989 on the initiative of the G7 to develop policies to combat m ...
(FATF) has defined cryptocurrency-related services as "virtual asset service providers" (VASPs) and recommended that they be regulated with the same
money laundering
Money laundering is the process of concealing the origin of money, obtained from illicit activities such as drug trafficking, corruption, embezzlement or gambling, by converting it into a legitimate source. It is a crime in many jurisdictions ...
(
AML) and
know your customer
Know Your Customer (KYC) guidelines in financial services require that professionals make an effort to verify the identity, suitability, and risks involved with maintaining a business relationship. The procedures fit within the broader scope of a ...
(KYC) requirements as financial institutions.
In May 2020, the Joint Working Group on interVASP Messaging Standards published "IVMS 101", a universal common language for communication of required originator and beneficiary information between VASPs. The FATF and financial regulators were informed as the data model was developed.
In June 2020, FATF updated its guidance to include the "Travel Rule" for cryptocurrencies, a measure which mandates that VASPs obtain, hold, and exchange information about the originators and beneficiaries of virtual asset transfers. Subsequent standardized protocol specifications recommended using
JSON
JSON (JavaScript Object Notation, pronounced ; also ) is an open standard file format and data interchange format that uses human-readable text to store and transmit data objects consisting of attribute–value pairs and arrays (or other ser ...
for relaying data between VASPs and identity services. As of December 2020, the IVMS 101 data model has yet to be finalized and ratified by the three global standard setting bodies that created it.
The European Commission published a digital finance strategy in September 2020. This included a draft regulation on Markets in Crypto-Assets (MiCA), which aimed to provide a comprehensive regulatory framework for digital assets in the EU.
On 10 June 2021, the
Basel Committee on Banking Supervision
The Basel Committee on Banking Supervision (BCBS) is a committee of banking supervisory authorities that was established by the central bank governors of the Group of Ten (G10) countries in 1974. The committee expanded its membership in 2009 a ...
proposed that banks that held cryptocurrency assets must set aside capital to cover all potential losses. For instance, if a bank were to hold Bitcoin worth $2 billion, it would be required to set aside enough capital to cover the entire $2 billion. This is a more extreme standard than banks are usually held to when it comes to other assets. However, this is a proposal and not a regulation.
The IMF is seeking a co-ordinated, consistent and comprehensive approach to supervising cryptocurrencies.
Tobias Adrian, the IMF's financial counsellor and head of its monetary and capital markets department said in a January 2022 interview that "Agreeing global regulations is never quick. But if we start now, we can achieve the goal of maintaining financial stability while also enjoying the benefits which the underlying technological innovations bring,"
United States
In 2021, 17 states passed laws and resolutions concerning cryptocurrency regulation. The
U.S. Securities and Exchange Commission
The U.S. Securities and Exchange Commission (SEC) is an independent agency of the United States federal government, created in the aftermath of the Wall Street Crash of 1929. The primary purpose of the SEC is to enforce the law against market ...
(SEC) is considering what steps to take. On 8 July 2021,
Senator Elizabeth Warren, part of the
Senate Banking Committee
The United States Senate Committee on Banking, Housing, and Urban Affairs (formerly the Committee on Banking and Currency), also known as the Senate Banking Committee, has jurisdiction over matters related to banks and banking, price controls, ...
, wrote to the chairman of the SEC and demanded that it provide answers on cryptocurrency regulation by 28 July 2021, due to the increase in cryptocurrency exchange use and the danger this poses to consumers. On 17 February 2022, the Justice department named Eun Young Choi as the first director of a National Cryptocurrency Enforcement Team to aid in identification of and dealing with misuse of cryptocurrencies and other digital assets.
China
In September 2017, China banned
ICOs
Icos Corporation (trademark ICOS) was an American biotechnology company and the largest biotechnology company in the U.S. state of Washington, before it was sold to Eli Lilly and Company in 2007. It was founded in 1989 by David Blech, Isaac ...
to cause
abnormal return from cryptocurrency decreasing during announcement window. The liquidity changes by banning ICOs in China was temporarily negative while the liquidity effect became positive after news.
