Cryptocurrencies
in the stability of their value through the use of technology. They consist of three
elements. First, a set of rules (the “protocol”), computer code specifying how
participants can transact. Second, a ledger storing the history of transactions. And
third, a decentralised network of participants that update, store and read the ledger
of transactions following the rules of the protocol. With these elements, advocates
claim, a cryptocurrency is not subject to the potentially misguided incentives of
banks and sovereigns.
In terms of the money flower taxonomy, cryptocurrencies combine three key
features. First, they are digital, aspiring to be a convenient means of payment and
relying on cryptography to prevent counterfeiting and fraudulent transactions.
Second, although created privately, they are no one’s liability, ie they cannot be
redeemed, and their value derives only from the expectation that they will continue
to be accepted by others. This makes them akin to a commodity money (although
without any intrinsic value in use). An
exchange.
Compared with other private digital moneys such as bank deposits, the
distinguishing feature of cryptocurrencies is digital peer-to-peer exchange. Digital
bank accounts have been around for decades. And privately issued “virtual
currencies” – eg as used in massive multiplayer online games like World of Warcraft
– predate cryptocurrencies by a decade. In contrast to these, cryptocurrency
transfers can in principle take place in a decentralised setting without the need for
a central counterparty to execute the exchange
