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What Is a Cryptocurrency?

Cryptocurrencies, such as the best-known version called bitcoin, emerged in 2009 as a means to process electronic payments. As we move further away from a cash-based economy, so much of how we conduct financial transactions is based on two factors: Credit and trust.

In order to extend credit, a financial institution must trust that the consumer will pay it back. The consumer, in return, must trust that the institution will keep his or her personal data, account numbers and other financial information secure. As we have learned during the course of this transition to a cashless society, mutual trust can and is breached quite often.

That chasm is what created a new form of currency, referred to as cryptocurrency because it exists only in electronic form. Instead of trusting a financial institution to securely conduct transactions, it takes the institution – and its accompanying need to collect personal data and impose middle-man fees – out of the trade deal. Cryptocurrency is a direct, peer-to-peer electronic transaction system secured by code that only the entity on the receiving end can read and process.

The transaction is secure, instant, irreversible, anonymous and incurs no third-party transaction fees. Also note that it is not backed, controlled or overseen by any central authority, and all transactions are recorded via a central cloud-based database. Because of the level of anonymity they offer, cryptocurrencies are unfortunately often connected with illegal activity.

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