A cryptocurrency, crypto-currency, or crypto[a] is a digital currency designed to work as a medium of exchange through a computer network that is not reliant on any central authority, such as a government or bank, to uphold or maintain it.[2] It is a decentralized system for verifying that the parties to a transaction have the money they claim to have, eliminating the need for traditional intermediaries, such as banks, when funds are being transferred between two entities.[3]

Individual coin ownership records are stored in a digital ledger, which is a computerized database using strong cryptography to secure transaction records, control the creation of additional coins, and verify the transfer of coin ownership.[4][5][6] Despite their name, cryptocurrencies are not considered to be currencies in the traditional sense, and while varying treatments have been applied to them, including classification as commodities, securities, and currencies, cryptocurrencies are generally viewed as a distinct asset class in practice.[7][8][9] Some crypto schemes use validators to maintain the cryptocurrency. In a proof-of-stake model, owners put up their tokens as collateral. In return, they get authority over the token in proportion to the amount they stake. Generally, these token stakers get additional ownership in the token over time via network fees, newly minted tokens, or other such reward mechanisms.[10]

Cryptocurrency does not exist in physical form (like paper money) and is typically not issued by a central authority. Cryptocurrencies typically use decentralized control as opposed to a central bank digital currency (CBDC).[11] When a cryptocurrency is minted, or created prior to issuance, or issued by a single issuer, it is generally considered centralized. When implemented with decentralized control, each cryptocurrency works through distributed ledger technology, typically a blockchain, that serves as a public financial transaction database.[12]

The first cryptocurrency was Bitcoin, which was first released as open-source software in 2009. As of March 2022, there were more than 9,000 other cryptocurrencies in the marketplace, of which more than 70 had a market capitalization exceeding $1 billion.[13]

History

See also: History of bitcoin

In 1983, American cryptographer David Chaum conceived of a type of cryptographic electronic money called ecash.[14][15] Later, in 1995, he implemented it through Digicash,[16] an early form of cryptographic electronic payments. Digicash required user software in order to withdraw notes from a bank and designate specific encrypted keys before it can be sent to a recipient. This allowed the digital currency to be untraceable by a third party.

In 1996, the National Security Agency published a paper entitled How to Make a Mint: The Cryptography of Anonymous Electronic Cash, describing a cryptocurrency system. The paper was first published in an MIT mailing list[17] and later in 1997 in The American Law Review.[18]

In 1998, Wei Dai described "b-money", an anonymous, distributed electronic cash system.[19] Shortly thereafter, Nick Szabo described bit gold.[20] Like Bitcoin and other cryptocurrencies that would follow it, bit gold (not to be confused with the later gold-based exchange BitGold) was described as an electronic currency system which required users to complete a proof of work function with solutions being cryptographically put together and published.

In January 2009, Bitcoin was created by pseudonymous developer Satoshi Nakamoto. It used SHA-256, a cryptographic hash function, in its proof-of-work scheme.[21][22] In April 2011, Namecoin was created as an attempt at forming a decentralized DNS. In October 2011, Litecoin was released which used scrypt as its hash function instead of SHA-256. Peercoin, created in August 2012, used a hybrid of proof-of-work and proof-of-stake.[23]

See also: Cryptocurrency bubble § History

Cryptocurrency has undergone several periods of growth and retraction, including several bubbles and market crashes, such as in 2011, 2013-2014–15, 2017-2018 and 2021–2023.[24][25]

On 6 August 2014, the UK announced its Treasury had commissioned a study of cryptocurrencies, and what role, if any, they could play in the UK economy. The study was also to report on whether regulation should be considered.[26] Its final report was published in 2018,[27] and it issued a consultation on cryptoassets and stablecoins in January 2021.[28]

In June 2021, El Salvador became the first country to accept Bitcoin as legal tender, after the Legislative Assembly had voted 62–22 to pass a bill submitted by President Nayib Bukele classifying the cryptocurrency as such.[29]

In August 2021, Cuba followed with Resolution 215 to recognize and regulate cryptocurrencies such as Bitcoin.[30]

In September 2021, the government of China, the single largest market for cryptocurrency, declared all cryptocurrency transactions illegal. This completed a crackdown on cryptocurrency that had previously banned the operation of intermediaries and miners within China.[31]

On 15 September 2022, the world's second largest cryptocurrency at that time, Ethereum transitioned its consensus mechanism from proof-of-work (PoW) to proof-of-stake (PoS) in an upgrade process known as "the Merge". According to the Ethereum Founder, the upgrade can cut both Ethereum's energy use and carbon-dioxide emissions by 99.9%.[32]

On 11 November 2022, FTX Trading Ltd., a cryptocurrency exchange, which also operated a crypto hedge fund, and had been valued at $18 billion,[33] filed for bankruptcy.[34] The financial impact of the collapse extended beyond the immediate FTX customer base, as reported,[35] while, at a Reuters conference, financial industry executives said that "regulators must step in to protect crypto investors."[36] Technology analyst Avivah Litan commented on the cryptocurrency ecosystem that "everything...needs to improve dramatically in terms of user experience, controls, safety, customer service."[37]

Formal definition

According to Jan Lansky, a cryptocurrency is a system that meets six conditions:[38]

The system does not require a central authority; its state is maintained through distributed consensus.

The system keeps an overview of cryptocurrency units and their ownership.

The system defines whether new cryptocurrency units can be created. If new cryptocurrency units can be created, the system defines the circumstances of their origin and how to determine the ownership of these new units.

Ownership of cryptocurrency units can be proved exclusively cryptographically.

The system allows transactions to be performed in which ownership of the cryptographic units is changed. A transaction statement can only be issued by an entity proving the current ownership of these units.

If two different instructions for changing the ownership of the same cryptographic units are simultaneously entered, the system performs at most one of them.

In March 2018, the word cryptocurrency was added to the Merriam-Webster Dictionary.[39]

Altcoins

Further information: List of cryptocurrencies

Tokens, cryptocurrencies, and other digital assets other than Bitcoin are collectively known as alternative cryptocurrencies,[40][41][42] typically shortened to "altcoins" or "alt coins",[43][44] or disparagingly "shitcoins".[45] Paul Vigna of The Wall Street Journal also described altcoins as "alternative versions of Bitcoin"[46] given its role as the model protocol for altcoin designers.

The logo of Ethereum, the second largest cryptocurrency

Altcoins often have underlying differences when compared to Bitcoin. For example, Litecoin aims to process a block every 2.5 minutes, rather than Bitcoin's 10 minutes, which allows Litecoin to confirm transactions faster than Bitcoin.[47] Another example is Ethereum, which has smart contract functionality that allows decentralized applications to be run on its blockchain.[48] Ethereum was the most used blockchain in 2020, according to Bloomberg News.[49] In 2016, it had the largest "following" of any altcoin, according to the New York Times.[50]

Significant rallies across altcoin markets are often referred to as an "altseason".[51][52]

Stablecoins

Stablecoins are cryptocurrencies designed to maintain a stable level of purchasing power.[53] Notably, these designs are not foolproof, as a number of stablecoins have crashed or lost their peg. For example, on 11 May 2022, Terra's stablecoin UST fell from $1 to 26 cents.[54][55] The subsequent failure of Terraform Labs resulted in the loss of nearly $40B invested in the Terra and Luna coins.[56] In September 2022, South Korean prosecutors requested the issuance of an Interpol Red Notice against the company's founder, Do Kwon.[57] In Hong Kong, the expected regulatory framework for stablecoins in 2023/24 is being shaped and includes a few considerations.[58]

Architecture

This section duplicates the scope of other articles, specifically Blockchain. Please discuss this issue on the talk page and edit it to conform with Wikipedia's Manual of Style by replacing the section with a link and a summary of the repeated material or by spinning off the repeated text into an article in its own right. (August 2022)

Cryptocurrency is produced by an entire cryptocurrency system collectively, at a rate which is defined when the system is created and which is publicly stated. In centralized banking and economic systems such as the US Federal Reserve System, corporate boards or governments control the supply of currency.[citation needed] In the case of cryptocurrency, companies or governments cannot produce new units, and have not so far provided backing for other firms, banks or corporate entities which hold asset value measured in it. The underlying technical system upon which cryptocurrencies are based was created by Satoshi Nakamoto.[59]

Within a proof-of-work system such as Bitcoin, the safety, integrity and balance of ledgers is maintained by a community of mutually distrustful parties referred to as miners. Miners use their computers to help validate and timestamp transactions, adding them to the ledger in accordance with a particular timestamping scheme.[21] In a proof-of-stake blockchain, transactions are validated by holders of the associated cryptocurrency, sometimes grouped together in stake pools.

Most cryptocurrencies are designed to gradually decrease the production of that currency, placing a cap on the total amount of that currency that will ever be in circulation.[60] Compared with ordinary currencies held by financial institutions or kept as cash on hand, cryptocurrencies can be more difficult for seizure by law enforcement.[4]

Blockchain

Main article: Blockchain

The validity of each cryptocurrency's coins is provided by a blockchain. A blockchain is a continuously growing list of records, called blocks, which are linked and secured using cryptography.[59][61] Each block typically contains a hash pointer as a link to a previous block,[61] a timestamp and transaction data.[62] By design, blockchains are inherently resistant to modification of the data. It is "an open, distributed ledger that can record transactions between two parties efficiently and in a verifiable and permanent way".[63] For use as a distributed ledger, a blockchain is typically managed by a peer-to-peer network collectively adhering to a protocol for validating new blocks. Once recorded, the data in any given block cannot be altered retroactively without the alteration of all subsequent blocks, which requires collusion of the network majority.

Blockchains are secure by design and are an example of a distributed computing system with high Byzantine fault tolerance. Decentralized consensus has therefore been achieved with a blockchain.[64]

Nodes

A node is a computer that connects to a cryptocurrency network. The node supports the cryptocurrency's network through either relaying transactions, validation, or hosting a copy of the blockchain. In terms of relaying transactions, each network computer (node) has a copy of the blockchain of the cryptocurrency it supports. When a transaction is made, the node creating the transaction broadcasts details of the transaction using encryption to other nodes throughout the node network so that the transaction (and every other transaction) is known.

Node owners are either volunteers, those hosted by the organization or body responsible for developing the cryptocurrency blockchain network technology, or those who are enticed to host a node to receive rewards from hosting the node network.[65]

Timestamping

Cryptocurrencies use various timestamping schemes to "prove" the validity of transactions added to the blockchain ledger without the need for a trusted third party.

The first timestamping scheme invented was the proof-of-work scheme. The most widely used proof-of-work schemes are based on SHA-256 and scrypt.[23]

Some other hashing algorithms that are used for proof-of-work include CryptoNote, Blake, SHA-3, and X11.

Another method is called the proof-of-stake scheme. Proof-of-stake is a method of securing a cryptocurrency network and achieving distributed consensus through requesting users to show ownership of a certain amount of currency. It is different from proof-of-work systems that run difficult hashing algorithms to validate electronic transactions. The scheme is largely dependent on the coin, and there is currently no standard form of it. Some cryptocurrencies use a combined proof-of-work and proof-of-stake scheme.[23]

Mining

Hashcoin mine

On a blockchain, mining is the validation of transactions. For this effort, successful miners obtain new cryptocurrency as a reward. The reward decreases transaction fees by creating a complementary incentive to contribute to the processing power of the network. The rate of generating hashes, which validate any transaction, has been increased by the use of specialized machines such as FPGAs and ASICs running complex hashing algorithms like SHA-256 and scrypt.[66] This arms race for cheaper-yet-efficient machines has existed since Bitcoin was introduced in 2009.[66] Mining is measured by hash rate typically in TH/s.[67]

With more people venturing into the world of virtual currency, generating hashes for validation has become more complex over time, forcing miners to invest increasingly large sums of money to improve computing performance. Consequently, the reward for finding a hash has diminished and often does not justify the investment in equipment and cooling facilities (to mitigate the heat the equipment produces), and the electricity required to run them.[68] Popular regions for mining include those with inexpensive electricity, a cold climate, and jurisdictions with clear and conducive regulations. By July 2019, Bitcoin's electricity consumption was estimated to be approximately 7 gigawatts, around 0.2% of the global total, or equivalent to the energy consumed nationally by Switzerland.[69]

Some miners pool resources, sharing their processing power over a network to split the reward equally, according to the amount of work they contributed to the probability of finding a block. A "share" is awarded to members of the mining pool who present a valid partial proof-of-work.

As of February 2018, the Chinese Government has halted trading of virtual currency, banned initial coin offerings and shut down mining. Many Chinese miners have since relocated to Canada[70] and Texas.[71] One company is operating data centers for mining operations at Canadian oil and gas field sites, due to low gas prices.[72] In June 2018, Hydro Quebec proposed to the provincial government to allocate 500 megawatts of power to crypto companies for mining.[73] According to a February 2018 report from Fortune, Iceland has become a haven for cryptocurrency miners in part because of its cheap electricity.[74]

In March 2018, the city of Plattsburgh, New York put an 18-month moratorium on all cryptocurrency mining in an effort to preserve natural resources and the "character and direction" of the city.[75] In 2021, Kazakhstan became the second-biggest crypto-currency mining country, producing 18.1% of the global exahash rate. The country built a compound containing 50,000 computers near Ekibastuz.[76]

GPU price rise

An increase in cryptocurrency mining increased the demand for graphics cards (GPU) in 2017.[77] The computing power of GPUs makes them well-suited to generating hashes. Popular favorites of cryptocurrency miners such as Nvidia's GTX 1060 and GTX 1070 graphics cards, as well as AMD's RX 570 and RX 580 GPUs, doubled or tripled in price – or were out of stock.[78] A GTX 1070 Ti which was released at a price of $450 sold for as much as $1,100. Another popular card, the GTX 1060 (6 GB model) was released at an MSRP of $250, and sold for almost $500. RX 570 and RX 580 cards from AMD were out of stock for almost a year. Miners regularly buy up the entire stock of new GPU's as soon as they are available.[79]

Nvidia has asked retailers to do what they can when it comes to selling GPUs to gamers instead of miners. Boris Böhles, PR manager for Nvidia in the German region, said: "Gamers come first for Nvidia."[80]

Mining accelerator chips

Numerous companies developed dedicated crypto-mining accelerator chips, capable of price-performance far higher than that of CPU or GPU mining. At one point Intel marketed its own brand of crypto accelerator chip, named Blockscale.[81]

Wallets

An example paper printable Bitcoin wallet consisting of one Bitcoin address for receiving and the corresponding private key for spending

Main article: Cryptocurrency wallet

A cryptocurrency wallet is a means of storing the public and private "keys" (address) or seed which can be used to receive or spend the cryptocurrency.[82] With the private key, it is possible to write in the public ledger, effectively spending the associated cryptocurrency. With the public key, it is possible for others to send currency to the wallet.

There exist multiple methods of storing keys or seed in a wallet. These methods range from using paper wallets (which are public, private or seed keys written on paper), to using hardware wallets (which are hardware to store your wallet information), to a digital wallet (which is a computer with a software hosting your wallet information), to hosting your wallet using an exchange where cryptocurrency is traded, or by storing your wallet information on a digital medium such as plaintext.[83]

Anonymity

Main article: Privacy and blockchain

Bitcoin is pseudonymous, rather than anonymous; the cryptocurrency in a wallet is not tied to a person, but rather to one or more specific keys (or "addresses").[84] Thereby, Bitcoin owners are not immediately identifiable, but all transactions are publicly available in the blockchain.[85] Still, cryptocurrency exchanges are often required by law to collect the personal information of their users.[86]

Some cryptocurrencies, such as Monero, Zerocoin, Zerocash, and CryptoNote, implement additional measures to increase privacy, such as by using zero-knowledge proofs.[87][88]

Economics

See also: Cryptoeconomics

Cryptocurrencies are used primarily outside banking and governmental institutions and are exchanged over the Internet.

