41841 – Cryptocurrencies: A Decentralised Alternative?

Cryptocurrencies have emerged as one of the most disruptive forces in modern finance, challenging long-held assumptions about what money is and who gets to issue it. Rather than being created and backed by a central bank, a cryptocurrency is a digital asset secured by cryptography and, in most cases, recorded on a distributed ledger maintained by a decentralised network of computers rather than any single institution.^1,24 This entry examines the technological foundations that make cryptocurrencies possible — blockchain, cryptography, and the consensus mechanisms that keep a decentralised network honest — before turning to the case for and against cryptocurrencies as a genuine alternative to fiat money, and how they are beginning to interact with the traditional financial system they were, in part, designed to bypass.

This entry covers:

• The core technologies underpinning cryptocurrencies — blockchain, cryptography, consensus mechanisms (Proof-of-Work and Proof-of-Stake), distributed ledgers, and smart contracts
• The potential advantages of cryptocurrencies over fiat money — decentralisation, transparency, limited supply, lower transaction costs, and financial inclusion
• The risks and challenges cryptocurrencies present — volatility, scalability, security, regulatory uncertainty, energy consumption, and illicit use
• How cryptocurrencies interact with the existing financial system, including stablecoins and the emergence of central bank digital currencies as a regulated response

This entry does not cover:

• Central bank digital currencies in detail — addressed in 41842
• The broader fintech ecosystem (mobile payments, robo-advisors, regtech) — addressed in 41843
• The prospect of a cashless society and its social implications — addressed in 41844

Cryptocurrency regulation remains a patchwork in progress. Because cryptocurrencies were designed to operate without a central issuing authority, they sit awkwardly within regulatory frameworks built around banks, currencies, and securities issued by identifiable, accountable entities. The result is significant uncertainty for investors and businesses: rules can restrict market access, create jurisdictional enforcement gaps as transactions cross borders instantly, and raise the cost of doing business for legitimate operators trying to comply with rules still being written.^37,38

Anti-money-laundering (AML) and know-your-customer (KYC) obligations are the area where regulatory frameworks have moved fastest, largely because the pseudonymous, borderless nature of crypto transactions makes them attractive for money laundering, tax evasion, and, in some documented cases, terrorist financing. Cryptocurrency exchanges in most developed jurisdictions are now required to verify customer identity and report suspicious transactions in much the same way as traditional financial institutions.^41,42

Legal tender status remains the exception rather than the rule: El Salvador’s 2021 decision to adopt Bitcoin as legal tender alongside the US dollar is a notable outlier, while most jurisdictions treat cryptocurrencies as property or a regulated financial instrument rather than money proper.^22,38 Central banks have not stood still in the face of this regulatory gap — the exploration of central bank digital currencies, covered in the next entry in this series, is in part a direct regulatory response, offering a central bank-backed digital alternative that sits inside existing monetary and legal frameworks rather than outside them.^47,48,49

Cryptocurrencies are frequently framed as either replacing or complementing the existing financial system, but in practice the relationship is more textured than either framing alone suggests.

Potential advantages. Decentralisation removes reliance on any single controlling entity, offering censorship resistance and, proponents argue, greater financial autonomy for users excluded from traditional banking.^30,31 Blockchain’s public ledger provides a degree of transparency uncommon in traditional finance.²⁵ Some cryptocurrencies, Bitcoin foremost among them, have a fixed or capped supply, which advocates argue can help preserve purchasing power against inflation.^26,43 Transaction costs, particularly for cross-border transfers, can undercut traditional remittance channels: the World Bank put the global average cost of sending USD200 at 6.2% in the fourth quarter of 2022, more than twice the Sustainable Development Goal target of 3%,²⁷ whereas on-chain transfer fees are typically a fraction of that — though crypto transaction fees themselves fluctuate with network congestion and are not a like-for-like remittance cost.