On 18 May 2021, China banned financial institutions and payment companies from being able to provide cryptocurrency transaction related services. This led to a sharp fall in the price of the biggest
proof of work
Proof of work (PoW) is a form of Cryptography, cryptographic proof (truth), proof in which one party (the ''prover'') proves to others (the ''verifiers'') that a certain amount of a specific computational effort has been expended. Verifiers can s ...
cryptocurrencies. For instance,
Bitcoin
Bitcoin ( abbreviation: BTC; sign: ₿) is a decentralized digital currency that can be transferred on the peer-to-peer bitcoin network. Bitcoin transactions are verified by network nodes through cryptography and recorded in a public distr ...
fell 31%,
Ethereum
Ethereum is a decentralized, open-source blockchain with smart contract functionality. Ether (Abbreviation: ETH; sign: Ξ) is the native cryptocurrency of the platform. Among cryptocurrencies, ether is second only to bitcoin in market capita ...
fell 44%,
Binance Coin fell 32% and
Dogecoin
Dogecoin ( or , Abbreviation: DOGE; sign: Ð) is a cryptocurrency created by software engineers Billy Markus and Jackson Palmer, who decided to create a payment system as a "joke", making fun of the wild speculation in cryptocurrencies at the ...
fell 30%. Proof of work mining was the next focus, with regulators in popular mining regions citing the use of electricity generated from highly polluting sources such as coal to create Bitcoin and Ethereum.
In September 2021, the Chinese government declared all cryptocurrency transactions of any kind illegal, completing its crackdown on cryptocurrency.
United Kingdom
In the United Kingdom, as of 10 January 2021, all cryptocurrency firms, such as exchanges, advisors and professionals that have either a presence, market product or provide services within the UK market must register with the
Financial Conduct Authority
The Financial Conduct Authority (FCA) is a financial regulation, financial regulatory body in the United Kingdom, but operates independently of the UK Government, and is financed by charging fees to members of the financial services industry. The ...
. Additionally, on 27 June 2021, the financial watchdog demanded that
Binance
Binance is a cryptocurrency exchange which is the largest exchange in the world in terms of daily trading volume of cryptocurrencies. It was founded in 2017 and is registered in the Cayman Islands.
Binance was founded by Changpeng Zhao, a d ...
, the world's largest cryptocurrency exchange, cease all regulated activities in the UK.
South Africa
South Africa, which has seen a large number of scams related to cryptocurrency, is said to be putting a regulatory timeline in place that will produce a regulatory framework. The largest scam occurred in April 2021, where the two founders of an African-based cryptocurrency exchange called Africrypt, Raees Cajee and Ameer Cajee, disappeared with $3.8 billion worth of
Bitcoin
Bitcoin ( abbreviation: BTC; sign: ₿) is a decentralized digital currency that can be transferred on the peer-to-peer bitcoin network. Bitcoin transactions are verified by network nodes through cryptography and recorded in a public distr ...
.
Additionally, Mirror Trading International disappeared with $170 million worth of cryptocurrency in January 2021.
South Korea
In March 2021, South Korea implemented new legislation to strengthen their oversight of digital assets. This legislation requires all digital asset managers, providers and exchanges to be registered with the Korea Financial Intelligence Unit in order to operate in South Korea.
Registering with this unit requires that all exchanges are certified by the Information Security Management System and that they ensure all customers have real name bank accounts. It also requires that the CEO and board members of the exchanges have not been convicted of any crimes and that the exchange holds sufficient levels of deposit insurance to cover losses arising from hacks.
Turkey
On 30 April 2021, the
Central Bank of the Republic of Turkey banned the use of cryptocurrencies and cryptoassets for making purchases on the grounds that the use of cryptocurrencies for such payments poses significant transaction risks.
El Salvador
On 9 June 2021,
El Salvador
El Salvador (; , meaning " The Saviour"), officially the Republic of El Salvador ( es, República de El Salvador), is a country in Central America. It is bordered on the northeast by Honduras, on the northwest by Guatemala, and on the south b ...
announced that it will adopt
Bitcoin
Bitcoin ( abbreviation: BTC; sign: ₿) is a decentralized digital currency that can be transferred on the peer-to-peer bitcoin network. Bitcoin transactions are verified by network nodes through cryptography and recorded in a public distr ...
as legal tender, the first country to do so.
