For many, ‘virtual’ currencies such as Bitcoin remain a mystery primarily associated with online criminals, despite no longer being far removed from the monetary system and transactions we’re used to. This article is intended to serve as a primer, rather than one of our more usual technical analyses: cryptocurrencies continue to play a key role in many areas of cyber-crime being used for everything from online marketplace transactions to ransomware demands. However, with a number of legitimate organisations ranging from the Bank of England to EY also taking an interest cryptocurrencies and the technologies behind them, it’s worth being informed.
Virtual currencies
The 2000s saw an increase in the number and utility of entirely virtual currencies (as opposed to digital currencies backed by some form of legal tender).
A number of dry definitions of ‘virtual currency’ exist, with the European Central Bank defining it as:
“a type of unregulated, digital money, which is issued and usually controlled by its developers, and used and accepted among the members of a specific virtual community”[3]
By this broad definition, a number of things qualify as virtual currencies: while some online games such as World of Warcraft forbid the exchange of the in-game currency for any other form of money, a black market engaging in just this exists. Equally, a number of online marketplaces – especially within the gaming community – require the one-way exchange of legal tender for virtual currencies, e.g. Microsoft Points.
Of course, a common feature of all of the currencies discussed so far is that they’re centralised: the Federal Reserve is the centralised authority and repository for US dollars, GS&R – the company behind E-Gold – held a centralised ledger tracking transactions, and Microsoft naturally keep track of Microsoft Points.
While not legal tender, the value of these currencies is agreed and accepted by all of the parties involved – much as people generally accept the declared value of paper money or an electronic bank transfer.
The arrival of Bitcoin in 2009 – the first and, arguably, most famous decentralised virtual currency – had a significant impact.