Private digital money, including cryptocurrencies

This chapter considers various types of private digital money, in particular cryptocurrencies, and how they differ – and particularly the operational risks of supporting them. First, the chapter describes some of the history of private money, which has emerged at various points in the past but then fallen into disuse until recently with the spectacular rise of cryptocurrencies such as Bitcoin. Some commentators have proclaimed a new era of finance, often claiming that private cryptos would replace existing financial institutions. The chapter then considers the underlying technology of most cryptocurrencies – blockchain – and how cryptocurrencies are created. The two leading cryptocurrencies – Bitcoin and Ethereum are described, as is the operations of a special type of cryptocurrency, a stablecoin. Finally, the chapter describes some of the operational risks that arise from issuing private money, while several case studies are provided in appendices.