Risks and challenges. Price volatility undermines the case for cryptocurrencies as a stable medium of exchange or store of value.^32,33 Many networks face scalability constraints that slow transaction speeds and push up fees during periods of high demand.^34,35 Security risks span exchange hacks, stolen private keys, and vulnerabilities in smart-contract code, with lost passwords or keys able to permanently strand a user’s holdings.³⁶ Proof-of-Work networks in particular draw scrutiny over energy consumption,^39,40 and the pseudonymity that appeals to privacy-conscious users is the same feature that makes illicit use harder to police.⁴¹

Interaction with the existing financial system. Rather than a clean substitution, cryptocurrencies increasingly sit alongside traditional finance. Stablecoins are used for trading and settlement on exchanges, as collateral within decentralised finance (DeFi) platforms, and as a bridge to financial services for the unbanked.^44,45 Established financial institutions have moved from wary distance to active engagement, offering custody and trading services for digital assets.^28,29 Central banks, for their part, have responded to the rise of private cryptocurrencies by accelerating work on their own digital currencies — seeking the efficiency gains of digital money without ceding monetary control to a decentralised, unregulated network.⁴⁷

Long-term outlook. Views diverge sharply. Proponents see cryptocurrencies enabling genuine financial freedom, innovation, and a more equitable financial system, with some advocating national reserve holdings of Bitcoin as a store of value and inflation hedge. Sceptics point to volatility, weak consumer protection, environmental cost, and the potential for illicit use. Mainstream economists and policymakers tend to sit between these poles, treating cryptocurrencies as a technology to be cautiously integrated and regulated rather than either embraced uncritically or dismissed outright.^22,23,24 Which view proves closer to the mark will depend on the interplay of technology, regulation, and public trust playing out over the years ahead.

1. What is blockchain? — IBM
2. What is Blockchain? — AWS
3. How does blockchain work? — Stanford Online
4. What Is Blockchain and How Does It Work? — Black Duck
5. Cryptocurrency security explained — University of Tulsa
6. What is cryptography? — Coinbase
7. What is double-spending and why is it such a problem? — Bitpanda Academy
8. Beyond the doomsday economics of "proof-of-work" in cryptocurrencies — BIS Working Papers
9. What is bitcoin mining? — Fidelity
11. Proof of Work (PoW): What it is and how it works — NerdWallet
12. What is Proof of Stake? — Tezos
13. Proof of stake — Ledger Academy
14. What is staking? — Bitpanda Academy
15. Proof of Work vs. Proof of Stake — Coinbase
16. Distributed ledger technology in payment, clearing and settlement: an analytical framework — Bank for International Settlements (CPMI)
17. What are distributed ledger technologies (DLTs)? — Hedera
19. Smart contracts — Iberdrola
20. What are Bitcoin smart contracts? — River
21. Blockchain for Decentralized Finance (DeFi) — ConsenSys
22. Crypto-assets — Moneysmart (Australian Securities and Investments Commission)
23. The Financial Stability Risks of Decentralised Finance — Financial Stability Board
24. Cryptocurrencies: looking beyond the hype — Bank for International Settlements, 2018 Annual Economic Report
25. Blockchain transparency — DeFipedia
26. Best crypto with limited supply in 2024 — Mudrex Learn
27. Remittances Remain Resilient but Likely to Slow — World Bank press release, 13 June 2023
28. Cryptocurrency’s impact on traditional banking — Finance Magnates
29. Cryptocurrency vs. traditional banking — Coincover
30. Decentralized finance: Racial equity and financial inclusion — Northwestern University Law Review
31. Achieving financial inclusion through digital currencies — UNDP
32. Crypto market volatility — Kraken
33. Volatility of leading cryptocurrencies worldwide — Statista
34. Bitcoin scalability — Xverse
35. Blockchain scalability — Crypto.com University
36. Top cryptocurrency security threats — Microminder
37. Cryptocurrency compliance challenges & strategies — Anaptyss
38. Cryptocurrency regulation — Encyclopædia Britannica
39. Bitcoin: Electricity consumption comparable to that of Poland — École polytechnique
40. Bitcoin energy consumption — Crypto.com
41. Crypto crime 2024 report — Trend Micro
42. Prospects and models of combating cryptocurrency crimes — EUCRIM
43. Fiat vs. crypto: What’s the difference? — The Motley Fool
44. This week in Web3 was all about stablecoins — PYMNTS.com
45. What is a stablecoin? — Coinbase
46. Top Types of Stablecoins You Need to Know — KuCoin Learn
47. Central bank digital currencies — Committee on Payments and Market Infrastructures & Markets Committee, Bank for International Settlements
48. CBDC Tracker — Atlantic Council
49. CBDC: Central bank digital currency — Deloitte