Decentralized cryptocurrency is produced by the entire cryptocurrency system collectively, at a rate which is defined when the system is created and which is publicly known. In centralized banking and economic systems such as the Federal Reserve System, corporate boards or governments control the supply of currency by printing units of fiat money or demanding additions to digital banking ledgers. In case of decentralized 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 decentralized cryptocurrencies are based was created by the group or individual known as Satoshi Nakamoto.[12]

As of September 2017, over a thousand cryptocurrency specifications exist; most are similar to and derived from the first fully implemented decentralized cryptocurrency, bitcoin. Within cryptocurrency systems the safety, integrity and balance of ledgers is maintained by a community of mutually distrustful parties referred to as miners: members of the general public using their computers to help validate and timestamp transactions, adding them to the ledger in accordance with a particular timestamping scheme.[13] Miners have a financial incentive to maintain the security of a cryptocurrency ledger.[12]

Most cryptocurrencies are designed to gradually decrease production of currency, placing an ultimate cap on the total amount of currency that will ever be in circulation, mimicking precious metals.[1][14] Compared with ordinary currencies held by financial institutions or kept as cash on hand, cryptocurrencies can be more difficult for seizure by law enforcement.[1] This difficulty is derived from leveraging cryptographic technologies. A primary example of this new challenge for law enforcement comes from the Silk Road case, where Ulbricht’s bitcoin stash “was held separately and … encrypted.”[15] Cryptocurrencies such as bitcoin are pseudonymous, though additions such as Zerocoin have been suggested, which would allow for true anonymity.[16][17][18]


In 1983 the American cryptographer David Chaum conceived an anonymous cryptographic electronic money called ecash.[19][20] Later, in 1995, he implemented it through Digicash,[21] an early form of cryptographic electronic payments which 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 the issuing bank, the government, or a third party.

In 1996 the NSA published a paper entitled How to Make a Mint: the Cryptography of Anonymous Electronic Cash, describing a Cryptocurrency system first publishing it in a MIT mailing list[22] and later in 1997, in The American Law Review (Vol. 46, Issue 4).[23]

In 1998, Wei Dai published a description of “b-money”, an anonymous, distributed electronic cash system.[24] Shortly thereafter, Nick Szabo created “bit gold“.[25] Like bitcoin and other cryptocurrencies that would follow it, bit gold (not to be confused with the later gold-based exchange, BitGold) was an electronic currency system which required users to complete a proof of work function with solutions being cryptographically put together and published. A currency system based on a reusable proof of work was later created by Hal Finney who followed the work of Dai and Szabo.

The first decentralized cryptocurrency, bitcoin, was created in 2009 by pseudonymous developer Satoshi Nakamoto. It used SHA-256, a cryptographic hash function, as its proof-of-work scheme.[13][26] In April 2011, Namecoin was created as an attempt at forming a decentralized DNS, which would make internet censorship very difficult. Soon after, in October 2011, Litecoin was released. It was the first successful cryptocurrency to use scrypt as its hash function instead of SHA-256. Another notable cryptocurrency, Peercoin was the first to use a proof-of-work/proof-of-stake hybrid.[27] IOTA was the first cryptocurrency not based on a blockchain, and instead uses the Tangle.[28][29] Built on a custom blockchain,[30] The Divi Project allows for easy exchange between currencies from within the wallet[31] and the ability to use personal identifying information for transactions.[32] Many other cryptocurrencies have been created though few have been successful, as they have brought little in the way of technical innovation.[33] On 6 August 2014, the UK announced its Treasury had been commissioned to do a study of cryptocurrencies, and what role, if any, they can play in the UK economy. The study was also to report on whether regulation should be considered.[34]


Gareth Murphy, a senior central banking officer has stated “widespread use [of cryptocurrency] would also make it more difficult for statistical agencies to gather data on economic activity, which are used by governments to steer the economy”. He cautioned that virtual currencies pose a new challenge to central banks’ control over the important functions of monetary and exchange rate policy.[35]

Jordan Kelley, founder of Robocoin, launched the first bitcoin ATM in the United States on February 20, 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.[36] By September 2017 1574 bitcoin ATMs were installed around the world with an average fee of 9.05%. An average of 3 bitcoin ATMs were being installed per day in September 2017.[37]

The Dogecoin Foundation, a charitable organization centered around Dogecoin and co-founded by Dogecoin co-creator Jackson Palmer, donated more than $30,000 worth of Dogecoin to help fund the Jamaican bobsled team‘s trip to the 2014 Olympic games in Sochi, Russia.[38] The growing community around Dogecoin is looking to cement its charitable credentials by raising funds to sponsor service dogs for children with special needs.[39]


