Once dismissed as a fringe interest of tech evangelists, virtual currencies like Bitcoin have surged to mainstream popularity and trillion dollar valuations. Created on decentralized computer networks, they are exchanged between individuals with virtual wallets and recorded publicly on distributed, tamper-proof ledgers known as blockchains. Blockchains eliminate the need for central authorities such as banks to verify transactions. Bitcoin, launched in 2009 by the pseudonymous software engineer Satoshi Nakamoto, is currently the most popular cryptocurrency with a market capitalization that peaked earlier this year at more than $60,000 per coin before falling sharply. Other cryptos such as Dogecoin have also gained value and garnered investments from high profile investors.
Proponents argue that cryptocurrencies democratize finance by enabling people to send money to each other without the involvement of third parties. Critics, however, point out that the currencies are used by criminals, terrorists, and rogue states to finance illicit activities, suffer from extreme market volatility, and consume massive amounts of electricity in mining operations. In addition, the rapid growth of cryptocurrencies and related DeFi enterprises is raising concerns over security, financial stability, taxation, and consumer protection.
Some cryptocurrencies claim to be fixed in price by being pegged to assets such as gold or the U.S. dollar, but most see their values rise and fall based on speculation and investor demand. As a result, many investors are unprotected by traditional laws such as bankruptcy and fraud. Regulators are attempting to craft rules that limit risks while encouraging innovation in the sector.