India
At present, India neither prohibits nor allows investment in the cryptocurrency market. In 2020, the Supreme Court of India had lifted the ban on cryptocurrency, which was imposed by the Reserve Bank of India. Since then, an investment in cryptocurrency is considered legitimate, though there is still ambiguity about the issues regarding the extent and payment of tax on the income accrued thereupon and also its regulatory regime. But it is being contemplated that the Indian Parliament will soon pass a specific law to either ban or regulate the cryptocurrency market in India. Expressing his public policy opinion on the Indian cryptocurrency market to a well-known online publication, a leading
public policy
Public policy is an institutionalized proposal or a decided set of elements like laws, regulations, guidelines, and actions to solve or address relevant and real-world problems, guided by a conception and often implemented by programs. Public p ...
lawyer and Vice President of
SAARCLAW (South Asian Association for Regional Co-operation in Law)
Hemant Batra
Hemant Batra (born 15 August 1967) is an Indian business, public policy, corporate and commercial senior practicing lawyer, newspaper – columnist writer author, TV anchor/Host, public speaker, commentator (law & public policy), mentor, and l ...
has said that the "cryptocurrency market has now become very big with involvement of billions of dollars in the market hence, it is now unattainable and irreconcilable for the government to completely ban all sorts of cryptocurrency and its trading and investment". He mooted regulating the cryptocurrency market rather than completely banning it. He favoured following
IMF and
FATF
The Financial Action Task Force (on Money Laundering) (FATF), also known by its French name, ''Groupe d'action financière'' (GAFI), is an intergovernmental organisation founded in 1989 on the initiative of the G7 to develop policies to combat mo ...
guidelines in this regard.
Legality
The
legal status of cryptocurrencies varies substantially from country to country and is still undefined or changing in many of them. At least one study has shown that broad generalizations about the use of Bitcoin in illicit finance are significantly overstated and that blockchain analysis is an effective crime fighting and intelligence gathering tool. While some countries have explicitly allowed their use and trade, others have banned or restricted it. According to the
Library of Congress
The Library of Congress (LOC) is the research library that officially serves the United States Congress and is the ''de facto'' national library of the United States. It is the oldest federal cultural institution in the country. The library is ...
in 2018, an "absolute ban" on trading or using cryptocurrencies applies in eight countries: Algeria, Bolivia, Egypt, Iraq, Morocco, Nepal, Pakistan, and the United Arab Emirates. An "implicit ban" applies in another 15 countries, which include Bahrain, Bangladesh, China, Colombia, the Dominican Republic, Indonesia, Iran, Kuwait, Lesotho, Lithuania, Macau, Oman, Qatar, Saudi Arabia and Taiwan.
In the United States and Canada, state and provincial securities regulators, coordinated through the
North American Securities Administrators Association
The North American Securities Administrators Association (NASAA), founded in Kansas in 1919, is the oldest international investor protection organization. NASAA is an association of state securities administrators who are charged with the responsi ...
, are investigating "Bitcoin scams" and
ICOs
Icos Corporation (trademark ICOS) was an American biotechnology company and the largest biotechnology company in the U.S. state of Washington, before it was sold to Eli Lilly and Company in 2007. It was founded in 1989 by David Blech, Isaac ...
in 40 jurisdictions.
Various government agencies, departments, and courts have classified Bitcoin differently.
China Central Bank banned the handling of Bitcoins by financial institutions in
China
China, officially the People's Republic of China (PRC), is a country in East Asia. It is the world's most populous country, with a population exceeding 1.4 billion, slightly ahead of India. China spans the equivalent of five time zones and ...
in early 2014.
In Russia, though owning cryptocurrency is legal, its residents are only allowed to purchase goods from other residents using the
Russian ruble
''hum''; cv, тенкĕ ''tenke''; kv, шайт ''shayt''; Lak: къуруш ''k'urush''; Mari: теҥге ''tenge''; os, сом ''som''; tt-Cyrl, сум ''sum''; udm, манет ''manet''; sah, солкуобай ''solkuobay''
, name_ab ...
while nonresidents are allowed to use foreign currency. Regulations and bans that apply to Bitcoin probably extend to similar cryptocurrency systems.
