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Digital currencies are monetary units of exchange stored or represented in a digital or other electronic format that operate like currency in some environments, but that do not have legal tender status in any jurisdiction. Bitcoin is a leading digital currency that is not backed by any tangible real asset and without specie, such as coin or precious metal.
Supporters of digital currencies believe they have the potential to support more efficient global commerce and to help combat poverty. The use of digital currencies, for the first time, allows Internet users to transfer unique digital property in a way in which the legitimacy of the transfer cannot be challenged.
Leading digital currencies use a public or private ledger that records all transactions occurring in the system. The ledger is broken into blocks of transactions, and each new block of transactions is linked to the previous block, forming what is called the “blockchain.” The newest block at the end of the chain links back to every block that precedes it. Access to the most recent block allows users to follow the chain backward to observe every transaction ever made.
Digital currencies are often called crypto currencies because they uses cryptography to control transactions and prevent double-spending. Once validated, every individual transaction is permanently recorded in the blockchain.
Digital currencies are often stored by associating them with addresses called “wallets.” Wallets can be stored on web services, on local hardware like personal computers and mobile devices. A wallet takes the form of a cryptographic “public key,” which is a string of numbers and letters. Each public key has a matching “private key,” known only to the user. Control of the private keys is what assures one of control of the digital currency, so collections of private keys must be protected by passwords or other means of securing them.
Potential Applications of Blockchain Technology
Financial-services firms and technologists are exploring using blockchains as a record of ownership of financial products instead of using a series of internal ledgers. Industry leaders believe a trusted private ledger removes the need for reconciling each transaction with a counterparty and will reduce errors.
Regulation of Digital Currencies and Blockchain Technology
The growth of digital currency and the adoption of blockchain technology is complicated by a lack of regulatory certainty. The debate over the long-term potential of digital currencies and blockchain technology has been influenced in part by the regulatory scrutiny of regulators in the United States and Europe including, the Commodity Futures Trading Commission (CFTC), the Federal Bureau of Investigations (FBI), the U.S. Department of Justice, the U.S. Department of the Treasury through the Financial Crimes Enforcement Network (FinCEN), the Internal Revenue Service (IRS), the U.S. Securities and Exchange Commission (SEC), and the state of New York through the Department of Business Oversight.