Cryptocurrencies are digital mediums of exchange that use encryption techniques to control the creation of monetary units and verify the transfer of funds. They are designed to solve the problems of traditional currencies by putting the power and responsibility in the hands of the holders of the currency. All cryptocurrencies adhere to the 5 properties and 3 functions of money, while also attempting to solve one or more real-world problems. Blockchain technology is what allows cryptocurrencies to exist, with Bitcoin being the most well-known example.
Records of ownership of individual coins are stored in a ledger, which is a computerised database that uses strong cryptography to secure transaction records, control the creation of additional coins and verify the transfer of ownership. Cryptocurrencies are generally fiat currencies, as they are not backed by or convertible into a commodity. Some cryptocurrency schemes use validators to hold the currency, with owners putting up their tokens as collateral in return for authority over the token in proportion to the amount they stake.
Cryptocurrencies do not exist in physical form and are not usually issued by a central authority. Instead, they use decentralised 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 centralised. Decentralised cryptocurrencies operate through a distributed ledger technology, typically a blockchain, which serves as a public database of financial transactions.
Bitcoin was created as a way to send money over the Internet without central control but otherwise used in the same way as traditional currencies. Regulators are still trying to figure out how to classify cryptocurrencies for trading, payments, anti-fraud, taxation and other purposes.
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