Block rewards

Proof-of-work cryptocurrencies, such as Bitcoin, offer block rewards incentives for miners. There has been an implicit belief that whether miners are paid by block rewards or transaction fees does not affect the security of the blockchain, but a study suggests that this may not be the case under certain circumstances.[89]

The rewards paid to miners increase the supply of the cryptocurrency. By making sure that verifying transactions is a costly business, the integrity of the network can be preserved as long as benevolent nodes control a majority of computing power. The verification algorithm requires a lot of processing power, and thus electricity in order to make verification costly enough to accurately validate public blockchain. Not only do miners have to factor in the costs associated with expensive equipment necessary to stand a chance of solving a hash problem, they further must consider the significant amount of electrical power in search of the solution. Generally, the block rewards outweigh electricity and equipment costs, but this may not always be the case.[90]

The current value, not the long-term value, of the cryptocurrency supports the reward scheme to incentivize miners to engage in costly mining activities.[91] In 2018, Bitcoin's design caused a 1.4% welfare loss compared to an efficient cash system, while a cash system with 2% money growth has a minor 0.003% welfare cost. The main source for this inefficiency is the large mining cost, which is estimated to be US$360 million per year. This translates into users being willing to accept a cash system with an inflation rate of 230% before being better off using Bitcoin as a means of payment. However, the efficiency of the Bitcoin system can be significantly improved by optimizing the rate of coin creation and minimizing transaction fees. Another potential improvement is to eliminate inefficient mining activities by changing the consensus protocol altogether.[92]

Transaction fees

Transaction fees for cryptocurrency depend mainly on the supply of network capacity at the time, versus the demand from the currency holder for a faster transaction.[citation needed] The currency holder can choose a specific transaction fee, while network entities process transactions in order of highest offered fee to lowest.[citation needed] Cryptocurrency exchanges can simplify the process for currency holders by offering priority alternatives and thereby determine which fee will likely cause the transaction to be processed in the requested time.[citation needed]

For Ethereum, transaction fees differ by computational complexity, bandwidth use, and storage needs, while Bitcoin transaction fees differ by transaction size and whether the transaction uses SegWit. In February 2023, the median transaction fee for Ether corresponded to $2.2845,[93] while for Bitcoin it corresponded to $0.659.[94]

Some cryptocurrencies have no transaction fees, and instead rely on client-side proof-of-work as the transaction prioritization and anti-spam mechanism.[95][96][97]

Exchanges

Main article: Cryptocurrency exchange

Cryptocurrency exchanges allow customers to trade cryptocurrencies[98] for other assets, such as conventional fiat money, or to trade between different digital currencies.

Crypto marketplaces do not guarantee that an investor is completing a purchase or trade at the optimal price. As a result, as of 2020 it was possible to arbitrage to find the difference in price across several markets.[99]

Atomic swaps

Atomic swaps are a mechanism where one cryptocurrency can be exchanged directly for another cryptocurrency, without the need for a trusted third party such as an exchange.[100]

ATMs

Bitcoin ATM

Jordan Kelley, founder of Robocoin, launched the first Bitcoin ATM in the United States on 20 February 2014. The kiosk installed in Austin, Texas, is similar to bank ATMs but has scanners to read government-issued identification such as a driver's license or a passport to confirm users' identities.[101]

Initial coin offerings

An initial coin offering (ICO) is a controversial means of raising funds for a new cryptocurrency venture. An ICO may be used by startups with the intention of avoiding regulation. However, securities regulators in many jurisdictions, including in the U.S., and Canada, have indicated that if a coin or token is an "investment contract" (e.g., under the Howey test, i.e., an investment of money with a reasonable expectation of profit based significantly on the entrepreneurial or managerial efforts of others), it is a security and is subject to securities regulation. In an ICO campaign, a percentage of the cryptocurrency (usually in the form of "tokens") is sold to early backers of the project in exchange for legal tender or other cryptocurrencies, often Bitcoin or Ether.[102][103][104]

According to PricewaterhouseCoopers, four of the 10 biggest proposed initial coin offerings have used Switzerland as a base, where they are frequently registered as non-profit foundations. The Swiss regulatory agency FINMA stated that it would take a "balanced approach" to ICO projects and would allow "legitimate innovators to navigate the regulatory landscape and so launch their projects in a way consistent with national laws protecting investors and the integrity of the financial system." In response to numerous requests by industry representatives, a legislative ICO working group began to issue legal guidelines in 2018, which are intended to remove uncertainty from cryptocurrency offerings and to establish sustainable business practices.[105]

Price trends

The market capitalization of a cryptocurrency is calculated by multiplying the price by the number of coins in circulation. The total cryptocurrency market cap has historically been dominated by Bitcoin accounting for at least 50% of the market cap value where altcoins have increased and decreased in market cap value in relation to Bitcoin. Bitcoin's value is largely determined by speculation among other technological limiting factors known as blockchain rewards coded into the architecture technology of Bitcoin itself. The cryptocurrency market cap follows a trend known as the "halving", which is when the block rewards received from Bitcoin are halved due to technological mandated limited factors instilled into Bitcoin which in turn limits the supply of Bitcoin. As the date reaches near of a halving (twice thus far historically) the cryptocurrency market cap increases, followed by a downtrend.[106]

By June 2021, cryptocurrency had begun to be offered by some wealth managers in the US for 401(k)s.[107][108][109]

Volatility

Cryptocurrency prices are much more volatile than established financial assets such as stocks. For example, over one week in May 2022, Bitcoin lost 20% of its value and Ethereum lost 26%, while Solana and Cardano lost 41% and 35% respectively. The falls were attributed to warnings about inflation. By comparison, in the same week, the Nasdaq tech stock index fell 7.6 per cent and the FTSE 100 was 3.6 per cent down.[110]

In the longer term, of the 10 leading cryptocurrencies identified by the total value of coins in circulation in January 2018, only four (Bitcoin, Ethereum, Cardano and Ripple (XRP)) were still in that position in early 2022.[111] The total value of all cryptocurrencies was $2 trillion at the end of 2021, but had halved nine months later.[112][113] The Wall Street Journal has commented that the crypto sector has become "intertwined" with the rest of the capital markets and "sensitive to the same forces that drive tech stocks and other risk assets", such as inflation forecasts.[114]

Databases

There are also centralized databases, outside of blockchains, that store crypto market data. Compared to the blockchain, databases perform fast as there is no verification process. Four of the most popular cryptocurrency market databases are CoinMarketCap, CoinGecko, BraveNewCoin, and Cryptocompare.[115]

Social and political aspects

See also: Crypto-anarchism and Cypherpunk

According to Alan Feuer of The New York Times, libertarians and anarcho-capitalists were attracted to the philosophical idea behind Bitcoin. Early Bitcoin supporter Roger Ver said: "At first, almost everyone who got involved did so for philosophical reasons. We saw Bitcoin as a great idea, as a way to separate money from the state."[116] Economist Paul Krugman argues that cryptocurrencies like Bitcoin are "something of a cult" based in "paranoid fantasies" of government power.[117]

David Golumbia says that the ideas influencing Bitcoin advocates emerge from right-wing extremist movements such as the Liberty Lobby and the John Birch Society and their anti-Central Bank rhetoric, or, more recently, Ron Paul and Tea Party-style libertarianism.[118] Steve Bannon, who owns a "good stake" in Bitcoin, sees cryptocurrency as a form of disruptive populism, taking control back from central authorities.[119]

Bitcoin's founder, Satoshi Nakamoto, has supported the idea that cryptocurrencies go well with libertarianism. "It's very attractive to the libertarian viewpoint if we can explain it properly," Nakamoto said in 2008.[120]

According to the European Central Bank, the decentralization of money offered by Bitcoin has its theoretical roots in the Austrian school of economics, especially with Friedrich von Hayek in his book Denationalisation of Money: The Argument Refined,[121] in which Hayek advocates a complete free market in the production, distribution and management of money to end the monopoly of central banks.[122]

Increasing regulation

The rise in the popularity of cryptocurrencies and their adoption by financial institutions has led some governments to assess whether regulation is needed to protect users. The Financial Action Task Force (FATF) has defined cryptocurrency-related services as "virtual asset service providers" (VASPs) and recommended that they be regulated with the same money laundering (AML) and know your customer (KYC) requirements as financial institutions.[123]

In May 2020, the Joint Working Group on interVASP Messaging Standards published "IVMS 101", a universal common language for communication of required originator and beneficiary information between VASPs. The FATF and financial regulators were informed as the data model was developed.[124]

In June 2020, FATF updated its guidance to include the "Travel Rule" for cryptocurrencies, a measure which mandates that VASPs obtain, hold, and exchange information about the originators and beneficiaries of virtual asset transfers.[125] Subsequent standardized protocol specifications recommended using JSON for relaying data between VASPs and identity services. As of December 2020, the IVMS 101 data model has yet to be finalized and ratified by the three global standard setting bodies that created it.[126]

The European Commission published a digital finance strategy in September 2020. This included a draft regulation on Markets in Crypto-Assets (MiCA), which aimed to provide a comprehensive regulatory framework for digital assets in the EU.[127][128]

On 10 June 2021, the Basel Committee on Banking Supervision proposed that banks that held cryptocurrency assets must set aside capital to cover all potential losses. For instance, if a bank were to hold Bitcoin worth $2 billion, it would be required to set aside enough capital to cover the entire $2 billion. This is a more extreme standard than banks are usually held to when it comes to other assets. However, this is a proposal and not a regulation.

The IMF is seeking a coordinated, consistent and comprehensive approach to supervising cryptocurrencies. Tobias Adrian, the IMF's financial counsellor and head of its monetary and capital markets department said in a January 2022 interview that "Agreeing global regulations is never quick. But if we start now, we can achieve the goal of maintaining financial stability while also enjoying the benefits which the underlying technological innovations bring,"[129]

United States

In 2021, 17 states passed laws and resolutions concerning cryptocurrency regulation.[130] The U.S. Securities and Exchange Commission (SEC) is considering what steps to take. On 8 July 2021, Senator Elizabeth Warren, part of the Senate Banking Committee, wrote to the chairman of the SEC and demanded answers on cryptocurrency regulation due to the increase in cryptocurrency exchange use and the danger this posed to consumers. On 5 August 2021, SEC Chairman Gary Gensler responded to Senator Elizabeth Warren's letter regarding cryptocurrency regulation and called for legislation focused on "crypto trading, lending and DeFi platforms," because of how vulnerable the investors could be when they traded on crypto trading platforms without a broker. He also argued that many tokens in the crypto market may be unregistered securities without required disclosures or market oversight. Additionally, Gensler did not hold back in his criticism of stablecoins. These tokens, which are pegged to the value of fiat currencies, may allow individuals to bypass important public policy goals related to traditional banking and financial systems, such as anti-money laundering, tax compliance, and sanctions.[131]

On 19 October 2021, The first bitcoin-linked exchange-traded fund (ETF) from ProShares started trading on the NYSE under the ticker "BITO." ProShares CEO Michael L. Sapir said the ETF would expose Bitcoin to a wider range of investors without the hassle of setting up accounts with cryptocurrency providers. Ian Balina, the CEO of Token Metrics, stated that the approval of the "BITO" ETF by the SEC was a significant endorsement for the crypto industry because many regulators globally were not in favor of crypto as well as the hesitance to accept crypto from retail investors. This event would eventually open more opportunities for new capital and new people in this space.[132]

The United States Department of the Treasury, on 20 May 2021, announced that it would require any transfer worth $10,000 or more to be reported to the Internal Revenue Service since cryptocurrency already posed a problem where illegal activity like tax evasion was facilitated broadly. This release from the IRS was a part of efforts to promote better compliance and consider more severe penalties for tax evaders.[133]

On 17 February 2022, the Justice department named Eun Young Choi as the first director of a National Cryptocurrency Enforcement Team to aid in identification of and dealing with misuse of cryptocurrencies and other digital assets.[134]

The Biden administration faced a dilemma as it tried to develop regulations for the cryptocurrency industry. On one hand, officials were hesitant to restrict the growing and profitable industry. On the other hand, they were committed to preventing illegal cryptocurrency transactions. To reconcile these conflicting goals, on 9 March 2022, President Biden issued an executive order.[135] Followed by the executive order, on 16 September 2022, the Comprehensive Framework for Responsible Development of Digital Assets document was released [136] to support development of cryptocurrencies and restrict their illegal use. The executive order included all digital assets, but cryptocurrencies posed both the greatest security risks and potential economic benefits. Though this might not address all of the challenges in crypto industry, it was a significant milestone in the U.S. cryptocurrency regulation history.[137]

In February 2023, the Securities and Exchange Commission (SEC) ruled that cryptocurrency exchange Kraken's estimated $42 billion in staked assets globally operated as an illegal securities seller. The company agreed to a $30 million settlement with the SEC and to cease selling its staking service in the U.S. The case would impact other major crypto exchanges operating staking programs.[138]

On 23 March 2023, the U.S. Securities and Exchange Commission (SEC) issued an alert to investors stating that firms offering crypto asset securities may not be complying with U.S. laws. The SEC stated that unregistered offerings of crypto asset securities may not include important information.[139]

China

In September 2017, China banned ICOs to cause abnormal return from cryptocurrency decreasing during announcement window. The liquidity changes by banning ICOs in China was temporarily negative while the liquidity effect became positive after news.[140]

On 18 May 2021, China banned financial institutions and payment companies from being able to provide cryptocurrency transaction related services.[141] This led to a sharp fall in the price of the biggest proof of work cryptocurrencies. For instance, Bitcoin fell 31%, Ethereum fell 44%, Binance Coin fell 32% and Dogecoin fell 30%.[142] Proof of work mining was the next focus, with regulators in popular mining regions citing the use of electricity generated from highly polluting sources such as coal to create Bitcoin and Ethereum.[143]

In September 2021, the Chinese government declared all cryptocurrency transactions of any kind illegal, completing its crackdown on cryptocurrency.[31]

United Kingdom

In the United Kingdom, as of 10 January 2021, all cryptocurrency firms, such as exchanges, advisors and professionals that have either a presence, market product or provide services within the UK market must register with the Financial Conduct Authority. Additionally, on 27 June 2021, the financial watchdog demanded that Binance, the world's largest cryptocurrency exchange,[144] cease all regulated activities in the UK.[145]

South Africa

South Africa, which has seen a large number of scams related to cryptocurrency, is said to be putting a regulatory timeline in place that will produce a regulatory framework.[146] The largest scam occurred in April 2021, where the two founders of an African-based cryptocurrency exchange called Africrypt, Raees Cajee and Ameer Cajee, disappeared with $3.8 billion worth of Bitcoin.[147] Additionally, Mirror Trading International disappeared with $170 million worth of cryptocurrency in January 2021.[147]

South Korea

In March 2021, South Korea implemented new legislation to strengthen their oversight of digital assets. This legislation requires all digital asset managers, providers and exchanges to be registered with the Korea Financial Intelligence Unit in order to operate in South Korea.[148] Registering with this unit requires that all exchanges are certified by the Information Security Management System and that they ensure all customers have real name bank accounts. It also requires that the CEO and board members of the exchanges have not been convicted of any crimes and that the exchange holds sufficient levels of deposit insurance to cover losses arising from hacks.[148]

Turkey

On 30 April 2021, the Central Bank of the Republic of Turkey banned the use of cryptocurrencies and cryptoassets for making purchases on the grounds that the use of cryptocurrencies for such payments poses significant transaction risks.[149]

El Salvador

On 9 June 2021, El Salvador announced that it will adopt Bitcoin as legal tender, the first country to do so.[150]

India

At present, India neither prohibits nor allows investment in the cryptocurrency market. In 2020, the Supreme Court of India had lifted the ban on cryptocurrency, which was imposed by the Reserve Bank of India.[151][152][153][154] Since then, an investment in cryptocurrency is considered legitimate, though there is still ambiguity about the issues regarding the extent and payment of tax on the income accrued thereupon and also its regulatory regime. But it is being contemplated that the Indian Parliament will soon pass a specific law to either ban or regulate the cryptocurrency market in India.[155] Expressing his public policy opinion on the Indian cryptocurrency market to a well-known online publication, a leading public policy lawyer and Vice President of SAARCLAW (South Asian Association for Regional Co-operation in Law) Hemant Batra has said that the "cryptocurrency market has now become very big with involvement of billions of dollars in the market hence, it is now unattainable and irreconcilable for the government to completely ban all sorts of cryptocurrency and its trading and investment".[156] He mooted regulating the cryptocurrency market rather than completely banning it. He favoured following IMF and FATF guidelines in this regard.

