Digital currency has become increasingly popular; since the introduction of Bitcoin in 2009, several digital currencies have been introduced and major companies like Dell and Overstock.com now accept the digital currency.
These digital currencies, also known as cryptocurrencies, are designed to cut out the banking middlemen, whose role is to process and verify transactions. Cryptocurrencies are digital currencies designed to use encryption techniques to regulate the generation of units of currency and verify the transfer of funds, these currencies are operated independently of a central bank.
Cryptocurrency allows a network of thousands of redundant computers to replace the middlemen, doing their job more accurately and more efficiently than centralized banks and financial institutions. Bitcoin, the most popular digital currency, has built a currency and electronic payments network which is not based on a physical commodity and releases new currency based on a set schedule to avoid over saturation. The central feature of Bitcoin is the blockchain, a publicly available database that records every bitcoin transaction. Instead of a centralized database controlled by a central bank, a decentralized computer network maintains the blockchain.
According to Bitcoin, the blockchain is a “shared public ledger on which the entire Bitcoin network relies. All confirmed transactions are included in the block chain. This way, Bitcoin wallets can calculate their spendable balance and new transactions can be verified to be spending bitcoins that are actually owned by the spender. The integrity and the chronological order of the block chain are enforced with cryptography.”
Complaints about digital currencies like Bitcoin often center on their potential use by criminals. Critics argue the unregulated digital currencies will allow criminals to hide or launder their money more easily, they argue tight regulations are needed. While these concerns are not without some merit, criminals already use hard currency in illegal activities; overregulating digital currencies before they have the opportunity to evolve and address these concerns is poor public policy.
Certain regulations on cryptocurrencies are appropriate, these regulations should focus on the same rules which govern regular currencies: contracts, disclosure, and fraud. Digital currencies need to be allowed to develop naturally, not only do they provide more options for consumers, but the competition created by these new currencies could promote improvements with existing currencies and monetary policies.