Cryptocurrencies represent value in the form of a sum of money. These are purely digital currency units that can be used to underpin a payment system that is an alternative to the regular currencies issued by central banks (sometimes referred to as ‘fiat currencies’ to distinguish them from cryptocurrencies). The world’s best known and oldest cryptocurrency is the bitcoin. In the Netherlands, bitcoins and other cryptocurrencies have a legal status as a means of exchange, but they are not legal tender.
Cryptocurrencies are generally recorded in decentralised data structures known as blockchains. Sometimes there is a separate blockchain for a specific cryptocurrency and in other cases, a single blockchain handles several currencies and/or other forms of digital property (known as tokens).
In general, cryptocurrencies are obtained by exchanging legal tender (such as dollars or euros) for the cryptocurrency through an online money changer (an exchange). Cryptocurrency can also be exchanged for goods or services; one example of the latter is providing the computer capacity needed for maintaining the blockchain network, also known as ‘mining’. The people running these mining computers are rewarded in cryptocurrency. Transactions using cryptocurrencies can also be programmed in the blockchain itself. This type of automated transaction is also referred to as a smart contract; these can also be added to the blockchain to guarantee the integrity of the rules that govern the transfer of digital tokens.
The blockchain is then acting as a publicly visible yet decentralised ledger that is distributed across a large number of computers worldwide. Well-known tokens that have their own blockchains are Bitcoin, Litecoin and Dash. Nobody can wipe earlier transactions from the blockchain and there is no need for anyone to act as an intermediary when trading in the currency. Thanks to the strong cryptography used in the transactions in the blockchain, they are immutable (i.e. cannot be changed). One risk of cryptocurrencies is that their value as expressed in fiat currencies can be very volatile. The reasons for that include the absence of any central banks attempting to damp down any fluctuations in value. An exception to the rule is what are known as stable coins, for which efforts are made actively to link them to an exchange rate against e.g. the dollar or the euro.