Switzerland

Switzerland was one of the first countries to implement the FATF's Travel Rule. FINMA, the Swiss regulator, issued its own guidance to VASPs in 2019. The guidance followed the FATF's Recommendation 16, however with stricter requirements. According to FINMA's[157] requirements, VASPs need to verify the identity of the beneficiary of the transfer.

Legality

Main article: Legality of cryptocurrency by country or territory

The legal status of cryptocurrencies varies substantially from country to country and is still undefined or changing in many of them. At least one study has shown that broad generalizations about the use of Bitcoin in illicit finance are significantly overstated and that blockchain analysis is an effective crime fighting and intelligence gathering tool.[158] While some countries have explicitly allowed their use and trade,[159] others have banned or restricted it. According to the Library of Congress in 2018, an "absolute ban" on trading or using cryptocurrencies applies in eight countries: Algeria, Bolivia, Egypt, Iraq, Morocco, Nepal, Pakistan, and the United Arab Emirates. An "implicit ban" applies in another 15 countries, which include Bahrain, Bangladesh, China, Colombia, the Dominican Republic, Georgia, Indonesia, Iran, Kuwait, Lesotho, Lithuania, Macau, Oman, Qatar, Saudi Arabia and Taiwan.[160] In the United States and Canada, state and provincial securities regulators, coordinated through the North American Securities Administrators Association, are investigating "Bitcoin scams" and ICOs in 40 jurisdictions.[161]

Various government agencies, departments, and courts have classified Bitcoin differently. China Central Bank banned the handling of Bitcoins by financial institutions in China in early 2014.

In Russia, though owning cryptocurrency is legal, its residents are only allowed to purchase goods from other residents using the Russian ruble while nonresidents are allowed to use foreign currency.[162] Regulations and bans that apply to Bitcoin probably extend to similar cryptocurrency systems.[163]

In August 2018, the Bank of Thailand announced its plans to create its own cryptocurrency, the Central Bank Digital Currency (CBDC).[164]

Advertising bans

Cryptocurrency advertisements have been banned on the following platforms:

Google[165] - Ended August 2021[166]

Twitter[165]

Facebook[165] - Ended December 2021[167]

Bing[168] - Ended June 2022[169]

Snapchat

LinkedIn[170]

MailChimp[171]

Baidu

Tencent

Weibo

Line

Yandex[170]

U.S. tax status

On 25 March 2014, the United States Internal Revenue Service (IRS) ruled that Bitcoin will be treated as property for tax purposes. Therefore, virtual currencies are considered commodities subject to capital gains tax.[172]

Legal concerns relating to an unregulated global economy

As the popularity and demand for online currencies has increased since the inception of Bitcoin in 2009,[173] so have concerns that such an unregulated person to person global economy that cryptocurrencies offer may become a threat to society. Concerns abound that altcoins may become tools for anonymous web criminals.[174]

Cryptocurrency networks display a lack of regulation that has been criticized as enabling criminals who seek to evade taxes and launder money. Money laundering issues are also present in regular bank transfers, however with bank-to-bank wire transfers for instance, the account holder must at least provide a proven identity.

Transactions that occur through the use and exchange of these altcoins are independent from formal banking systems, and therefore can make tax evasion simpler for individuals. Since charting taxable income is based upon what a recipient reports to the revenue service, it becomes extremely difficult to account for transactions made using existing cryptocurrencies, a mode of exchange that is complex and difficult to track.[174]

Systems of anonymity that most cryptocurrencies offer can also serve as a simpler means to launder money. Rather than laundering money through an intricate net of financial actors and offshore bank accounts, laundering money through altcoins can be achieved through anonymous transactions.[174]

Cryptocurrency makes legal enforcement against extremist groups more complicated, which consequently strengthens them.[175] White supremacist Richard Spencer went as far as to declare Bitcoin the "currency of the alt-right".[176]

Loss, theft, and fraud

Main article: Cryptocurrency and crime

In February 2014, the world's largest Bitcoin exchange, Mt. Gox, declared bankruptcy. Likely due to theft, the company claimed that it had lost nearly 750,000 Bitcoins belonging to their clients. This added up to approximately 7% of all Bitcoins in existence, worth a total of $473 million. Mt. Gox blamed hackers, who had exploited the transaction malleability problems in the network. The price of a Bitcoin fell from a high of about $1,160 in December to under $400 in February.[177]

On 21 November 2017, Tether announced that it had been hacked, losing $31 million in USDT from its core treasury wallet.[178]

On 7 December 2017, Slovenian cryptocurrency exchange Nicehash reported that hackers had stolen over $70M using a hijacked company computer.[179]

On 19 December 2017, Yapian, the owner of South Korean exchange Youbit, filed for bankruptcy after suffering two hacks that year.[180][181] Customers were still granted access to 75% of their assets.

In May 2018, Bitcoin Gold had its transactions hijacked and abused by unknown hackers.[182] Exchanges lost an estimated $18m and Bitcoin Gold was delisted from Bittrex after it refused to pay its share of the damages.

On 13 September 2018, Homero Josh Garza was sentenced to 21 months of imprisonment, followed by three years of supervised release.[183] Garza had founded the cryptocurrency startups GAW Miners and ZenMiner in 2014, acknowledged in a plea agreement that the companies were part of a pyramid scheme, and pleaded guilty to wire fraud in 2015. The U.S. Securities and Exchange Commission separately brought a civil enforcement action against Garza, who was eventually ordered to pay a judgment of $9.1 million plus $700,000 in interest. The SEC's complaint stated that Garza, through his companies, had fraudulently sold "investment contracts representing shares in the profits they claimed would be generated" from mining.[184]

In January 2018, Japanese exchange Coincheck reported that hackers had stolen $530M worth of cryptocurrencies.[185]

In June 2018, South Korean exchange Coinrail was hacked, losing over $37M worth of cryptos.[186] The hack worsened an already ongoing cryptocurrency selloff by an additional $42 billion.[187]

On 9 July 2018, the exchange Bancor, whose code and fundraising had been subjects of controversy, had $23.5 million in cryptocurrency stolen.[188]

A 2020 EU report found that users had lost crypto-assets worth hundreds of millions of US dollars in security breaches at exchanges and storage providers. Between 2011 and 2019, reported breaches ranged from four to twelve a year. In 2019, more than a billion dollars worth of cryptoassets was reported stolen. Stolen assets "typically find their way to illegal markets and are used to fund further criminal activity".[189]

According to a 2020 report produced by the United States Attorney General's Cyber-Digital Task Force, the following three categories make up the majority of illicit cryptocurrency uses: "(1) financial transactions associated with the commission of crimes; (2) money laundering and the shielding of legitimate activity from tax, reporting, or other legal requirements; or (3) crimes, such as theft, directly implicating the cryptocurrency marketplace itself." The report concludes that "for cryptocurrency to realize its truly transformative potential, it is imperative that these risks be addressed" and that "the government has legal and regulatory tools available at its disposal to confront the threats posed by cryptocurrency's illicit uses".[190][191]

According to the UK 2020 national risk assessment—a comprehensive assessment of money laundering and terrorist financing risk in the UK—the risk of using cryptoassets such as Bitcoin for money laundering and terrorism financing is assessed as "medium" (from "low" in the previous 2017 report).[192] Legal scholars suggested that the money laundering opportunities may be more perceived than real.[193] Blockchain analysis company Chainalysis concluded that illicit activities like cybercrime, money laundering and terrorism financing made up only 0.15% of all crypto transactions conducted in 2021, representing a total of $14 billion.[194][195][196]

In December 2021, Monkey Kingdom - a NFT project based in Hong Kong lost US$1.3 million worth of cryptocurrencies via a phishing link used by the hacker.[197]

Money laundering

See also: Cryptocurrency and crime

According to blockchain data company Chainalysis, criminals laundered US$8,600,000,000 worth of cryptocurrency in 2021, up by 30% from the previous year.[198] The data suggests that rather than managing numerous illicit havens, cybercriminals make use of a small group of purpose built centralized exchanges for sending and receiving illicit cryptocurrency. In 2021, those exchanges received 47% of funds sent by crime linked addresses.[199] Almost $2.2bn worth of cryptocurrencies was embezzled from DeFi protocols in 2021, which represents 72% of all cryptocurrency theft in 2021.

According to Bloomberg and the New York Times, Federation Tower, a two skyscraper complex in the heart of Moscow City, is home to many cryptocurrency businesses under suspicion of facilitating extensive money laundering, including accepting illicit cryptocurrency funds obtained through scams, darknet markets, and ransomware.[200] Notable businesses include Garantex, Eggchange, Cashbank, Buy-Bitcoin, Tetchange, Bitzlato, and Suex, which was sanctioned by the U.S. in 2021. Bitzlato founder and owner Anatoly Legkodymov was arrested following money-laundering charges by the United States Department of Justice.[201]

Dark money has also been flowing into Russia through a dark web marketplace called Hydra, which is powered by cryptocurrency, and enjoyed more than $1 billion in sales in 2020, according to Chainalysis.[202] The platform demands that sellers liquidate cryptocurrency only through certain regional exchanges, which has made it difficult for investigators to trace the money.

Almost 74% of ransomware revenue in 2021 — over $400 million worth of cryptocurrency — went to software strains likely affiliated with Russia, where oversight is notoriously limited.[200] However, Russians are also leaders in the benign adoption of cryptocurrencies, as the ruble is unreliable, and President Putin favours the idea of "overcoming the excessive domination of the limited number of reserve currencies."[203]

In 2022, RenBridge - an unregulated alternative to exchanges for transferring value between blockchains - was found to be responsible for the laundering of at least $540 million since 2020. It is especially popular with people attempting to launder money from theft. This includes a cyberattack on Japanese crypto exchange Liquid that has been linked to North Korea.[204]

Darknet markets

Main article: Darknet market

Properties of cryptocurrencies gave them popularity in applications such as a safe haven in banking crises and means of payment, which also led to the cryptocurrency use in controversial settings in the form of online black markets, such as Silk Road.[174] The original Silk Road was shut down in October 2013 and there have been two more versions in use since then. In the year following the initial shutdown of Silk Road, the number of prominent dark markets increased from four to twelve, while the amount of drug listings increased from 18,000 to 32,000.[174]

Darknet markets present challenges in regard to legality. Cryptocurrency used in dark markets are not clearly or legally classified in almost all parts of the world. In the U.S., Bitcoins are labelled as "virtual assets".[citation needed] This type of ambiguous classification puts pressure on law enforcement agencies around the world to adapt to the shifting drug trade of dark markets.[205][unreliable source?]

Wash trades

Various studies have found that crypto-trading is rife with wash trading. Wash trading is a process, illegal in some jurisdictions, involving buyers and sellers being the same person or group, and may be used to manipulate the price of a cryptocurrency or inflate volume artificially. Exchanges with higher volumes can demand higher premiums from token issuers.[206] A study from 2019 concluded that up to 80% of trades on unregulated cryptocurrency exchanges could be wash trades.[206] A 2019 report by Bitwise Asset Management claimed that 95% of all Bitcoin trading volume reported on major website CoinMarketCap had been artificially generated, and of 81 exchanges studied, only 10 provided legitimate volume figures.[207]

As a tool to evade sanctions

In 2022, cryptocurrencies attracted attention when Western nations imposed severe economic sanctions on Russia in the aftermath of its invasion of Ukraine in February. However, American sources warned in March that some crypto-transactions could potentially be used to evade economic sanctions against Russia and Belarus.[208]

In April 2022, the computer programmer Virgil Griffith received a five-year prison sentence in the US for attending a Pyongyang cryptocurrency conference, where he gave a presentation on blockchains which might be used for sanctions evasion.[209]

Impacts and analysis

External video

video icon Cryptocurrencies: looking beyond the hype, Hyun Song Shin, Bank for International Settlements, 2:48[210]

The Bank for International Settlements summarized several criticisms of cryptocurrencies in Chapter V of their 2018 annual report. The criticisms include the lack of stability in their price, the high energy consumption, high and variable transactions costs, the poor security and fraud at cryptocurrency exchanges, vulnerability to debasement (from forking), and the influence of miners.[210][211][212]

Speculation, fraud, and adoption

See also: Cryptocurrency bubble, Cryptocurrency and crime, and Criminal activity on Bitcoin's network

Cryptocurrencies have been compared to Ponzi schemes, pyramid schemes[213] and economic bubbles,[214] such as housing market bubbles.[215] Howard Marks of Oaktree Capital Management stated in 2017 that digital currencies were "nothing but an unfounded fad (or perhaps even a pyramid scheme), based on a willingness to ascribe value to something that has little or none beyond what people will pay for it", and compared them to the tulip mania (1637), South Sea Bubble (1720), and dot-com bubble (1999), which all experienced profound price booms and busts.[216]

Regulators in several countries have warned against cryptocurrency and some have taken measures to dissuade users.[217] However, research in 2021 by the UK's financial regulator suggests such warnings either went unheard, or were ignored. Fewer than one in 10 potential cryptocurrency buyers were aware of consumer warnings on the FCA website, and 12% of crypto users were not aware that their holdings were not protected by statutory compensation.[218][219] Of 1,000 respondents between the ages of eighteen and forty, almost 70% falsely assumed cryptocurrencies were regulated, 75% of younger crypto investors claimed to be driven by competition with friends and family, 58% said that social media enticed them to make high risk investments.[220] The FCA recommends making use of its warning list, which flags unauthorized financial firms.[221]

Many banks do not offer virtual currency services themselves and can refuse to do business with virtual currency companies.[222] In 2014, Gareth Murphy, a senior banking officer, suggested that the widespread adoption of cryptocurrencies may lead to too much money being obfuscated, blinding economists who would use such information to better steer the economy.[223] While traditional financial products have strong consumer protections in place, there is no intermediary with the power to limit consumer losses if Bitcoins are lost or stolen. One of the features cryptocurrency lacks in comparison to credit cards, for example, is consumer protection against fraud, such as chargebacks.

The French regulator Autorité des marchés financiers (AMF) lists 16 websites of companies that solicit investment in cryptocurrency without being authorized to do so in France.[224]

An October 2021 paper by the National Bureau of Economic Research found that Bitcoin suffers from systemic risk as the top 10,000 addresses control about one-third of all Bitcoin in circulation.[225] It is even worse for Bitcoin miners, with 0.01% controlling 50% of the capacity. According to researcher Flipside Crypto, less than 2% of anonymous accounts control 95% of all available Bitcoin supply.[226] This is considered risky as a great deal of the market is in the hands of a few entities.

