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). Media coverage of cryptocurrencies has been widespread, and various observers have characterized cryptocurrencies as either the future of monetary and payment systems that will displace government-backed currencies or a fad with little real value. 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. Even when forms of money had intrinsic value, governments played a role in assigning value to money. The trusted intermediaries maintain private ledgers of accounts recording how much money each participant holds. In addition, intermediaries generally are required to provide certain protections to consumers involved in electronic transactions. Notably, certain individuals may lack access to electronic payment systems. In general, these electronic payment systems use public ledgers that allow individuals to establish an account with a pseudonymous name known to the entire network—or an address corresponding to a public key—and a passcode or private key that is paired to the public key and known only to the account holder. In addition, certain companies offer applications or interfaces that users can download onto a device to make transacting in cryptocurrencies more user-friendly. Blockchain technology uses cryptographic protocols to prevent invalid alteration or manipulation of the public ledger. In this system, parties that otherwise do not know each other can exchange something of value (i.e., a digital currency) not because they trust each other but because they trust the platform and its cryptographic protocols to prevent double spending and invalid changes to the ledger. Recent volatility in the price of cryptocurrencies suggests they function poorly as a unit of account and a store of value (two of the three functions of money discussed in " The Functions of Money ," above), an issue covered in the " Potential Challenges to Widespread Adoption " section of this report. This number indicates how many times a day Bitcoins are transferred between accounts. Skeptics, however, emphasize the obstacles facing the widespread adoption of cryptocurrencies and doubt that cryptocurrencies can overcome these challenges. These risks could act as a disincentive to parties considering using cryptocurrencies in certain transactions and thus could hinder cryptocurrencies' ability to act as a medium of exchange. Potential Risks Posed by Cryptocurrencies

Policymakers developed most financial laws and regulations before the invention and subsequent growth of cryptocurrencies, which raises questions about whether existing laws and regulations appropriately and efficiently address the risks posed by cryptocurrency. These bills include the following: 
H.R. H.R. H.R. H.R. However, this secondary use of cryptocurrency as investment vehicles is different from the use of cryptocurrencies as money, and it is beyond the scope of this report. Cryptocurrency is a relatively new type of asset, and consumers may not be familiar with how cryptocurrencies work and how they derive their value. Some central bankers and other experts and observers have speculated that the widespread adoption of cryptocurrencies could affect the ability of the Federal Reserve and other central banks to implement and transmit monetary policy, and some have suggested that these institutions should issue their own digital, fiat currencies. For example, some proponents extend the arguments related to cryptocurrencies providing efficiency gains over traditional legacy systems to CBCDs; they contend that central banks could use the technologies underlying cryptocurrencies to deploy a faster, less costly government-supported payment system. Proponents of the technology assert cryptocurrencies will become a widely used payment method and provide increased economic efficiency, privacy, and independence from centralized institutions and authorities. Skeptics—citing technological challenges and obstacles to widespread adoption—assert cryptocurrencies do not effectively perform the functions of money and will not be a valuable, widely used form of money in the future. As technological advancements and economic conditions play out, policymakers likely will be faced with various issues related to cryptocurrency, including concerns about its alleged facilitation of crime, the adequacy of consumer protections for those engaged in cryptocurrency transactions, the level of appropriate regulation of the industry, and cryptocurrency's potential effect on monetary policy.
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 2008 invention of the first cryptocurrency, Bitcoin, cryptocurrencies have proliferated. In recent years, they experienced a rapid increase and subsequent decrease in value. One estimate found that, as of August 2018, there were nearly 1,900 different cryptocurrencies worth about $220 billion. 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. 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. 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. They note various obstacles to extensive adoption of cryptocurrencies, including economic (e.g., existing trust in traditional systems and volatile cryptocurrency value), technological (e.g., scalability), and usability obstacles (e.g., access to equipment necessary to participate). 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 been 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 115th Congress has shown significant interest in these and other issues relating to cryptocurrencies. For example, the House passed several bills (H.R. 2433, H.R. 5036, and H.R. 6069, and H.R. 6411) aimed at better understanding or regulating cryptocurrencies. The 116th Congress—and beyond—may continue to consider the numerous policy issues raised by the increasing use of cryptocurrencies.