The legal status of cryptocurrencies varies substantially from country to country and is still undefined or changing in many of them. While some countries have explicitly allowed their use and trade, others have banned or restricted it. Likewise, various government agencies, departments, and courts have classified bitcoins differently. China Central Bank banned the handling of bitcoins by financial institutions in China during an extremely fast adoption period in early 2014.[40] In Russia, though cryptocurrencies are legal, it is illegal to actually purchase goods with any currency other than the Russian ruble.[41]

On March 25, 2014, the United States Internal Revenue Service (IRS) ruled that bitcoin will be treated as property for tax purposes as opposed to currency. This means bitcoin will be subject to capital gains tax. One benefit of this ruling is that it clarifies the legality of bitcoin. No longer do investors need to worry that investments in or profit made from bitcoins are illegal or how to report them to the IRS.[42] In a paper published by researchers from Oxford and Warwick, it was shown that bitcoin has some characteristics more like the precious metals market than traditional currencies, hence in agreement with the IRS decision even if based on different reasons.[43]

Cryptocurrency Alliance Super PAC

The Cryptocurrency Alliance Super PAC. One of the many groups formed to protect consumer interests in cryptocurrencies.

In response to the IRS ruling, numerous organizations have been created to advocate for consumers. One of the most prominent examples is the Washington, D.C. based Cryptocurrency Alliance, an independent expenditure-only committee (Super PAC), created to raise awareness about cryptocurrencies and blockchain technology.[44]

Legal issues not dealing with governments have also arisen for cryptocurrencies. Coinye, for example, is an altcoin that used rapper Kanye West as its logo without permission. Upon hearing of the release of Coinye, originally called Coinye West, attorneys for Kanye West sent a cease and desist letter to the email operator of Coinye, David P. McEnery Jr. The letter stated that Coinye was willful trademark infringement, unfair competition, cyberpiracy, and dilution and instructed Coinye to stop using the likeness and name of Kanye West.[45] 17th of January 2014 Coinye was closed.[46]

The legal concern of an unregulated global economy[edit]

As the popularity of and demand for online currencies has increased since the inception of bitcoin in 2009,[47][48] 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.[49]

Cryptocurrency networks display a marked lack of regulation that attracts many users who seek decentralized exchange and use of currency; however the very same lack of regulations has been critiqued as potentially enabling criminals who seek to evade taxes and launder money.

Transactions that occur through the use and exchange of these altcoins are independent from formal banking systems, and therefore can make tax evasion simpler for individuals. Since charting taxable income is based upon what a recipient reports to the revenue service, it becomes extremely difficult to account for transactions made using existing cryptocurrencies, a mode of exchange that is complex and (in some cases) impossible to track.[49]

Systems of anonymity that most cryptocurrencies offer can also serve as a simpler means to launder money. Rather than laundering money through an intricate net of financial actors and offshore bank accounts, laundering money through altcoins can be achieved through anonymous transactions.[49]

Loss, theft, and fraud[edit]

GBL, a Chinese bitcoin trading platform, suddenly shut down on October 26, 2013. Subscribers, unable to log in, lost up to $5 million worth of bitcoin.[50][51]

In February 2014, cryptocurrency made headlines due to the world’s largest bitcoin exchange, Mt. Gox, declaring bankruptcy. The company stated that it had lost nearly $473 million of their customer’s bitcoins likely due to theft. This was equivalent to approximately 750,000 bitcoins, or about 7% of all the bitcoins in existence. Due to this crisis, among other news, the price of a bitcoin fell from a high of about $1,160 in December to under $400 in February.[52]

Two members of the Silk Road Task Force—a multi-agency federal task force that carried out the U.S. investigation of Silk Road—seized bitcoins for their own use in the course of the investigation.[53] DEA agent Carl Mark Force IV, who attempted to extort Silk Road founder Ross Ulbricht (“Dread Pirate Roberts”), pleaded guilty to money laundering, obstruction of justice, and extortion under color of official right, and was sentenced to 6.5 years in federal prison.[53] U.S. Secret Service agent Shaun Bridges pleaded guilty to crimes relating to his diversion of $800,000 worth of bitcoins to his personal account during the investigation, and also separately pleaded guilty to money laundering in connection with another cryptocurrency theft; he was sentenced to nearly eight years in federal prison.[54]

