Cryptocurrencies are virtual coins used to make digital payments. They’re exchanged on decentralized computer networks between people with virtual wallets, and transactions are recorded publicly on tamper-proof ledgers called blockchains. Bitcoin, launched in 2009, is the most famous cryptocurrency; it now has a market value of more than $1 trillion. Other cryptocurrencies have proliferated, and some investors hold them as investments in the hope that they will rise in value. Like stocks and bonds, cryptocurrency investments are subject to volatile price swings that can result in large losses. But unlike traditional financial assets, cryptocurrency investments are not backed by government-backed insurance or other consumer protections.
Proponents say cryptocurrencies empower individuals, bypassing central banks and Wall Street. But critics allege that they are a tool of criminal activity and rogue states, facilitating illegal activities such as ransomware (attacking computer networks to demand payment in cryptocurrency) and the trade of illicit drugs. They also claim that cryptocurrencies promote inequality and are vulnerable to extreme price volatility.
The cryptocurrency boom has prompted governments around the world to begin crafting rules for the industry. But the rapid rise of cryptocurrencies and DeFi enterprises means that billions of dollars are now being invested in a sector with very little regulation, raising concerns about fraud, cybersecurity, and the potential for financial stability risks. And the enormous energy requirements of cryptocurrency mining raise environmental concerns. In a bid to assert sovereignty, many central banks are considering introducing their own digital currencies, known as CBDCs.
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