In August 2018, the
Bank of Thailand
The Bank of Thailand (BOT) ( Abrv: ธปท.; th, ธนาคารแห่งประเทศไทย, ) is the central bank of Thailand.
History
The Bank of Thailand (BOT) was first set up as the Thai National Banking Bureau. The Bank ...
announced its plans to create its own cryptocurrency, the Central Bank Digital Currency (CBDC).
Advertising bans
Cryptocurrency advertisements have been banned on the following platforms:
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Google
Google LLC () is an American multinational technology company focusing on search engine technology, online advertising, cloud computing, computer software, quantum computing, e-commerce, artificial intelligence, and consumer electronics. ...
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Twitter
Twitter is an online social media and social networking service owned and operated by American company Twitter, Inc., on which users post and interact with 280-character-long messages known as "tweets". Registered users can post, like, and ...
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Facebook
Facebook is an online social media and social networking service owned by American company Meta Platforms. Founded in 2004 by Mark Zuckerberg with fellow Harvard College students and roommates Eduardo Saverin, Andrew McCollum, Dustin M ...
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Bing
Bing most often refers to:
* Bing Crosby (1903–1977), American singer
* Microsoft Bing, a web search engine
Bing may also refer to:
Food and drink
* Bing (bread), a Chinese flatbread
* Bing (soft drink), a UK brand
* Bing cherry, a varie ...
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Snapchat
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LinkedIn
LinkedIn () is an American business and employment-oriented online service that operates via websites and mobile apps. Launched on May 5, 2003, the platform is primarily used for professional networking and career development, and allows job se ...
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MailChimp
Mailchimp is a marketing automation platform and email marketing service. "Mailchimp" is the trade name of its operator, Rocket Science Group, an American company founded in 2001 by Ben Chestnut and Mark Armstrong, with Dan Kurzius joining at a ...
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Baidu
Baidu, Inc. ( ; , meaning "hundred times") is a Chinese multinational technology company specializing in Internet-related services and products and artificial intelligence (AI), headquartered in Beijing's Haidian District. It is one of the l ...
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Tencent
Tencent Holdings Ltd. () is a Chinese multinational technology and entertainment conglomerate and holding company headquartered in Shenzhen. It is one of the highest grossing multimedia companies in the world based on revenue. It is also the w ...
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Weibo
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Line
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Yandex
Yandex LLC (russian: link=no, Яндекс, p=ˈjandəks) is a Russian multinational technology company providing Internet-related products and services, including an Internet search engine, information services, e-commerce, transportation, map ...
U.S. tax status
On 25 March 2014, the United States
Internal Revenue Service
The Internal Revenue Service (IRS) is the revenue service for the United States federal government, which is responsible for collecting U.S. federal taxes and administering the Internal Revenue Code, the main body of the federal statutory ta ...
(IRS) ruled that Bitcoin will be treated as property for tax purposes. Therefore, virtual currencies are considered commodities subject to capital gains tax.
The legal concern of an unregulated global economy
As the popularity and demand for online currencies has increased since the inception of Bitcoin in 2009, so have concerns that such an unregulated person to person global economy that cryptocurrencies offer may become a threat to society. Concerns abound that altcoins may become tools for anonymous web criminals.
[ALI, S, T; CLARKE, D; MCCORRY, P;
Bitcoin: Perils of an Unregulated Global P2P Currency
._Money_laundering_issues_FinCEN_Files.html" ;"title="Money_laundering.html" "title="y S. T Ali, D. Clarke, P. McCorry
Newcastle upon Tyne: Newcastle University: Computing Science, 2015.
(Newcastle University, Computing Science, Technical Report Series, No. CS-TR-1470)]
Cryptocurrency networks display a lack of regulation that has been criticized as enabling criminals who seek to evade taxes and
launder_money_
Money_laundering_is_the_process_of_concealing_the_origin_of_money,_obtained_from_illicit_activities_such_as_drug_trafficking,_corruption,_embezzlement_or_gambling,_by_converting_it_into_a_legitimate_source._It_is_a_crime_in_many_jurisdictions__...
._Money_laundering_issues_FinCEN_Files">are_also_present_in_regular_bank_transfers,_however_with_bank-to-bank_wire_transfers_for_instance,_the_account_holder_must_at_least_Wire_transfer#Security.html" ;"title="Money laundering">launder money