A paper by John Griffin, a finance professor at the University of Texas, and Amin Shams, a graduate student found that in 2017 the price of Bitcoin had been substantially inflated using another cryptocurrency, Tether.[227]

Roger Lowenstein, author of "Bank of America: The Epic Struggle to Create the Federal Reserve," says in a New York Times story that FTX will face over $8 billion in claims.[228]

Non-fungible tokens

Non-fungible tokens (NFTs) are digital assets that represent art, collectibles, gaming, etc. Like crypto, their data is stored on the blockchain. NFTs are bought and traded using cryptocurrency. The Ethereum blockchain was the first place where NFTs were implemented, but now many other blockchains have created their own versions of NFTs. The popularity of NFTs has increased since 2021.[229]

Banks

As the first big Wall Street bank to embrace cryptocurrencies, Morgan Stanley announced on 17 March 2021 that they will be offering access to Bitcoin funds for their wealthy clients through three funds which enable Bitcoin ownership for investors with an aggressive risk tolerance.[230] BNY Mellon on 11 February 2021 announced that it would begin offering cryptocurrency services to its clients.[231]

On 20 April 2021,[232] Venmo added support to its platform to enable customers to buy, hold and sell cryptocurrencies.[233]

In October 2021, financial services company Mastercard announced it is working with digital asset manager Bakkt on a platform that would allow any bank or merchant on the Mastercard network to offer cryptocurrency services.[234]

Environmental impact

See also: Environmental effects of bitcoin

Mining for proof-of-work cryptocurrencies requires enormous amounts of electricity and consequently comes with a large carbon footprint due to causing greenhouse gas emissions.[235] Proof-of-work blockchains such as Bitcoin, Ethereum, Litecoin, and Monero were estimated to have added between 3 million and 15 million tons of carbon dioxide (CO2) to the atmosphere in the period from 1 January 2016 to 30 June 2017.[236] By November 2018, Bitcoin was estimated to have an annual energy consumption of 45.8TWh, generating 22.0 to 22.9 million tons of CO2, rivalling nations like Jordan and Sri Lanka.[237] By the end of 2021, Bitcoin was estimated to produce 65.4 million tons of CO2, as much as Greece,[238] and consume between 91 and 177 terawatt-hours annually.[239][240]

Critics have also identified a large electronic waste problem in disposing of mining rigs.[241] Mining hardware is improving at a fast rate, quickly resulting in older generations of hardware.[242]

Bitcoin is the least energy-efficient cryptocurrency, using 707.6 kilowatt-hours of electricity per transaction.[243]

Before June 2021, China was the primary location for Bitcoin mining. However, due to concerns over power usage and other factors, China forced out Bitcoin operations, at least temporarily. As a result, the United States promptly emerged as the top global leader in the industry. An example of a gross amount of electronic waste associated with Bitcoin mining operations in the US is a facility that located in Dalton, Georgia which is consuming nearly the same amount of electricity as the combined power usage of 97,000 households in its vicinity. Another example is that Riot Platforms operates a Bitcoin mining facility in Rockdale, Texas, which consumes approximately as much electricity as the nearby 300,000 households. This makes it the most energy-intensive Bitcoin mining operation in the United States.[244]

The world's second-largest cryptocurrency, Ethereum, uses 62.56 kilowatt-hours of electricity per transaction.[245] XRP is the world's most energy efficient cryptocurrency, using 0.0079 kilowatt-hours of electricity per transaction.[246]

Although the biggest PoW blockchains consume energy on the scale of medium-sized countries, the annual power demand from proof-of-stake (PoS) blockchains is on a scale equivalent to a housing estate. The Times identified six "environmentally friendly" cryptocurrencies: Chia, IOTA, Cardano, Nano, Solarcoin and Bitgreen.[247] Academics and researchers have used various methods for estimating the energy use and energy efficiency of blockchains. A study of the six largest proof-of-stake networks in May 2021 concluded:

Cardano has the lowest electricity use per node;

Polkadot has the lowest electricity use overall; and

Solana has the lowest electricity use per transaction.

In terms of annual consumption (kWh/yr), the figures were: Polkadot (70,237), Tezos (113,249), Avalanche (489,311), Algorand (512,671), Cardano (598,755) and Solana (1,967,930). This equates to Polkadot consuming 7 times the electricity of an average U.S. home, Cardano 57 homes and Solana 200 times as much. The research concluded that PoS networks consumed 0.001% the electricity of the Bitcoin network.[248] University College London researchers reached a similar conclusion.[249]

Variable renewable energy power stations could invest in Bitcoin mining to reduce curtailment, hedge electricity price risk, stabilize the grid, increase the profitability of renewable energy power stations and therefore accelerate transition to sustainable energy.[250][251][252][253][254]

Technological limitations

There are also purely technical elements to consider. For example, technological advancement in cryptocurrencies such as Bitcoin result in high up-front costs to miners in the form of specialized hardware and software.[255] Cryptocurrency transactions are normally irreversible after a number of blocks confirm the transaction. Additionally, cryptocurrency private keys can be permanently lost from local storage due to malware, data loss or the destruction of the physical media. This precludes the cryptocurrency from being spent, resulting in its effective removal from the markets.[256]

Academic studies

Main article: Ledger (journal)

In September 2015, the establishment of the peer-reviewed academic journal Ledger (ISSN 2379-5980) was announced. It covers studies of cryptocurrencies and related technologies, and is published by the University of Pittsburgh.[257]

The journal encourages authors to digitally sign a file hash of submitted papers, which will then be timestamped into the Bitcoin blockchain. Authors are also asked to include a personal Bitcoin address in the first page of their papers.[258][259]

Aid agencies

A number of aid agencies have started accepting donations in cryptocurrencies, including UNICEF.[260] Christopher Fabian, principal adviser at UNICEF Innovation, said the children's fund would uphold donor protocols, meaning that people making donations online would have to pass checks before they were allowed to deposit funds.[261][262]

However, in 2021, there was a backlash against donations in Bitcoin because of the environmental emissions it caused. Some agencies stopped accepting Bitcoin and others turned to "greener" cryptocurrencies.[263] The U.S. arm of Greenpeace stopped accepting bitcoin donations after seven years. It said: "As the amount of energy needed to run Bitcoin became clearer, this policy became no longer tenable."[264]

In 2022, the Ukrainian government raised over US$10,000,000 worth of aid through cryptocurrency following the 2022 Russian invasion of Ukraine.[265]

Criticism

Bitcoin has been characterized as a speculative bubble by eight winners of the Nobel Memorial Prize in Economic Sciences: Paul Krugman,[266] Robert J. Shiller,[267] Joseph Stiglitz,[268] Richard Thaler,[269] James Heckman,[270] Thomas Sargent,[270] Angus Deaton,[270] and Oliver Hart;[270] and by central bank officials including Alan Greenspan,[271] Agustín Carstens,[272] Vítor Constâncio,[273] and Nout Wellink.[274]

The investors Warren Buffett and George Soros have respectively characterized it as a "mirage"[275] and a "bubble";[276] while the business executives Jack Ma and J.P. Morgan Chase CEO Jamie Dimon have called it a "bubble"[277] and a "fraud",[278] respectively, although Jamie Dimon later said he regretted dubbing Bitcoin a fraud.[279] BlackRock CEO Laurence D. Fink called Bitcoin an "index of money laundering".[280]

In June 2022, Bill Gates said that cryptocurrencies are "100% based on greater fool theory".[281]

Legal scholars criticize the lack of regulation, which hinders conflict resolution when crypto assets are at the center of a legal dispute, for example a divorce or an inheritance. In Switzerland, jurists generally deny that cryptocurrencies are objects that fall under property law, as cryptocurrencies do not belong to any class of legally defined objects (Typenzwang, the legal numerus clausus). Therefore, it is debated whether anybody could even be sued for embezzlement of cryptocurrency if he/she had access to someone's wallet. However, in the law of obligations and contract law, any kind of object would be legally valid, but the object would have to be tied to an identified counterparty. However, as the more popular cryptocurrencies can be freely and quickly exchanged into legal tender, they are financial assets and have to be taxed and accounted for as such.[282]

Crypto-related suicides

In 2018, an increase in crypto-related suicides was noticed after the cryptocurrency market crashed in August. The situation was particularly critical in Korea as crypto traders were on "suicide watch". A cryptocurrency forum on Reddit even started providing suicide prevention support to affected investors.[283][284][285]

The May 2022 collapse of the Luna currency operated by Terra also led to reports of suicidal investors in crypto-related subreddits.[286]

Digital currency (digital money, electronic money or electronic currency) is any currency, money, or money-like asset that is primarily managed, stored or exchanged on digital computer systems, especially over the internet. Types of digital currencies include cryptocurrency, virtual currency and central bank digital currency. Digital currency may be recorded on a distributed database on the internet, a centralized electronic computer database owned by a company or bank, within digital files or even on a stored-value card.[1]

Digital currencies exhibit properties similar to traditional currencies, but generally do not have a classical physical form of fiat currency historically that can be held in the hand, like currencies with printed banknotes or minted coins. However, they do have a physical form in an unclassical sense coming from the computer to computer and computer to human interactions and the information and processing power of the servers that store and keep track of money. This unclassical physical form allows nearly instantaneous transactions over the internet and vastly lowers the cost associated with distributing notes and coins: for example, of the types of money in the UK economy, 3% are notes and coins, and 79% as electronic money (in the form of bank deposits).[2] Usually not issued by a governmental body, virtual currencies are not considered a legal tender and they enable ownership transfer across governmental borders.[3]

This type of currency may be used to buy physical goods and services, but may also be restricted to certain communities such as for use inside an online game.[4]

Digital money can either be centralized, where there is a central point of control over the money supply (for instance, a bank), or decentralized, where the control over the money supply is predetermined or agreed upon democratically.

History

Precursory ideas for digital currencies were presented in electronic payment methods such as the Sabre (travel reservation system).[5] In 1983, a research paper titled "Blind Signatures for Untraceable Payments" by David Chaum introduced the idea of digital cash.[6][7] In 1989, he founded DigiCash, an electronic cash company, in Amsterdam to commercialize the ideas in his research.[8] It filed for bankruptcy in 1998.[8][9]

e-gold was the first widely used Internet money, introduced in 1996, and grew to several million users before the US Government shut it down in 2008. e-gold has been referenced to as "digital currency" by both US officials and academia.[10][11][12][13][14] In 1997, Coca-Cola offered buying from vending machines using mobile payments.[15] PayPal launched its USD-denominated service in 1998. In 2009, bitcoin was launched, which marked the start of decentralized blockchain-based digital currencies with no central server, and no tangible assets held in reserve. Also known as cryptocurrencies, blockchain-based digital currencies proved resistant to attempt by government to regulate them, because there was no central organization or person with the power to turn them off.[16]

Origins of digital currencies date back to the 1990s Dot-com bubble. Another known digital currency service was Liberty Reserve, founded in 2006; it lets users convert dollars or euros to Liberty Reserve Dollars or Euros, and exchange them freely with one another at a 1% fee. Several digital currency operations were reputed to be used for Ponzi schemes and money laundering, and were prosecuted by the U.S. government for operating without MSB licenses.[17] Q coins or QQ coins, were used as a type of commodity-based digital currency on Tencent QQ's messaging platform and emerged in early 2005. Q coins were so effective in China that they were said to have had a destabilizing effect on the Chinese Yuan currency due to speculation.[18] Recent interest in cryptocurrencies has prompted renewed interest in digital currencies, with bitcoin, introduced in 2008, becoming the most widely used and accepted digital currency.

Sub-types of digital currency and comparisons

Digital currency as a specific type and as a meta-group name

Digital currency is a term that refers to a specific type of electronic currency with specific properties. Digital currency is also a term used to include the meta-group of sub-types of digital currency, the specific meaning can only be determined within the specific legal or contextual case. Legally and technically, there already are a myriad of legal definitions of digital currency and the many digital currency sub-types. Combining different possible properties, there exists an extensive number of implementations creating many and numerous sub-types of digital currency. Many governmental jurisdictions have implemented their own unique definition for digital currency, virtual currency, cryptocurrency, e-money, network money, e-cash, and other types of digital currency. Within any specific government jurisdiction, different agencies and regulators define different and often conflicting meanings for the different types of digital currency based on the specific properties of a specific currency type or sub-type.

Digital versus virtual currency

Main article: Virtual currency

A virtual currency has been defined in 2012 by the European Central Bank 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".[19] The US Department of Treasury in 2013 defined it more tersely as "a medium of exchange that operates like a currency in some environments, but does not have all the attributes of real currency".[20] The US Department of Treasury also stated that, "Virtual currency does not have legal-tender status in any jurisdiction."[20]

According to the European Central Bank's 2015 "Virtual currency schemes – a further analysis" report, virtual currency is a digital representation of value, not issued by a central bank, credit institution or e-money institution, which, in some circumstances, can be used as an alternative to money.[21] In the previous report of October 2012, the virtual currency was defined 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.[19]

According to the Bank for International Settlements' November 2015 "Digital currencies" report, it is an asset represented in digital form and having some monetary characteristics.[22] Digital currency can be denominated to a sovereign currency and issued by the issuer responsible to redeem digital money for cash. In that case, digital currency represents electronic money (e-money). Digital currency denominated in its own units of value or with decentralized or automatic issuance will be considered as a virtual currency. As such, bitcoin is a digital currency but also a type of virtual currency. Bitcoin and its alternatives are based on cryptographic algorithms, so these kinds of virtual currencies are also called cryptocurrencies.

Digital versus cryptocurrency

Cryptocurrency is a sub-type of digital currency and a digital asset that relies on cryptography to chain together digital signatures of asset transfers, peer-to-peer networking and decentralization. In some cases a proof-of-work or proof-of-stake scheme is used to create and manage the currency.[23][24][25][26] Cryptocurrencies can allow electronic money systems to be decentralized. When implemented with a blockchain, the digital ledger system or record keeping system uses cryptography to edit separate shards of database entries that are distributed across many separate servers. The first and most popular system is bitcoin, a peer-to-peer electronic monetary system based on cryptography.

Digital versus traditional currency

Most of the traditional money supply is bank money held on computers. They are considered digital currency in some cases. One could argue that our increasingly cashless society means that all currencies are becoming digital currencies, but they are not presented to us as such.[27]

Types of systems

Centralized systems

Main article: Electronic funds transfer

Currency can be exchanged electronically using debit cards and credit cards using electronic funds transfer at point of sale.

Mobile digital wallets

A number of electronic money systems use contactless payment transfer in order to facilitate easy payment and give the payee more confidence in not letting go of their electronic wallet during the transaction.

In 1994 Mondex and National Westminster Bank provided an "electronic purse" to residents of Swindon

In about 2005 Telefónica and BBVA Bank launched a payment system in Spain called Mobipay[28] which used simple short message service facilities of feature phones intended for pay-as-you-go services including taxis and pre-pay phone recharges via a BBVA current bank account debit.

In January 2010, Venmo launched as a mobile payment system through SMS, which transformed into a social app where friends can pay each other for minor expenses like a cup of coffee, rent and pay a share of the restaurant bill when one has forgotten their wallet.[29] It is popular with college students, but has some security issues.[30] It can be linked to a bank account, credit/debit card or have a loaded value to limit the amount of loss in case of a security breach. Credit cards and non-major debit cards incur a 3% processing fee.[31]

On 19 September 2011, Google Wallet released in the United States to make it easy to carry all one's credit/debit cards on a phone.[32]

In 2012 Ireland's O2 (owned by Telefónica) launched Easytrip to pay road tolls which were charged to the mobile phone account or prepay credit.[33]

The UK's O2 invented O2 Wallet[34] at about the same time. The wallet can be charged with regular bank accounts or cards and discharged by participating retailers using a technique known as 'money messages'. The service closed in 2014.

On 9 September 2014, Apple Pay was announced at the iPhone 6 event. In October 2014 it was released as an update to work on iPhone 6 and Apple Watch. It is very similar to Google Wallet, but for Apple devices only.[35]

Central bank digital currency

A central bank digital currency (CBDC) is a form of universally accessible digital money in a nation and holds the same value as the country's paper currency. Like a cryptocurrency, a CBCD is held in the form of tokens. CBDCs are different from regular digital cash forms like in online bank accounts because CBDCs are established through the central bank within a country, with liabilities held by one's government, rather than from a commercial bank.[36] Approximately nine countries have already[when?] established a CBDC, with interest in the system increasing highly throughout the world. In these nations, CBDCs have been used as a form of exchange and a way for governments to try to prevent risks from occurring within their financial systems.[37]

Decentralized systems

Main article: Cryptocurrency

See also: List of cryptocurrencies

Digital Currency has been implemented in some cases as a decentralized system of any combination of currency issuance, ownership record, ownership transfer authorization and validation, and currency storage.

Per the Bank for International Settlements (BIS), "These schemes do not distinguish between users based on location, and therefore allow value to be transferred between users across borders. Moreover, the speed of a transaction is not conditional on the location of the payer and payee."[3]

Law

Since 2001, the European Union has implemented the E-Money Directive "on the taking up, pursuit and prudential supervision of the business of electronic money institutions" last amended in 2009.[38]

In the United States, electronic money is governed by Article 4A of the Uniform Commercial Code for wholesale transactions and the Electronic Fund Transfer Act for consumer transactions. Provider's responsibility and consumer's liability are regulated under Regulation E.[39][40]

Regulation

Virtual currencies pose challenges for central banks, financial regulators, departments or ministries of finance, as well as fiscal authorities and statistical authorities.