Homero Josh Garza, who founded the cryptocurrency startups GAW Miners and ZenMiner in 2014, acknowledged in a plea agreement that the companies were part of a pyramid scheme, and pleaded guilty to wire fraud in 2015. The U.S. Securities and Exchange Commission separately brought a civil enforcement action against Garza, who was eventually ordered to pay a judgment of $9.1 million plus $700,000 in interest. The SEC’s complaint stated that Garza, through his companies, had fraudulently sold “investment contracts representing shares in the profits they claimed would be generated” from mining.[55]

On November 21, 2017, an online company (Tether) which backs bitcoin cryptocurrency with fiat currency claims they were hacked, losing $31 million in USTD from their primary wallet.[56] The company has ‘tagged’ the stolen currency, hoping to ‘lock’ them in the hacker’s wallet (making them unspendable). Tether indicates that it is building a new core for its primary wallet in response to the attack in order to prevent the stolen coins from being used.

On December 6, 2017, more than $60 million worth of bitcoin was stolen after a cyber attack hit the cryptocurrency mining platform NiceHash (Slovenia-based company). According to the CEO Marko Kobal and co-founder Sasa Coh, bitcoin worth $64 million USD was stolen, although users have pointed to a bitcoin wallet which holds 4,736.42 bitcoins, equivalent to $67 million.[57][58]

Darknet markets[edit]

Cryptocurrency is also used in controversial settings in the form of online black markets, such as Silk Road. The original Silk Road was shut down in October 2013 and there have been two more versions in use since then; the current version being Silk Road 3.0. The successful format of Silk Road has been widely used in online dark markets, which has led to a subsequent decentralization of the online dark market. In the year following the initial shutdown of Silk Road, the number of prominent dark markets increased from four to twelve, while the amount of drug listings increased from 18,000 to 32,000.[49]

Darknet markets present growing challenges in regard to legality. Bitcoins and other forms of cryptocurrency used in dark markets are not clearly or legally classified in almost all parts of the world. In the U.S., bitcoins are labelled as “virtual assets”. This type of ambiguous classification puts mounting pressure on law enforcement agencies around the world to adapt to the shifting drug trade of dark markets.[59]

Since most darknet markets run through Tor, they can be found with relative ease on public domains. This means that their addresses can be found, as well as customer reviews and open forums pertaining to the drugs being sold on the market, all without incriminating any form of user.[49] This kind of anonymity enables users on both sides of dark markets to escape the reaches of law enforcement. The result is that law enforcement adheres to a campaign of singling out individual markets and drug dealers to cut down supply. However, dealers and suppliers are able to stay one step ahead of law enforcement, who cannot keep up with the rapidly expanding and anonymous marketplaces of dark markets.[59]

Fundings – ICOs[edit]

An initial coin offering (ICO) is a means by which funds are raised for a new cryptocurrency venture. An ICO may be used by startups with the intention of bypassing rigorous and regulated capital-raising processes required by venture capitalists or banks. 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 , it 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 Ethereum. The coins may ultimately be intended to be used as a medium of payment on a platform or within an ecosystem.[60][61][62][63]


Cryptocurrencies use various timestamping schemes to avoid the need for a trusted third party to timestamp transactions added to the blockchain ledger.

Proof-of-work schemes[edit]

The first timestamping scheme invented was the proof-of-work scheme. The most widely used proof-of-work schemes are based on SHA-256, which was introduced by bitcoin, and scrypt, which is used by currencies such as Litecoin.[27] The latter now dominates over the world of cryptocurrencies, with at least 480 confirmed implementations.[64]

Some other hashing algorithms that are used for proof-of-work include CryptoNight, Blake, SHA-3, and X11.

Modifications of the proof-of-work algorithm have been created to address the problem of scaling, such as the way the IOTA ledger works. IOTA uses a simplified Proof-of-work algorithm making use of directed acyclic graph.[65] A new transaction becomes part of the ledger after its sender does a small amount of proof-of-work. Each network participant is therefore also a miner, however without any economic incentive other than enabling their own transactions.[65][66] This system scales automatically as it gets used more.[67]

Proof-of-stake and combined schemes[edit]

Some cryptocurrencies use a combined proof-of-work/proof-of-stake scheme.[27][68] The 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.


Crypto-currency market capitalizations as of 12 November 2016

Crypto-currency market capitalizations as of 29 June 2017

Cryptocurrencies are used primarily outside existing banking and governmental institutions and are exchanged over the Internet. While these alternative, decentralized modes of exchange are in the early stages of development, they have the unique potential to challenge existing systems of currency and payments. As of December 2017 total market capitalization of cryptocurrencies is bigger than 600 billion USD and record high daily volume is larger than 500 billion USD.[69]

Competition in cryptocurrency markets[edit]

As of January 2018, there were over 1384 and growing[70][better source needed] digital currencies in existence.


