Cryptocurrency: The Economics of Money and Selected Policy Issues

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Table 1. Selected CRS Products Covering Cryptocurrency Related Issues Summary Cryptocurrencies are digital money in electronic payment systems that generally do not require government backing or the involvement of an intermediary, such as a bank. Instead, users of the system validate payments using certain protocols.

Since the invention of the first cryptocurrency, Bitcoin, cryptocurrencies have proliferated. In recent years, they experienced a rapid increase and subsequent decrease in value.

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Given this rapid growth and volatility, cryptocurrencies have drawn the attention of the public and policymakers. A particularly notable feature of cryptocurrencies is their potential to act as an alternative form of money. Historically, money has either had intrinsic value or derived value from government decree.

Cryptocurrency: The Economics of Money and Selected Policy Issues

Using money electronically generally has involved using the private ledgers and systems of at least one trusted intermediary. Cryptocurrencies, by contrast, generally employ user agreement, a network of users, and cryptographic protocols to achieve valid transfers of value. Cryptocurrency users typically use a pseudonymous address to identify each other and a passcode or private key to make changes to a public ledger in order to transfer value between accounts.

Other computers in the network validate these transfers. Through this use of blockchain technology, cryptocurrency systems protect their public ledgers of accounts against manipulation, so that users can only send cryptocurrency to which they have access, thus allowing users to make valid transfers without a centralized, trusted intermediary.

Money serves three interrelated economic functions: it is a medium of exchange, a unit of account, and a store of value.

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How well cryptocurrencies can serve those functions relative to existing money and payment systems likely will play a large part in determining cryptocurrencies' future value and importance. Proponents of the technology argue cryptocurrency can effectively serve those functions and will be widely adopted.

They contend that a decentralized system using cryptocurrencies ultimately will be more efficient and secure than existing monetary and payment systems. Skeptics doubt that cryptocurrencies can effectively act as money and achieve widespread use.

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They note various obstacles to extensive adoption of cryptocurrencies, including economic e. In addition, skeptics assert that cryptocurrencies are currently overvalued and under-regulated. The invention and proliferation of cryptocurrencies present numerous risks and related policy issues. Cryptocurrencies, because they are pseudonymous and decentralized, could facilitate money laundering and other crimes, raising the issue of whether existing regulations appropriately guard against this possibility.

Many consumers may lack familiarity with cryptocurrencies and how they work and derive value. In addition, although cryptocurrency ledgers appear safe from manipulation, individuals and exchanges have Fibonacci correction hacked or targeted in scams involving cryptocurrencies.

Accordingly, critics of cryptocurrencies have raised concerns that existing laws and regulations do not adequately protect consumers dealing in cryptocurrencies. At the same time, proponents of cryptocurrencies warn against over-regulating what they argue is a technology that will yield large benefits. Finally, if cryptocurrency becomes a widely used form of money, it could affect the ability of the Federal Reserve and other central banks to implement and transmit monetary policy, leading some observers to argue that central banks should develop their own digital currencies as opposed to a cryptocurrency ; others oppose this idea.

The th Congress has shown significant interest in these and other issues relating to cryptocurrencies. For example, the House has passed several bills H.

make money on the exchange of bitcoin within the payer system

Introduction Inan unknown computer programmer or group of programmers using the pseudonym Satoshi Nakamoto created a computer platform that would allow users to make valid transfers of digital representations of value. A cryptocurrency is digital money in an electronic payment system in which payments are validated by a decentralized network of system users and cryptographic protocols instead of by a centralized intermediary such as a bank.

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For example, cryptocurrencies have been sold to investors to raise funding through initial coin offerings ICOs4 and the terms of certain derivatives are now based on cryptocurrencies. The purpose of this report is to assess how and how well cryptocurrencies perform this function, and in so doing to identify possible benefits, challenges, risks, and policy issues surrounding cryptocurrencies. It then describes the features and characteristics of cryptocurrencies and examines the potential benefits they offer and the challenges they face regarding their use as money.

The report also examines certain risks posed by cryptocurrencies when they are used as money and related policy issues, focusing in particular on two issues: cryptocurrencies' potential role in facilitating criminal activity and concerns about protections for consumers who use these currencies.

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Finally, the report analyzes cryptocurrencies' impact on monetary policy and the possibility that central banks could issue their own, government-backed digital currencies. Where this report examines the regulation of cryptocurrencies, make money on the exchange of bitcoin within the payer system generally focuses on how they are regulated in the United Make money on the exchange of bitcoin within the payer system.

The Functions of Money Money exists because it serves a useful economic purpose: it facilitates the exchange of goods and services. Without it, people would have to engage in a barter economy, wherein people trade goods and services for other goods and services.

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In a barter system, every exchange requires a double coincidence of wants—each party must possess the exact good or be offering the exact service that the other party wants. In turn, the rancher, tailor, and dentist would have to make the same search and negotiation with each other to satisfy their wants.

Wants are satisfied more efficiently if all members of a society agree they will accept money—a mutually recognized representation of value—for payment, be that ounces of gold, a government-endorsed slip of paper called a dollar, or a digital entry in an electronic ledger.

How well something serves as money depends on how well it serves as 1 a medium of exchange, 2 a unit of account, and 3 a store of value. To function as a medium of exchange, the thing must be tradable and agreed to have value.

To function as unit of account, the thing must act as a good measurement system. To function as a store of value, the thing must be able to purchase approximately the same value of goods and services at some future date as it can purchase now.

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Conceivably, yes. A potato has intrinsic value this report will examine value in more detail in the following section, " Traditional Money "as it provides nourishment. However, a potato's tradability is limited: many people would find it impractical to carry around sacks of potatoes for daily transactions or to buy a car for many thousands of pounds of potatoes. A measurement system based on potatoes is also problematic.

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Each potato has a different size and degree of freshness, so to say something is worth "one potato" is imprecise and variable. In addition, a potato cannot be divided without changing its value.

Two halves of a potato are worth less than a whole potato—the exposed flesh will soon turn brown and rot—so people would be unlikely to agree to prices in fractions of potato. The issue of freshness also limits potatoes' ability to be a store of value; a potato eventually sprouts eyes and spoils, and so must be spent quickly or it will lose value.

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In contrast, an ounce of gold and a dollar bill can be carried easily in a pocket and thus are tradeable. Each unit is identical and can be divided into fractions of an ounce or cents, respectively, making both gold and dollars effective units of account. Gold is an inert metal and a dollar bill, when well cared for, will not degrade substantively for years, meaning can both function as a store of value.

Likewise, with the use of digital technology, electronic messages to change entries in a ledger can be sent easily by swiping a card or pushing a button and can be denominated in identical and divisible units.