Adoption by governments

As of 2016, over 24 countries are investing in distributed ledger technologies (DLT) with $1.4bn in investments. In addition, over 90 central banks are engaged in DLT discussions, including implications of a central bank issued digital currency.[41]

Hong Kong's Octopus card system: Launched in 1997 as an electronic purse for public transportation, is the most successful and mature implementation of contactless smart cards used for mass transit payments. After only 5 years, 25 percent of Octopus card transactions are unrelated to transit, and accepted by more than 160 merchants.[42]

London Transport's Oyster card system: Oyster is a plastic smartcard that can hold pay-as-you-go credit, Travelcards and Bus & Tram season tickets. An Oyster card can be used to travel on bus, Tube, tram, DLR, London Overground and most National Rail services in London.[43]

Japan's FeliCa: A contactless RFID smart card, used in a variety of ways such as in ticketing systems for public transportation, e-money, and residence door keys.[44]

The Netherlands' Chipknip: As an electronic cash system used in the Netherlands, all ATM cards issued by the Dutch banks had value that could be loaded via Chipknip loading stations. For people without a bank, pre-paid Chipknip cards could be purchased at various locations in the Netherlands. As of 1 January 2015, payment can no longer be made with Chipknip.[45]

Belgium's Proton: An electronic purse application for debit cards in Belgium. Introduced in February 1995, as a means to replace cash for small transactions. The system was retired on 31 December 2014.[46]

In March 2018, the Marshall Islands became the first country to issue their own cryptocurrency and certify it as legal tender; the currency is called the "sovereign".[47]

United States of America

US Commodity Futures Trading Commission guidance

The US Commodity Futures Trading Commission (CFTC) has determined virtual currencies are properly defined as commodities in 2015.[48] The CFTC warned investors against pump and dump schemes that use virtual currencies.[49]

US Internal Revenue Service guidance

The US Internal Revenue Service (IRS) ruling Notice 2014-21[50] defines any virtual currency, cryptocurrency and digital currency as property; gains and losses are taxable within standard property policies.

US Treasury guidance

On 20 March 2013, the Financial Crimes Enforcement Network issued a guidance to clarify how the U.S. Bank Secrecy Act applied to persons creating, exchanging, and transmitting virtual currencies.[51]

US Securities and Exchange Commission guidance

In May 2014 the US Securities and Exchange Commission (SEC) "warned about the hazards of bitcoin and other virtual currencies".[52][53]

New York state regulation

In July 2014, the New York State Department of Financial Services proposed the most comprehensive regulation of virtual currencies to date, commonly called BitLicense. It has gathered input from bitcoin supporters and the financial industry through public hearings and a comment period until 21 October 2014 to customize the rules. The proposal per NY DFS press release "sought to strike an appropriate balance that helps protect consumers and root out illegal activity".[citation needed] It has been criticized by smaller companies to favor established institutions, and Chinese bitcoin exchanges have complained that the rules are "overly broad in its application outside the United States".[54]

Canada

The Bank of Canada have explored the possibility of creating a version of its currency on the blockchain.[55]

The Bank of Canada teamed up with the nation's five largest banks – and the blockchain consulting firm R3 – for what was known as Project Jasper. In a simulation run in 2016, the central bank issued CAD-Coins onto a blockchain similar Ethereum.[56] The banks used the CAD-Coins to exchange money the way they do at the end of each day to settle their master accounts.[56]

China

Main article: Digital renminbi

In 2016, Fan Yifei, a deputy governor of China's central bank, the People's Bank of China (PBOC), wrote that "the conditions are ripe for digital currencies, which can reduce operating costs, increase efficiency and enable a wide range of new applications".[56] According to Fan Yifei, the best way to take advantage of the situation is for central banks to take the lead, both in supervising private digital currencies and in developing digital legal tender of their own.[57]

In October 2019, the PBOC announced that a digital renminbi would be released after years of preparation.[58] The version of the currency, known as DCEP (Digital Currency Electronic Payment),[59] is based on cryptocurrency which can be "decoupled" from the banking system.[60] The announcement received a variety of responses: some believe it is more about domestic control and surveillance.[61]

In December 2020, the PBOC distributed CN¥20 million worth of digital renminbi to the residents of Suzhou through a lottery program to further promote the government-backed digital currency. Recipients of the currency could make both offline and online purchases, expanding on an earlier trial that did not require internet connection through the inclusion of online stores in the program. Around 20,000 transactions were reported by the e-commerce company JD.com in the first 24 hours of the trial. Contrary to other online payment platforms such as Alipay or WeChat Pay, the digital currency does not have transaction fees.[62]

Denmark

The Danish government proposed getting rid of the obligation for selected retailers to accept payment in cash, moving the country closer to a "cashless" economy.[63] The Danish Chamber of Commerce is backing the move.[64] Nearly a third of the Danish population uses MobilePay, a smartphone application for transferring money.[63]

Ecuador

A law passed by the National Assembly of Ecuador gives the government permission to make payments in electronic currency and proposes the creation of a national digital currency. "Electronic money will stimulate the economy; it will be possible to attract more Ecuadorian citizens, especially those who do not have checking or savings accounts and credit cards alone. The electronic currency will be backed by the assets of the Central Bank of Ecuador", the National Assembly said in a statement.[65] In December 2015, Sistema de Dinero Electrónico ("electronic money system") was launched, making Ecuador the first country with a state-run electronic payment system.[66]

El Salvador

On Jun 9, 2021, the Legislative Assembly of El Salvador has become the first country in the world to officially classify Bitcoin as legal currency. Starting 90 days after approval, every business must accept Bitcoin as legal tender for goods or services, unless it is unable to provide the technology needed to do the transaction.[67]

Netherlands

The Dutch central bank is experimenting with a blockchain-based virtual currency called "DNBCoin".[56][68]

India

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The Unified Payments Interface (UPI) is a real-time payment system for instant money transfers between any two bank accounts held in participating banks in India. The interface has been developed by the National Payments Corporation of India and is regulated by the Reserve Bank of India. This digital payment system is available 24*7*365. UPI is agnostic to the type of user and is used for person to person, person to business, business to person and business to business transactions.

Transactions can be initiated by the payer or the payee. To identify a bank account it uses a unique Virtual Payment Address (VPA) of the type 'accountID@bankID'. The VPA can be assigned by the bank, but can also be self specified just like an email address. The simplest and most common form of VPA is 'mobilenumber@upi'. Money can be transferred from one VPA to another or from one VPA to any bank account in a participating bank using account number and bank branch details. Transfers can be inter-bank or intra-bank.

UPI has no intermediate holding pond for money. It withdraws funds directly from the bank account of the sender and deposits them directly into the recipient's bank account whenever a transaction is requested. A sender can initiate and authorise a transfer using a two step secure process: login using a pass code → initiate → verify using a passcode. A receiver can initiate a payment request on the system to send the payer a notification or by presenting a QR code. On receiving the request, the payer can decline or confirm the payment using the same two step process: login → confirm → verify. The system is extraordinarily user friendly to the extent that even technophobes and barely literate users are adopting it in huge numbers.

Russia

Government-controlled Sberbank of Russia owns YooMoney – electronic payment service and digital currency of the same name.[69]

Sweden

Sweden is in the process of replacing all of its physical banknotes, and most of its coins by mid-2017.[needs update] However, the new banknotes and coins of the Swedish krona will probably be circulating at about half the 2007 peak of 12,494 kronor per capita. The Riksbank is planning to begin discussions of an electronic currency issued by the central bank to which "is not to replace cash, but to act as complement to it".[70] Deputy Governor Cecilia Skingsley states that cash will continue to spiral out of use in Sweden, and while it is currently fairly easy to get cash in Sweden, it is often very difficult to deposit it into bank accounts, especially in rural areas. No decision has been currently made about the decision to create "e-krona".

In her speech,[when?] Skingsley states: "The first question is whether e-krona should be booked in accounts or whether the ekrona should be some form of a digitally transferable unit that does not need an underlying account structure, roughly like cash." Skingsley also states: "Another important question is whether the Riksbank should issue e-krona directly to the general public or go via the banks, as we do now with banknotes and coins." Other questions will be addressed like interest rates, should they be positive, negative, or zero?[citation needed]

Switzerland

In 2016, a city government first accepted digital currency in payment of city fees. Zug, Switzerland, added bitcoin as a means of paying small amounts, up to SFr 200, in a test and an attempt to advance Zug as a region that is advancing future technologies. In order to reduce risk, Zug immediately converts any bitcoin received into the Swiss currency.[71] Swiss Federal Railways, government-owned railway company of Switzerland, sells bitcoins at its ticket machines.[72]

UK

In 2016, the UK's chief scientific adviser, Sir Mark Walport, advised the government to consider using a blockchain-based digital currency.[73]

The chief economist of Bank of England, the central bank of the United Kingdom, proposed the abolition of paper currency. The Bank has also taken an interest in blockchain.[56][74] In 2016 it has embarked on a multi-year research programme to explore the implications of a central bank issued digital currency.[41] The Bank of England has produced several research papers on the topic. One suggests that the economic benefits of issuing a digital currency on a distributed ledger could add as much as 3 percent to a country's economic output.[56] The Bank said that it wanted the next version of the bank's basic software infrastructure to be compatible with distributed ledgers.[56]

Adoption by financial actors

Government attitude dictates the tendency among established heavy financial actors that both are risk-averse and conservative. None of these offered services around cryptocurrencies and much of the criticism came from them. "The first mover among these has been Fidelity Investments, Boston based Fidelity Digital Assets LLC will provide enterprise-grade custody solutions, a cryptocurrency trading execution platform and institutional advising services 24 hours a day, seven days a week designed to align with blockchain's always-on trading cycle".[75] It will work with Bitcoin and Ethereum with general availability scheduled for 2019.[needs update]

Hard vs. soft digital currencies

Hard electronic currency does not have the ability to be disputed or reversed when used. It is nearly impossible to reverse a transaction, justified or not. It is very similar to cash.

Soft electronic currencies are the opposite of hard electronic currencies. Payments can be reversed. Usually, when a payment is reversed there is a "clearing time." A hard currency can be "softened" with a third-party service.

Criticism

Many existing digital currencies have not yet seen widespread usage, and may not be easily used or exchanged. Banks generally do not accept or offer services for them.[76] There are concerns that cryptocurrencies are extremely risky due to their very high volatility[77] and potential for pump and dump schemes.[78] Regulators in several countries have warned against their use and some have taken concrete regulatory measures to dissuade users.[79] The non-cryptocurrencies are all centralized. As such, they may be shut down or seized by a government at any time.[80] The more anonymous a currency is, the more attractive it is to criminals, regardless of the intentions of its creators.[80] Bitcoin has also been criticised for its energy inefficient SHA-256-based proof of work.[81]

According to Barry Eichengreen, an economist known for his work on monetary and financial economics, "cryptocurrencies like Bitcoin are too volatile to possess the essential attributes of money. Stablecoins have fragile currency pegs that diminish their utility in transactions. And central bank digital currencies are a solution in search of a problem."[82]

Popularity

Digital Currencies have become popular due to their convenient nature. Many users believe digital currency allows them to transfer money quicker and in a simpler manner. Many countries have adopted forms of digital currency due to doubts in the strength of their banking systems and distrust in the state of their economy. Other users prefer digital currency due to the freedom it gives them in their spending habits. Due to the fact that regulation over digital currencies is weak, many users can go around typical rules and regulations that are upheld with fiat currencies. In times of financial predicaments within a country, digital currencies may also help protect a user's assets.[83]

List

Non-cryptocurrencies

Currency Code Year Est. Active Founder Monetary base (April 2013) Notes

Beenz 1998 No Charles Cohen[84] —

e-gold 1996 No Gold & Silver Reserve Inc. —

Rand 1999 No James Orlin Grabbe — Not related to South African rand

Ven 2007 Yes Hub Culture —

A computer network is a set of computers sharing resources located on or provided by network nodes. Computers use common communication protocols over digital interconnections to communicate with each other. These interconnections are made up of telecommunication network technologies based on physically wired, optical, and wireless radio-frequency methods that may be arranged in a variety of network topologies.

The nodes of a computer network can include personal computers, servers, networking hardware, or other specialized or general-purpose hosts. They are identified by network addresses and may have hostnames. Hostnames serve as memorable labels for the nodes and are rarely changed after initial assignment. Network addresses serve for locating and identifying the nodes by communication protocols such as the Internet Protocol.

Computer networks may be classified by many criteria, including the transmission medium used to carry signals, bandwidth, communications protocols to organize network traffic, the network size, the topology, traffic control mechanisms, and organizational intent.[citation needed]

Computer networks support many applications and services, such as access to the World Wide Web, digital video and audio, shared use of application and storage servers, printers and fax machines, and use of email and instant messaging applications.

History

Computer networking may be considered a branch of computer science, computer engineering, and telecommunications, since it relies on the theoretical and practical application of the related disciplines. Computer networking was influenced by a wide array of technology developments and historical milestones.

In the late 1950s, a network of computers was built for the U.S. military Semi-Automatic Ground Environment (SAGE) radar system[1][2][3] using the Bell 101 modem. It was the first commercial modem for computers, released by AT&T Corporation in 1958. The modem allowed digital data to be transmitted over regular unconditioned telephone lines at a speed of 110 bits per second (bit/s).

In 1959, Christopher Strachey filed a patent application for time-sharing and John McCarthy initiated the first project to implement time-sharing of user programs at MIT.[4][5][6][7] Stratchey passed the concept on to J. C. R. Licklider at the inaugural UNESCO Information Processing Conference in Paris that year.[8] McCarthy was instrumental in the creation of three of the earliest time-sharing systems (the Compatible Time-Sharing System in 1961, the BBN Time-Sharing System in 1962, and the Dartmouth Time Sharing System in 1963).

In 1959, Anatoly Kitov proposed to the Central Committee of the Communist Party of the Soviet Union a detailed plan for the re-organisation of the control of the Soviet armed forces and of the Soviet economy on the basis of a network of computing centres.[9] Kitov's proposal was rejected, as later was the 1962 OGAS economy management network project.[10]

In 1960, the commercial airline reservation system semi-automatic business research environment (SABRE) went online with two connected mainframes.

In 1963, J. C. R. Licklider sent a memorandum to office colleagues discussing the concept of the "Intergalactic Computer Network", a computer network intended to allow general communications among computer users.

Throughout the 1960s, Paul Baran and Donald Davies independently developed the concept of packet switching to transfer information between computers over a network.[11][12][13] Davies pioneered the implementation of the concept. The NPL network, a local area network at the National Physical Laboratory (United Kingdom) used a line speed of 768 kbit/s and later high-speed T1 links (1.544 Mbit/s line rate).[14][15][16]

In 1965, Western Electric introduced the first widely used telephone switch that implemented computer control in the switching fabric.

In 1969, the first four nodes of the ARPANET were connected using 50 kbit/s circuits between the University of California at Los Angeles, the Stanford Research Institute, the University of California at Santa Barbara, and the University of Utah.[17] In the early 1970s, Leonard Kleinrock carried out mathematical work to model the performance of packet-switched networks, which underpinned the development of the ARPANET.[18][19] His theoretical work on hierarchical routing in the late 1970s with student Farouk Kamoun remains critical to the operation of the Internet today.

In 1972, commercial services were first deployed on public data networks in Europe,[20][21][22] which began using X.25 in the late 1970s and spread across the globe.[14] The underlying infrastructure was used for expanding TCP/IP networks in the 1980s.[23]

In 1973, the French CYCLADES network, directed by Louis Pouzin was the first to make the hosts responsible for the reliable delivery of data, rather than this being a centralized service of the network itself.[24]

In 1973, Peter Kirstein put internetworking into practice at University College London (UCL), connecting the ARPANET to British academic networks, the first international heterogeneous computer network.[25][26]

In 1973, Robert Metcalfe wrote a formal memo at Xerox PARC describing Ethernet, a networking system that was based on the Aloha network, developed in the 1960s by Norman Abramson and colleagues at the University of Hawaii. In July 1976, Robert Metcalfe and David Boggs published their paper "Ethernet: Distributed Packet Switching for Local Computer Networks"[27] and collaborated on several patents received in 1977 and 1978.

In 1974, Vint Cerf, Yogen Dalal, and Carl Sunshine published the Transmission Control Protocol (TCP) specification, RFC 675, coining the term Internet as a shorthand for internetworking.[28]

In 1976, John Murphy of Datapoint Corporation created ARCNET, a token-passing network first used to share storage devices.

In 1977, the first long-distance fiber network was deployed by GTE in Long Beach, California.