In order to follow the development of the market of cryptocurrencies, indices keep track of notable cryptocurrencies and their cumulative market value.

Crypto index CRIX[edit]

The cryptocurrency index CRIX is a conceptual measurement jointly developed by statisticians at Humboldt University of Berlin, Singapore Management University and the enterprise CoinGecko and was launched in 2016.[71] The index represents cryptocurrency market characteristics dating back until July 31, 2014.[72][73] Its algorithm takes into account that the cryptocurrency market is frequently changing, with the continuous creation of new cryptocurrencies and infrequent trading of some of the existing ones.[74][75] Therefore, the number of index members is adjusted quarterly according to their relevance on the cryptocurrency market as a whole.[72] It is the first dynamic index reflecting changes on the cryptocurrency market.[citation needed]

CCI30 Crypto Currencies Index[edit]

The CCI30 index is composed of the 30 crypto currencies with the biggest market capitalization. It was created by a team of mathematicians, quantitative analysts and traders, led by Professor Igor Rivin and Carlo Scevola, economist. The components of the index are set at a fixed number of 30, weighted based on the square root of their smoothed market capitalization. The composition of the index is revised on a quarterly basis, using an exponentially weighted moving average of the market capitalization. The CCI30 starts in January 2015 with a value of 100. This index is freely available to the public,[76] and can be replicated by funds that follow a passive investment strategy.

Academic studies[edit]


In September 2015, the establishment of the peer-reviewed academic journal Ledger (ISSN 2379-5980) was announced. It will cover studies of cryptocurrencies and related technologies, and is published by the University of Pittsburgh.[77][78] The journal encourages authors to digitally sign a file hash of submitted papers, which will then be timestamped into the bitcoin blockchain. Authors are also asked to include a personal bitcoin address in the first page of their papers.[79][80]


Cryptocurrencies have been compared to pyramid schemes and economic bubbles,[81] such as housing market bubbles.[82] Howard Marks of Oaktree Capital Management stated in 2017 that digital currencies were “nothing but an unfounded fad (or perhaps even a pyramid scheme), based on a willingness to ascribe value to something that has little or none beyond what people will pay for it”, and compared them to the tulip mania (1637), South Sea Bubble (1720), and dot-com bubble (1999).[83] In October 2017, BlackRock CEO Larry Fink called bitcoin an ‘index of money laundering’.[84] “Bitcoin just shows you how much demand for money laundering there is in the world,” he said.

While cryptocurrencies are digital currencies that are managed through advanced encryption techniques, many governments have taken a cautious approach toward them, fearing their lack of central control and the effects they could have on financial security.[85] Regulators in several countries have warned against cryptocurrency and some have taken concrete regulatory measures to dissuade users.[86] Additionally, many banks do not offer services for cryptocurrencies and can refuse to offer services to virtual-currency companies.[87] While traditional financial products have strong consumer protections in place, there is no intermediary with the power to limit consumer losses if bitcoins are lost or stolen.[88] One of the features cryptocurrency lacks in comparison to credit cards, for example, is consumer protection against fraud, such as chargebacks.

An enormous amount of energy goes into proof-of-work cryptocurrency mining, although cryptocurrency proponents claim it is important to compare it to the consumption of the traditional financial system.[89] Some cryptocurrencies such as Ripple require no mining, and many others use proof-of-stake algorithms, which require far less energy.

There are also purely technical elements to consider. For example, technological advancement in cryptocurrencies such as bitcoin result in high up-front costs to miners in the form of specialized hardware and software.[90] Cryptocurrency transactions are normally irreversible after a number of blocks confirm the transaction. Additionally, cryptocurrency can be permanently lost from local storage due to malware or data loss. This can also happen through the destruction of the physical media, effectively removing lost cryptocurrencies forever from their markets.[91]

The cryptocurrency community refers to pre-mining, hidden launches, or extreme rewards for the altcoin founders as a deceptive practice,[92] but it can also be used as an inherent part of a digital cryptocurrency’s design, as in the case of Ripple.[93] Pre-mining means currency is generated by the currency’s founders prior to mining code being released to the public.[94]

The success of some cryptocurrencies has caused multi-level marketing schemes to arise with pseudo cryptocurrencies, such as OneCoin.[95]

See also[edit]


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External links[edit]