In 1977, Xerox Network Systems (XNS) was developed by Robert Metcalfe and Yogen Dalal at Xerox.[29]

In 1979, Robert Metcalfe pursued making Ethernet an open standard.[30]

In 1980, Ethernet was upgraded from the original 2.94 Mbit/s protocol to the 10 Mbit/s protocol, which was developed by Ron Crane, Bob Garner, Roy Ogus,[31] and Yogen Dalal.[32]

In 1995, the transmission speed capacity for Ethernet increased from 10 Mbit/s to 100 Mbit/s. By 1998, Ethernet supported transmission speeds of 1 Gbit/s. Subsequently, higher speeds of up to 400 Gbit/s were added (as of 2018). The scaling of Ethernet has been a contributing factor to its continued use.[30]

Use

Computer networks extend interpersonal communications by electronic means with various technologies, such as email, instant messaging, online chat, voice and video telephone calls, and video conferencing. A network allows sharing of network and computing resources. Users may access and use resources provided by devices on the network, such as printing a document on a shared network printer or use of a shared storage device. A network allows sharing of files, data, and other types of information giving authorized users the ability to access information stored on other computers on the network. Distributed computing uses computing resources across a network to accomplish tasks.

Network packet

Network Packet

Most modern computer networks use protocols based on packet-mode transmission. A network packet is a formatted unit of data carried by a packet-switched network.

Packets consist of two types of data: control information and user data (payload). The control information provides data the network needs to deliver the user data, for example, source and destination network addresses, error detection codes, and sequencing information. Typically, control information is found in packet headers and trailers, with payload data in between.

With packets, the bandwidth of the transmission medium can be better shared among users than if the network were circuit switched. When one user is not sending packets, the link can be filled with packets from other users, and so the cost can be shared, with relatively little interference, provided the link is not overused. Often the route a packet needs to take through a network is not immediately available. In that case, the packet is queued and waits until a link is free.

The physical link technologies of packet networks typically limit the size of packets to a certain maximum transmission unit (MTU). A longer message may be fragmented before it is transferred and once the packets arrive, they are reassembled to construct the original message.

Network topology

Further information: Network topology

Common network topologies

The physical or geographic locations of network nodes and links generally have relatively little effect on a network, but the topology of interconnections of a network can significantly affect its throughput and reliability. With many technologies, such as bus or star networks, a single failure can cause the network to fail entirely. In general, the more interconnections there are, the more robust the network is; but the more expensive it is to install. Therefore, most network diagrams are arranged by their network topology which is the map of logical interconnections of network hosts.

Common topologies are:

Bus network: all nodes are connected to a common medium along this medium. This was the layout used in the original Ethernet, called 10BASE5 and 10BASE2. This is still a common topology on the data link layer, although modern physical layer variants use point-to-point links instead, forming a star or a tree.

Star network: all nodes are connected to a special central node. This is the typical layout found in a small switched Ethernet LAN, where each client connects to a central network switch, and logically in a wireless LAN, where each wireless client associates with the central wireless access point.

Ring network: each node is connected to its left and right neighbor node, such that all nodes are connected and that each node can reach each other node by traversing nodes left- or rightwards. Token ring networks, and the Fiber Distributed Data Interface (FDDI), made use of such a topology.

Mesh network: each node is connected to an arbitrary number of neighbors in such a way that there is at least one traversal from any node to any other.

Fully connected network: each node is connected to every other node in the network.

Tree network: nodes are arranged hierarchically. This is the natural topology for a larger Ethernet network with multiple switches and without redundant meshing.

The physical layout of the nodes in a network may not necessarily reflect the network topology. As an example, with FDDI, the network topology is a ring, but the physical topology is often a star, because all neighboring connections can be routed via a central physical location. Physical layout is not completely irrelevant, however, as common ducting and equipment locations can represent single points of failure due to issues like fires, power failures and flooding.

Overlay network

A sample overlay network

An overlay network is a virtual network that is built on top of another network. Nodes in the overlay network are connected by virtual or logical links. Each link corresponds to a path, perhaps through many physical links, in the underlying network. The topology of the overlay network may (and often does) differ from that of the underlying one. For example, many peer-to-peer networks are overlay networks. They are organized as nodes of a virtual system of links that run on top of the Internet.[33]

Overlay networks have been around since the invention of networking when computer systems were connected over telephone lines using modems before any data network existed.

The most striking example of an overlay network is the Internet itself. The Internet itself was initially built as an overlay on the telephone network.[33] Even today, each Internet node can communicate with virtually any other through an underlying mesh of sub-networks of wildly different topologies and technologies. Address resolution and routing are the means that allow mapping of a fully connected IP overlay network to its underlying network.

Another example of an overlay network is a distributed hash table, which maps keys to nodes in the network. In this case, the underlying network is an IP network, and the overlay network is a table (actually a map) indexed by keys.

Overlay networks have also been proposed as a way to improve Internet routing, such as through quality of service guarantees achieve higher-quality streaming media. Previous proposals such as IntServ, DiffServ, and IP multicast have not seen wide acceptance largely because they require modification of all routers in the network.[citation needed] On the other hand, an overlay network can be incrementally deployed on end-hosts running the overlay protocol software, without cooperation from Internet service providers. The overlay network has no control over how packets are routed in the underlying network between two overlay nodes, but it can control, for example, the sequence of overlay nodes that a message traverses before it reaches its destination[citation needed].

For example, Akamai Technologies manages an overlay network that provides reliable, efficient content delivery (a kind of multicast). Academic research includes end system multicast,[34] resilient routing and quality of service studies, among others.

Network links

Further information: Data transmission

Network links

The transmission media (often referred to in the literature as the physical medium) used to link devices to form a computer network include electrical cable, optical fiber, and free space. In the OSI model, the software to handle the media is defined at layers 1 and 2 — the physical layer and the data link layer.

A widely adopted family that uses copper and fiber media in local area network (LAN) technology are collectively known as Ethernet. The media and protocol standards that enable communication between networked devices over Ethernet are defined by IEEE 802.3. Wireless LAN standards use radio waves, others use infrared signals as a transmission medium. Power line communication uses a building's power cabling to transmit data.

Wired

Bundle of glass threads with light emitting from the ends

Fiber optic cables are used to transmit light from one computer/network node to another.

The following classes of wired technologies are used in computer networking.

Coaxial cable is widely used for cable television systems, office buildings, and other work-sites for local area networks. Transmission speed ranges from 200 million bits per second to more than 500 million bits per second.[citation needed]

ITU-T G.hn technology uses existing home wiring (coaxial cable, phone lines and power lines) to create a high-speed local area network.

Twisted pair cabling is used for wired Ethernet and other standards. It typically consists of 4 pairs of copper cabling that can be utilized for both voice and data transmission. The use of two wires twisted together helps to reduce crosstalk and electromagnetic induction. The transmission speed ranges from 2 Mbit/s to 10 Gbit/s. Twisted pair cabling comes in two forms: unshielded twisted pair (UTP) and shielded twisted-pair (STP). Each form comes in several category ratings, designed for use in various scenarios.

World map with red and blue lines

2007 map showing submarine optical fiber telecommunication cables around the world

An optical fiber is a glass fiber. It carries pulses of light that represent data via lasers and optical amplifiers. Some advantages of optical fibers over metal wires are very low transmission loss and immunity to electrical interference. Using dense wave division multiplexing, optical fibers can simultaneously carry multiple streams of data on different wavelengths of light, which greatly increases the rate that data can be sent to up to trillions of bits per second. Optic fibers can be used for long runs of cable carrying very high data rates, and are used for undersea communications cables to interconnect continents. There are two basic types of fiber optics, single-mode optical fiber (SMF) and multi-mode optical fiber (MMF). Single-mode fiber has the advantage of being able to sustain a coherent signal for dozens or even a hundred kilometers. Multimode fiber is cheaper to terminate but is limited to a few hundred or even only a few dozens of meters, depending on the data rate and cable grade.[35]

Wireless

Black laptop with the router in the background

Computers are very often connected to networks using wireless links.

Main article: Wireless network

Network connections can be established wirelessly using radio or other electromagnetic means of communication.

Terrestrial microwave – Terrestrial microwave communication uses Earth-based transmitters and receivers resembling satellite dishes. Terrestrial microwaves are in the low gigahertz range, which limits all communications to line-of-sight. Relay stations are spaced approximately 40 miles (64 km) apart.

Communications satellites – Satellites also communicate via microwave. The satellites are stationed in space, typically in geosynchronous orbit 35,400 km (22,000 mi) above the equator. These Earth-orbiting systems are capable of receiving and relaying voice, data, and TV signals.

Cellular networks use several radio communications technologies. The systems divide the region covered into multiple geographic areas. Each area is served by a low-power transceiver.

Radio and spread spectrum technologies – Wireless LANs use a high-frequency radio technology similar to digital cellular. Wireless LANs use spread spectrum technology to enable communication between multiple devices in a limited area. IEEE 802.11 defines a common flavor of open-standards wireless radio-wave technology known as Wi-Fi.

Free-space optical communication uses visible or invisible light for communications. In most cases, line-of-sight propagation is used, which limits the physical positioning of communicating devices.

Extending the Internet to interplanetary dimensions via radio waves and optical means, the Interplanetary Internet.[36]

IP over Avian Carriers was a humorous April fool's Request for Comments, issued as RFC 1149. It was implemented in real life in 2001.[37]

The last two cases have a large round-trip delay time, which gives slow two-way communication but does not prevent sending large amounts of information (they can have high throughput).

Network nodes

Main article: Node (networking)

Apart from any physical transmission media, networks are built from additional basic system building blocks, such as network interface controllers, repeaters, hubs, bridges, switches, routers, modems, and firewalls. Any particular piece of equipment will frequently contain multiple building blocks and so may perform multiple functions.

Network interfaces

Main article: Network interface controller

A network interface circuit with a port for ATM

An ATM network interface in the form of an accessory card. A lot of network interfaces are built-in.

A network interface controller (NIC) is computer hardware that connects the computer to the network media and has the ability to process low-level network information. For example, the NIC may have a connector for accepting a cable, or an aerial for wireless transmission and reception, and the associated circuitry.

In Ethernet networks, each NIC has a unique Media Access Control (MAC) address—usually stored in the controller's permanent memory. To avoid address conflicts between network devices, the Institute of Electrical and Electronics Engineers (IEEE) maintains and administers MAC address uniqueness. The size of an Ethernet MAC address is six octets. The three most significant octets are reserved to identify NIC manufacturers. These manufacturers, using only their assigned prefixes, uniquely assign the three least-significant octets of every Ethernet interface they produce.

Repeaters and hubs

Main article: Repeater

A repeater is an electronic device that receives a network signal, cleans it of unnecessary noise and regenerates it. The signal is retransmitted at a higher power level, or to the other side of obstruction so that the signal can cover longer distances without degradation. In most twisted-pair Ethernet configurations, repeaters are required for cable that runs longer than 100 meters. With fiber optics, repeaters can be tens or even hundreds of kilometers apart.

Repeaters work on the physical layer of the OSI model but still require a small amount of time to regenerate the signal. This can cause a propagation delay that affects network performance and may affect proper function. As a result, many network architectures limit the number of repeaters used in a network, e.g., the Ethernet 5-4-3 rule.

An Ethernet repeater with multiple ports is known as an Ethernet hub. In addition to reconditioning and distributing network signals, a repeater hub assists with collision detection and fault isolation for the network. Hubs and repeaters in LANs have been largely obsoleted by modern network switches.

Bridges and switches

Main articles: Network bridge and Network switch

Network bridges and network switches are distinct from a hub in that they only forward frames to the ports involved in the communication whereas a hub forwards to all ports.[38] Bridges only have two ports but a switch can be thought of as a multi-port bridge. Switches normally have numerous ports, facilitating a star topology for devices, and for cascading additional switches.

Bridges and switches operate at the data link layer (layer 2) of the OSI model and bridge traffic between two or more network segments to form a single local network. Both are devices that forward frames of data between ports based on the destination MAC address in each frame.[39] They learn the association of physical ports to MAC addresses by examining the source addresses of received frames and only forward the frame when necessary. If an unknown destination MAC is targeted, the device broadcasts the request to all ports except the source, and discovers the location from the reply.

Bridges and switches divide the network's collision domain but maintain a single broadcast domain. Network segmentation through bridging and switching helps break down a large, congested network into an aggregation of smaller, more efficient networks.

Routers

Main article: Router (computing)

A typical home or small office router showing the ADSL telephone line and Ethernet network cable connections

A router is an internetworking device that forwards packets between networks by processing the addressing or routing information included in the packet. The routing information is often processed in conjunction with the routing table. A router uses its routing table to determine where to forward packets and does not require broadcasting packets which is inefficient for very big networks.

Modems

Main article: Modem

Modems (modulator-demodulator) are used to connect network nodes via wire not originally designed for digital network traffic, or for wireless. To do this one or more carrier signals are modulated by the digital signal to produce an analog signal that can be tailored to give the required properties for transmission. Early modems modulated audio signals sent over a standard voice telephone line. Modems are still commonly used for telephone lines, using a digital subscriber line technology and cable television systems using DOCSIS technology.

Firewalls

Main article: Firewall (computing)

Firewalls

A firewall is a network device or software for controlling network security and access rules. Firewalls are inserted in connections between secure internal networks and potentially insecure external networks such as the Internet. Firewalls are typically configured to reject access requests from unrecognized sources while allowing actions from recognized ones. The vital role firewalls play in network security grows in parallel with the constant increase in cyber attacks.

Communication protocols

Protocols in relation to the Internet layering scheme.

The TCP/IP model and its relation to common protocols used at different layers of the model

When a router is present, message flows go down through protocol layers, across to the router, up the stack inside the router, and back down again and is sent on to the final destination where it climbs back up the stack

Message flows between two devices (A-B) at the four layers of the TCP/IP model in the presence of a router (R). Red flows are effective communication paths, black paths are across the actual network links.

A communication protocol is a set of rules for exchanging information over a network. Communication protocols have various characteristics. They may be connection-oriented or connectionless, they may use circuit mode or packet switching, and they may use hierarchical addressing or flat addressing.

In a protocol stack, often constructed per the OSI model, communications functions are divided up into protocol layers, where each layer leverages the services of the layer below it until the lowest layer controls the hardware that sends information across the media. The use of protocol layering is ubiquitous across the field of computer networking. An important example of a protocol stack is HTTP (the World Wide Web protocol) running over TCP over IP (the Internet protocols) over IEEE 802.11 (the Wi-Fi protocol). This stack is used between the wireless router and the home user's personal computer when the user is surfing the web.

There are many communication protocols, a few of which are described below.

Further information: Rate Based Satellite Control Protocol

Common protocols

Internet protocol suite

The Internet protocol suite, also called TCP/IP, is the foundation of all modern networking. It offers connection-less and connection-oriented services over an inherently unreliable network traversed by datagram transmission using Internet protocol (IP). At its core, the protocol suite defines the addressing, identification, and routing specifications for Internet Protocol Version 4 (IPv4) and for IPv6, the next generation of the protocol with a much enlarged addressing capability. The Internet protocol suite is the defining set of protocols for the Internet.[40]

IEEE 802

IEEE 802 is a family of IEEE standards dealing with local area networks and metropolitan area networks. The complete IEEE 802 protocol suite provides a diverse set of networking capabilities. The protocols have a flat addressing scheme. They operate mostly at layers 1 and 2 of the OSI model.

For example, MAC bridging (IEEE 802.1D) deals with the routing of Ethernet packets using a Spanning Tree Protocol. IEEE 802.1Q describes VLANs, and IEEE 802.1X defines a port-based Network Access Control protocol, which forms the basis for the authentication mechanisms used in VLANs[41] (but it is also found in WLANs[42]) – it is what the home user sees when the user has to enter a "wireless access key".

Ethernet

Ethernet is a family of technologies used in wired LANs. It is described by a set of standards together called IEEE 802.3 published by the Institute of Electrical and Electronics Engineers.

Wireless LAN

Wireless LAN based on the IEEE 802.11 standards, also widely known as WLAN or WiFi, is probably the most well-known member of the IEEE 802 protocol family for home users today. IEEE 802.11 shares many properties with wired Ethernet.

SONET/SDH

SONET & SDH

Synchronous optical networking (SONET) and Synchronous Digital Hierarchy (SDH) are standardized multiplexing protocols that transfer multiple digital bit streams over optical fiber using lasers. They were originally designed to transport circuit mode communications from a variety of different sources, primarily to support circuit-switched digital telephony. However, due to its protocol neutrality and transport-oriented features, SONET/SDH also was the obvious choice for transporting Asynchronous Transfer Mode (ATM) frames.

Asynchronous Transfer Mode

Asynchronous Transfer Mode

Asynchronous Transfer Mode (ATM) is a switching technique for telecommunication networks. It uses asynchronous time-division multiplexing and encodes data into small, fixed-sized cells. This differs from other protocols such as the Internet protocol suite or Ethernet that use variable-sized packets or frames. ATM has similarities with both circuit and packet switched networking. This makes it a good choice for a network that must handle both traditional high-throughput data traffic, and real-time, low-latency content such as voice and video. ATM uses a connection-oriented model in which a virtual circuit must be established between two endpoints before the actual data exchange begins.

ATM still plays a role in the last mile, which is the connection between an Internet service provider and the home user.[43][needs update]

Cellular standards

There are a number of different digital cellular standards, including: Global System for Mobile Communications (GSM), General Packet Radio Service (GPRS), cdmaOne, CDMA2000, Evolution-Data Optimized (EV-DO), Enhanced Data Rates for GSM Evolution (EDGE), Universal Mobile Telecommunications System (UMTS), Digital Enhanced Cordless Telecommunications (DECT), Digital AMPS (IS-136/TDMA), and Integrated Digital Enhanced Network (iDEN).[44]

Routing

Routing calculates good paths through a network for information to take. For example, from node 1 to node 6 the best routes are likely to be 1-8-7-6, 1-8-10-6 or 1-9-10-6, as these are the shortest routes.

Routing is the process of selecting network paths to carry network traffic. Routing is performed for many kinds of networks, including circuit switching networks and packet switched networks.

In packet-switched networks, routing protocols direct packet forwarding through intermediate nodes. Intermediate nodes are typically network hardware devices such as routers, bridges, gateways, firewalls, or switches. General-purpose computers can also forward packets and perform routing, though because they lack specialized hardware, may offer limited performance. The routing process directs forwarding on the basis of routing tables, which maintain a record of the routes to various network destinations. Most routing algorithms use only one network path at a time. Multipath routing techniques enable the use of multiple alternative paths.

Routing can be contrasted with bridging in its assumption that network addresses are structured and that similar addresses imply proximity within the network. Structured addresses allow a single routing table entry to represent the route to a group of devices. In large networks, the structured addressing used by routers outperforms unstructured addressing used by bridging. Structured IP addresses are used on the Internet. Unstructured MAC addresses are used for bridging on Ethernet and similar local area networks.

Geographic scale

Computer network types

by scale

Nanoscale

Near-field (NFC)

Body

Personal (PAN)

Near-me

Local (LAN)

Storage (SAN)

Wireless (WLAN)

Virtual (VLAN)

Home (HAN)

Building

Campus (CAN)

Backbone

Metropolitan (MAN)

Municipal wireless (MWN)

Wide (WAN)

Cloud

Internet

Interplanetary Internet

vte

Networks may be characterized by many properties or features, such as physical capacity, organizational purpose, user authorization, access rights, and others. Another distinct classification method is that of the physical extent or geographic scale.

Nanoscale network

A nanoscale network has key components implemented at the nanoscale, including message carriers, and leverages physical principles that differ from macroscale communication mechanisms. Nanoscale communication extends communication to very small sensors and actuators such as those found in biological systems and also tends to operate in environments that would be too harsh for other communication techniques.[45]

Personal area network

A personal area network (PAN) is a computer network used for communication among computers and different information technological devices close to one person. Some examples of devices that are used in a PAN are personal computers, printers, fax machines, telephones, PDAs, scanners, and video game consoles. A PAN may include wired and wireless devices. The reach of a PAN typically extends to 10 meters.[46] A wired PAN is usually constructed with USB and FireWire connections while technologies such as Bluetooth and infrared communication typically form a wireless PAN.

Local area network

A local area network (LAN) is a network that connects computers and devices in a limited geographical area such as a home, school, office building, or closely positioned group of buildings. Wired LANs are most commonly based on Ethernet technology. Other networking technologies such as ITU-T G.hn also provide a way to create a wired LAN using existing wiring, such as coaxial cables, telephone lines, and power lines.[47]

A LAN can be connected to a wide area network (WAN) using a router. The defining characteristics of a LAN, in contrast to a WAN, include higher data transfer rates, limited geographic range, and lack of reliance on leased lines to provide connectivity.[citation needed] Current Ethernet or other IEEE 802.3 LAN technologies operate at data transfer rates up to and in excess of 100 Gbit/s,[48] standardized by IEEE in 2010.

Home area network

A home area network (HAN) is a residential LAN used for communication between digital devices typically deployed in the home, usually a small number of personal computers and accessories, such as printers and mobile computing devices. An important function is the sharing of Internet access, often a broadband service through a cable Internet access or digital subscriber line (DSL) provider.

Storage area network

A storage area network (SAN) is a dedicated network that provides access to consolidated, block-level data storage. SANs are primarily used to make storage devices, such as disk arrays, tape libraries, and optical jukeboxes, accessible to servers so that the storage appears as locally attached devices to the operating system. A SAN typically has its own network of storage devices that are generally not accessible through the local area network by other devices. The cost and complexity of SANs dropped in the early 2000s to levels allowing wider adoption across both enterprise and small to medium-sized business environments.[citation needed]

Campus area network

A campus area network (CAN) is made up of an interconnection of LANs within a limited geographical area. The networking equipment (switches, routers) and transmission media (optical fiber, Cat5 cabling, etc.) are almost entirely owned by the campus tenant or owner (an enterprise, university, government, etc.).

For example, a university campus network is likely to link a variety of campus buildings to connect academic colleges or departments, the library, and student residence halls.

Backbone network

A backbone network is part of a computer network infrastructure that provides a path for the exchange of information between different LANs or subnetworks. A backbone can tie together diverse networks within the same building, across different buildings, or over a wide area. When designing a network backbone, network performance and network congestion are critical factors to take into account. Normally, the backbone network's capacity is greater than that of the individual networks connected to it.

For example, a large company might implement a backbone network to connect departments that are located around the world. The equipment that ties together the departmental networks constitutes the network backbone. Another example of a backbone network is the Internet backbone, which is a massive, global system of fiber-optic cable and optical networking that carry the bulk of data between wide area networks (WANs), metro, regional, national and transoceanic networks.

Metropolitan area network

A metropolitan area network (MAN) is a large computer network that interconnects users with computer resources in a geographic region of the size of a metropolitan area.

Wide area network

A wide area network (WAN) is a computer network that covers a large geographic area such as a city, country, or spans even intercontinental distances. A WAN uses a communications channel that combines many types of media such as telephone lines, cables, and airwaves. A WAN often makes use of transmission facilities provided by common carriers, such as telephone companies. WAN technologies generally function at the lower three layers of the OSI model: the physical layer, the data link layer, and the network layer.

Enterprise private network

An enterprise private network is a network that a single organization builds to interconnect its office locations (e.g., production sites, head offices, remote offices, shops) so they can share computer resources.

Virtual private network

A virtual private network (VPN) is an overlay network in which some of the links between nodes are carried by open connections or virtual circuits in some larger network (e.g., the Internet) instead of by physical wires. The data link layer protocols of the virtual network are said to be tunneled through the larger network. One common application is secure communications through the public Internet, but a VPN need not have explicit security features, such as authentication or content encryption. VPNs, for example, can be used to separate the traffic of different user communities over an underlying network with strong security features.

VPN may have best-effort performance or may have a defined service level agreement (SLA) between the VPN customer and the VPN service provider.

Global area network

A global area network (GAN) is a network used for supporting mobile users across an arbitrary number of wireless LANs, satellite coverage areas, etc. The key challenge in mobile communications is handing off communications from one local coverage area to the next. In IEEE Project 802, this involves a succession of terrestrial wireless LANs.[49]

Organizational scope

Networks are typically managed by the organizations that own them. Private enterprise networks may use a combination of intranets and extranets. They may also provide network access to the Internet, which has no single owner and permits virtually unlimited global connectivity.

Intranet

An intranet is a set of networks that are under the control of a single administrative entity. An intranet typically uses the Internet Protocol and IP-based tools such as web browsers and file transfer applications. The administrative entity limits the use of the intranet to its authorized users. Most commonly, an intranet is the internal LAN of an organization. A large intranet typically has at least one web server to provide users with organizational information.

Extranet

An extranet is a network that is under the administrative control of a single organization but supports a limited connection to a specific external network. For example, an organization may provide access to some aspects of its intranet to share data with its business partners or customers. These other entities are not necessarily trusted from a security standpoint. The network connection to an extranet is often, but not always, implemented via WAN technology.

Internet

Partial map of the Internet based on 2005 data.[50] Each line is drawn between two nodes, representing two IP addresses. The length of the lines indicates the delay between those two nodes.

An internetwork is the connection of multiple different types of computer networks to form a single computer network using higher-layer network protocols and connecting them together using routers.

The Internet is the largest example of internetwork. It is a global system of interconnected governmental, academic, corporate, public, and private computer networks. It is based on the networking technologies of the Internet protocol suite. It is the successor of the Advanced Research Projects Agency Network (ARPANET) developed by DARPA of the United States Department of Defense. The Internet utilizes copper communications and an optical networking backbone to enable the World Wide Web (WWW), the Internet of things, video transfer, and a broad range of information services.

Participants on the Internet use a diverse array of methods of several hundred documented, and often standardized, protocols compatible with the Internet protocol suite and the IP addressing system administered by the Internet Assigned Numbers Authority and address registries. Service providers and large enterprises exchange information about the reachability of their address spaces through the Border Gateway Protocol (BGP), forming a redundant worldwide mesh of transmission paths.

Darknet

A darknet is an overlay network, typically running on the Internet, that is only accessible through specialized software. It is an anonymizing network where connections are made only between trusted peers — sometimes called friends (F2F)[51] — using non-standard protocols and ports.

Darknets are distinct from other distributed peer-to-peer networks as sharing is anonymous (that is, IP addresses are not publicly shared), and therefore users can communicate with little fear of governmental or corporate interference.[52]

Network service

Network services are applications hosted by servers on a computer network, to provide some functionality for members or users of the network, or to help the network itself to operate.

The World Wide Web, E-mail,[53] printing and network file sharing are examples of well-known network services. Network services such as Domain Name System (DNS) give names for IP and MAC addresses (people remember names like nm.lan better than numbers like 210.121.67.18),[54] and Dynamic Host Configuration Protocol (DHCP) to ensure that the equipment on the network has a valid IP address.[55]

Services are usually based on a service protocol that defines the format and sequencing of messages between clients and servers of that network service.

Network performance

Bandwidth

Bandwidth in bit/s may refer to consumed bandwidth, corresponding to achieved throughput or goodput, i.e., the average rate of successful data transfer through a communication path. The throughput is affected by processes such as bandwidth shaping, bandwidth management, bandwidth throttling, bandwidth cap and bandwidth allocation (using, for example, bandwidth allocation protocol and dynamic bandwidth allocation).

Network delay

Main article: Network delay

Network delay is a design and performance characteristic of a telecommunications network. It specifies the latency for a bit of data to travel across the network from one communication endpoint to another. It is typically measured in multiples or fractions of a second. Delay may differ slightly, depending on the location of the specific pair of communicating endpoints. Engineers usually report both the maximum and average delay, and they divide the delay into several parts:

Processing delay – time it takes a router to process the packet header

Queuing delay – time the packet spends in routing queues

Transmission delay – time it takes to push the packet's bits onto the link

Propagation delay – time for a signal to propagate through the media

A certain minimum level of delay is experienced by signals due to the time it takes to transmit a packet serially through a link. This delay is extended by more variable levels of delay due to network congestion. IP network delays can range from a few milliseconds to several hundred milliseconds.

Quality of service

Depending on the installation requirements, network performance is usually measured by the quality of service of a telecommunications product. The parameters that affect this typically can include throughput, jitter, bit error rate and latency.

The following list gives examples of network performance measures for a circuit-switched network and one type of packet-switched network, viz. ATM:

Circuit-switched networks: In circuit switched networks, network performance is synonymous with the grade of service. The number of rejected calls is a measure of how well the network is performing under heavy traffic loads.[56] Other types of performance measures can include the level of noise and echo.

ATM: In an Asynchronous Transfer Mode (ATM) network, performance can be measured by line rate, quality of service (QoS), data throughput, connect time, stability, technology, modulation technique, and modem enhancements.[57][verification needed][full citation needed]

There are many ways to measure the performance of a network, as each network is different in nature and design. Performance can also be modeled instead of measured. For example, state transition diagrams are often used to model queuing performance in a circuit-switched network. The network planner uses these diagrams to analyze how the network performs in each state, ensuring that the network is optimally designed.[58]

Network congestion

Network congestion occurs when a link or node is subjected to a greater data load than it is rated for, resulting in a deterioration of its quality of service. When networks are congested and queues become too full, packets have to be discarded, and so networks rely on re-transmission. Typical effects of congestion include queueing delay, packet loss or the blocking of new connections. A consequence of these latter two is that incremental increases in offered load lead either to only a small increase in the network throughput or to a reduction in network throughput.

Network protocols that use aggressive retransmissions to compensate for packet loss tend to keep systems in a state of network congestion—even after the initial load is reduced to a level that would not normally induce network congestion. Thus, networks using these protocols can exhibit two stable states under the same level of load. The stable state with low throughput is known as congestive collapse.

Modern networks use congestion control, congestion avoidance and traffic control techniques to try to avoid congestion collapse (i.e. endpoints typically slow down or sometimes even stop transmission entirely when the network is congested). These techniques include: exponential backoff in protocols such as 802.11's CSMA/CA and the original Ethernet, window reduction in TCP, and fair queueing in devices such as routers. Another method to avoid the negative effects of network congestion is implementing priority schemes so that some packets are transmitted with higher priority than others. Priority schemes do not solve network congestion by themselves, but they help to alleviate the effects of congestion for some services. An example of this is 802.1p. A third method to avoid network congestion is the explicit allocation of network resources to specific flows. One example of this is the use of Contention-Free Transmission Opportunities (CFTXOPs) in the ITU-T G.hn standard, which provides high-speed (up to 1 Gbit/s) Local area networking over existing home wires (power lines, phone lines and coaxial cables).

For the Internet, RFC 2914 addresses the subject of congestion control in detail.

Network resilience

Network resilience is "the ability to provide and maintain an acceptable level of service in the face of faults and challenges to normal operation."[59]

Security

Main article: Computer security

Computer networks are also used by security hackers to deploy computer viruses or computer worms on devices connected to the network, or to prevent these devices from accessing the network via a denial-of-service attack.

Network security

Network Security consists of provisions and policies adopted by the network administrator to prevent and monitor unauthorized access, misuse, modification, or denial of the computer network and its network-accessible resources.[60] Network security is the authorization of access to data in a network, which is controlled by the network administrator. Users are assigned an ID and password that allows them access to information and programs within their authority. Network security is used on a variety of computer networks, both public and private, to secure daily transactions and communications among businesses, government agencies, and individuals.

Network surveillance

Network surveillance is the monitoring of data being transferred over computer networks such as the Internet. The monitoring is often done surreptitiously and may be done by or at the behest of governments, by corporations, criminal organizations, or individuals. It may or may not be legal and may or may not require authorization from a court or other independent agency.

Computer and network surveillance programs are widespread today, and almost all Internet traffic is or could potentially be monitored for clues to illegal activity.

Surveillance is very useful to governments and law enforcement to maintain social control, recognize and monitor threats, and prevent/investigate criminal activity. With the advent of programs such as the Total Information Awareness program, technologies such as high-speed surveillance computers and biometrics software, and laws such as the Communications Assistance For Law Enforcement Act, governments now possess an unprecedented ability to monitor the activities of citizens.[61]

However, many civil rights and privacy groups—such as Reporters Without Borders, the Electronic Frontier Foundation, and the American Civil Liberties Union—have expressed concern that increasing surveillance of citizens may lead to a mass surveillance society, with limited political and personal freedoms. Fears such as this have led to numerous lawsuits such as Hepting v. AT&T.[61][62] The hacktivist group Anonymous has hacked into government websites in protest of what it considers "draconian surveillance".[63][64]

End to end encryption

End-to-end encryption (E2EE) is a digital communications paradigm of uninterrupted protection of data traveling between two communicating parties. It involves the originating party encrypting data so only the intended recipient can decrypt it, with no dependency on third parties. End-to-end encryption prevents intermediaries, such as Internet service providers or application service providers, from discovering or tampering with communications. End-to-end encryption generally protects both confidentiality and integrity.

Examples of end-to-end encryption include HTTPS for web traffic, PGP for email, OTR for instant messaging, ZRTP for telephony, and TETRA for radio.

Typical server-based communications systems do not include end-to-end encryption. These systems can only guarantee the protection of communications between clients and servers, not between the communicating parties themselves. Examples of non-E2EE systems are Google Talk, Yahoo Messenger, Facebook, and Dropbox. Some such systems, for example, LavaBit and SecretInk, have even described themselves as offering "end-to-end" encryption when they do not. Some systems that normally offer end-to-end encryption have turned out to contain a back door that subverts negotiation of the encryption key between the communicating parties, for example Skype or Hushmail.

The end-to-end encryption paradigm does not directly address risks at the endpoints of the communication themselves, such as the technical exploitation of clients, poor quality random number generators, or key escrow. E2EE also does not address traffic analysis, which relates to things such as the identities of the endpoints and the times and quantities of messages that are sent.

SSL/TLS

Main article: Transport Layer Security

The introduction and rapid growth of e-commerce on the World Wide Web in the mid-1990s made it obvious that some form of authentication and encryption was needed. Netscape took the first shot at a new standard. At the time, the dominant web browser was Netscape Navigator. Netscape created a standard called secure socket layer (SSL). SSL requires a server with a certificate. When a client requests access to an SSL-secured server, the server sends a copy of the certificate to the client. The SSL client checks this certificate (all web browsers come with an exhaustive list of CA root certificates preloaded), and if the certificate checks out, the server is authenticated and the client negotiates a symmetric-key cipher for use in the session. The session is now in a very secure encrypted tunnel between the SSL server and the SSL client.[35]

Views of networks

Users and network administrators typically have different views of their networks. Users can share printers and some servers from a workgroup, which usually means they are in the same geographic location and are on the same LAN, whereas a Network Administrator is responsible to keep that network up and running. A community of interest has less of a connection of being in a local area and should be thought of as a set of arbitrarily located users who share a set of servers, and possibly also communicate via peer-to-peer technologies.

Network administrators can see networks from both physical and logical perspectives. The physical perspective involves geographic locations, physical cabling, and the network elements (e.g., routers, bridges and application layer gateways) that interconnect via the transmission media. Logical networks, called, in the TCP/IP architecture, subnets, map onto one or more transmission media. For example, a common practice in a campus of buildings is to make a set of LAN cables in each building appear to be a common subnet, using VLAN technology.

Both users and administrators are aware, to varying extents, of the trust and scope characteristics of a network. Again using TCP/IP architectural terminology, an intranet is a community of interest under private administration usually by an enterprise, and is only accessible by authorized users (e.g. employees).[65] Intranets do not have to be connected to the Internet, but generally have a limited connection. An extranet is an extension of an intranet that allows secure communications to users outside of the intranet (e.g. business partners, customers).[65]

Unofficially, the Internet is the set of users, enterprises, and content providers that are interconnected by Internet Service Providers (ISP). From an engineering viewpoint, the Internet is the set of subnets, and aggregates of subnets, that share the registered IP address space and exchange information about the reachability of those IP addresses using the Border Gateway Protocol. Typically, the human-readable names of servers are translated to IP addresses, transparently to users, via the directory function of the Domain Name System (DNS).

Over the Internet, there can be business-to-business (B2B), business-to-consumer (B2C) and consumer-to-consumer (C2C) communications. When money or sensitive information is exchanged, the communications are apt to be protected by some form of communications security mechanism. Intranets and extranets can be securely superimposed onto the Internet, without any access by general Internet users and administrators, using secure Virtual Private Network (VPN) technology.

Journals and newsletters

Open Computer Science (open access journal)

See also

Comparison of network diagram software

Cyberspace

History of the Internet

Information Age

Information revolution

ISO/IEC 11801 – International standard for electrical and optical cables

Minimum-Pairs Protocol

Network simulation

Network planning and design

Network traffic control

Cloud

Network on a chip

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 Pelkey, James L. (2007). "6.9 – Metcalfe Joins the Systems Development Division of Xerox 1975-1978". Entrepreneurial Capitalism and Innovation: A History of Computer Communications, 1968-1988. Archived from the original on 2023-02-04. Retrieved 2019-09-05.

 Spurgeon, Charles E. (2000). Ethernet The Definitive Guide. O'Reilly & Associates. ISBN 1-56592-660-9.

 "Introduction to Ethernet Technologies". www.wband.com. WideBand Products. Archived from the original on 2018-04-10. Retrieved 2018-04-09.

 Pelkey, James L. (2007). "Yogen Dalal". Entrepreneurial Capitalism and Innovation: A History of Computer Communications, 1968-1988. Retrieved 2023-05-07.

 D. Andersen; H. Balakrishnan; M. Kaashoek; R. Morris (October 2001), Resilient Overlay Networks, Association for Computing Machinery, archived from the original on 2011-11-24, retrieved 2011-11-12

 "End System Multicast". project web site. Carnegie Mellon University. Archived from the original on 2005-02-21. Retrieved 2013-05-25.

 Meyers, Mike (2012). CompTIA Network+ exam guide : (Exam N10-005) (5th ed.). New York: McGraw-Hill. ISBN 9780071789226. OCLC 748332969.

 A. Hooke (September 2000), Interplanetary Internet (PDF), Third Annual International Symposium on Advanced Radio Technologies, archived from the original (PDF) on 2012-01-13, retrieved 2011-11-12

 "Bergen Linux User Group's CPIP Implementation". Blug.linux.no. Archived from the original on 2014-02-15. Retrieved 2014-03-01.

 Bradley Mitchell. "bridge – network bridges". About.com. Archived from the original on 2008-03-28.

 "Define switch". webopedia. September 1996. Archived from the original on 2008-04-08. Retrieved 2008-04-08.

 Tanenbaum, Andrew S. (2003). Computer Networks (4th ed.). Prentice Hall.

 IEEE Standard for Local and Metropolitan Area Networks--Port-Based Network Access Control. February 2020. 7.1.3 Connectivity to unauthenticated systems. doi:10.1109/IEEESTD.2020.9018454. ISBN 978-1-5044-6440-6. Archived from the original on 2023-02-04. Retrieved 2022-05-09. {{cite book}}: |journal= ignored (help)

 IEEE Standard for Information Technology--Telecommunications and Information Exchange between Systems - Local and Metropolitan Area Networks--Specific Requirements - Part 11: Wireless LAN Medium Access Control (MAC) and Physical Layer (PHY) Specifications. February 2021. 4.2.5 Interaction with other IEEE 802 layers. doi:10.1109/IEEESTD.2021.9363693. ISBN 978-1-5044-7283-8. Archived from the original on 2022-05-17. Retrieved 2022-05-09. {{cite book}}: |journal= ignored (help)

 Martin, Thomas. "Design Principles for DSL-Based Access Solutions" (PDF). Archived from the original (PDF) on 2011-07-22.

 Paetsch, Michael (1993). The evolution of mobile communications in the US and Europe: Regulation, technology, and markets. Boston, London: Artech House. ISBN 978-0-8900-6688-1.

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 Margaret Rouse. "personal area network (PAN)". TechTarget. Archived from the original on 2023-02-04. Retrieved 2011-01-29.

 "New global standard for fully networked home". ITU-T Newslog. ITU. 2008-12-12. Archived from the original on 2009-02-21. Retrieved 2011-11-12.

 "IEEE P802.3ba 40Gb/s and 100Gb/s Ethernet Task Force". IEEE 802.3 ETHERNET WORKING GROUP. Archived from the original on 2011-11-20. Retrieved 2011-11-12.

 "IEEE 802.20 Mission and Project Scope". IEEE 802.20 — Mobile Broadband Wireless Access (MBWA). Retrieved 2011-11-12.

 "Maps". The Opto Project. Archived from the original on 2005-01-15.

 Mansfield-Devine, Steve (December 2009). "Darknets". Computer Fraud & Security. 2009 (12): 4–6. doi:10.1016/S1361-3723(09)70150-2.

 Wood, Jessica (2010). "The Darknet: A Digital Copyright Revolution" (PDF). Richmond Journal of Law and Technology. 16 (4). Archived (PDF) from the original on 2012-04-15. Retrieved 2011-10-25.

 Klensin, J. (October 2008). Simple Mail Transfer Protocol. doi:10.17487/RFC5321. RFC 5321.

 Mockapetris, P. (November 1987). Domain names – Implementation and Specification. doi:10.17487/RFC1035. RFC 1035.

 Peterson, L.L.; Davie, B.S. (2011). Computer Networks: A Systems Approach (5th ed.). Elsevier. p. 372. ISBN 978-0-1238-5060-7.

 ITU-D Study Group 2 (June 2006). Teletraffic Engineering Handbook (PDF). Archived from the original (PDF) on 2007-01-11.

 Telecommunications Magazine Online Archived 2011-02-08 at the Wayback Machine, Americas January 2003, Issue Highlights, Online Exclusive: Broadband Access Maximum Performance, Retrieved on February 13, 2005.

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 "Definitions: Resilience". ResiliNets Research Initiative. Archived from the original on 2020-11-06. Retrieved 2011-11-12.

 Simmonds, A; Sandilands, P; van Ekert, L (2004). "An Ontology for Network Security Attacks". Applied Computing. Lecture Notes in Computer Science. Vol. 3285. pp. 317–323. doi:10.1007/978-3-540-30176-9_41. ISBN 978-3-540-23659-7. S2CID 2204780.

 "Is the U.S. Turning Into a Surveillance Society?". American Civil Liberties Union. Archived from the original on 2017-03-14. Retrieved 2009-03-13.

 Jay Stanley; Barry Steinhardt (January 2003). "Bigger Monster, Weaker Chains: The Growth of an American Surveillance Society" (PDF). American Civil Liberties Union. Archived (PDF) from the original on 2022-10-09. Retrieved 2009-03-13.

 Emil Protalinski (2012-04-07). "Anonymous hacks UK government sites over 'draconian surveillance'". ZDNet. Archived from the original on 2013-04-03. Retrieved 12 March 2013.

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 Rosen, E.; Rekhter, Y. (March 1999). BGP/MPLS VPNs. doi:10.17487/RFC2547. RFC 2547.

A bank is a financial institution that accepts deposits from the public and creates a demand deposit while simultaneously making loans.[1] Lending activities can be directly performed by the bank or indirectly through capital markets.

Whereby banks play an important role in financial stability and the economy of a country, most jurisdictions exercise a high degree of regulation over banks. Most countries have institutionalized a system known as fractional-reserve banking, under which banks hold liquid assets equal to only a portion of their current liabilities. In addition to other regulations intended to ensure liquidity, banks are generally subject to minimum capital requirements based on an international set of capital standards, the Basel Accords.

Banking in its modern sense evolved in the fourteenth century in the prosperous cities of Renaissance Italy but in many ways functioned as a continuation of ideas and concepts of credit and lending that had their roots in the ancient world. In the history of banking, a number of banking dynasties – notably, the Medicis, the Fuggers, the Welsers, the Berenbergs, and the Rothschilds – have played a central role over many centuries. The oldest existing retail bank is Banca Monte dei Paschi di Siena (founded in 1472), while the oldest existing merchant bank is Berenberg Bank (founded in 1590).

History

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This section needs expansion with: history after the 19th century. You can help by adding to it. (August 2020)

Main article: History of banking

This 15th-century painting depicts money-dealers at a banca (bench) during the Cleansing of the Temple.

Medieval

The present era of banking can be traced to medieval and early Renaissance Italy, to the rich cities in the centre and north like Florence, Lucca, Siena, Venice and Genoa. The Bardi and Peruzzi families dominated banking in 14th-century Florence, establishing branches in many other parts of Europe.[2] Giovanni di Bicci de' Medici set up one of the most famous Italian banks, the Medici Bank, in 1397.[3] The Republic of Genoa founded the earliest-known state deposit bank, Banco di San Giorgio (Bank of St. George), in 1407 at Genoa, Italy.[4]

Early modern

Sealing of the Bank of England Charter (1694), by Lady Jane Lindsay, 1905.

Fractional reserve banking and the issue of banknotes emerged in the 17th and 18th centuries. Merchants started to store their gold with the goldsmiths of London, who possessed private vaults, and who charged a fee for that service. In exchange for each deposit of precious metal, the goldsmiths issued receipts certifying the quantity and purity of the metal they held as a bailee; these receipts could not be assigned, only the original depositor could collect the stored goods.

Gradually the goldsmiths began to lend money out on behalf of the depositor, and promissory notes (which evolved into banknotes) were issued for money deposited as a loan to the goldsmith. Thus by the 19th century we find in ordinary cases of deposits of money with banking corporations, or bankers, the transaction amounts to a mere loan or mutuum, and the bank is to restore, not the same money, but an equivalent sum, whenever it is demanded[5] and money, when paid into a bank, ceases altogether to be the money of the principal (see Parker v. Marchant, 1 Phillips 360); it is then the money of the banker, who is bound to return an equivalent by paying a similar sum to that deposited with him when he is asked for it. [6] The goldsmith paid interest on deposits. Since the promissory notes were payable on demand, and the advances (loans) to the goldsmith's customers were repayable over a longer time-period, this was an early form of fractional reserve banking. The promissory notes developed into an assignable instrument which could circulate as a safe and convenient form of money[7] backed by the goldsmith's promise to pay,[8][need quotation to verify] allowing goldsmiths to advance loans with little risk of default.[9][need quotation to verify] Thus the goldsmiths of London became the forerunners of banking by creating new money based on credit.

Interior of the Helsinki Branch of the Vyborg-Bank [fi] in the 1910s

The Bank of England originated the permanent issue of banknotes in 1695.[10] The Royal Bank of Scotland established the first overdraft facility in 1728.[11] By the beginning of the 19th century Lubbock's Bank had established a bankers' clearing house in London to allow multiple banks to clear transactions. The Rothschilds pioneered international finance on a large scale,[12][13] financing the purchase of shares in the Suez canal for the British government in 1875.[14][need quotation to verify]

Etymology

The word bank was taken into Middle English from Middle French banque, from Old Italian banco, meaning "table", from Old High German banc, bank "bench, counter". Benches were used as makeshift desks or exchange counters during the Renaissance by Florentine bankers, who used to make their transactions atop desks covered by green tablecloths.[15][16]

Definition

The definition of a bank varies from country to country. See the relevant country pages for more information.

Under English common law, a banker is defined as a person who carries on the business of banking by conducting current accounts for their customers, paying cheques drawn on them and also collecting cheques for their customers.[17]

Banco de Venezuela in Coro.

Branch of Nepal Bank in Pokhara, Western Nepal.

In most common law jurisdictions there is a Bills of Exchange Act that codifies the law in relation to negotiable instruments, including cheques, and this Act contains a statutory definition of the term banker: banker includes a body of persons, whether incorporated or not, who carry on the business of banking' (Section 2, Interpretation). Although this definition seems circular, it is actually functional, because it ensures that the legal basis for bank transactions such as cheques does not depend on how the bank is structured or regulated.

The business of banking is in many common law countries not defined by statute but by common law, the definition above. In other English common law jurisdictions there are statutory definitions of the business of banking or banking business. When looking at these definitions it is important to keep in mind that they are defining the business of banking for the purposes of the legislation, and not necessarily in general. In particular, most of the definitions are from legislation that has the purpose of regulating and supervising banks rather than regulating the actual business of banking. However, in many cases, the statutory definition closely mirrors the common law one. Examples of statutory definitions:

"banking business" means the business of receiving money on current or deposit account, paying and collecting cheques drawn by or paid in by customers, the making of advances to customers, and includes such other business as the Authority may prescribe for the purposes of this Act; (Banking Act (Singapore), Section 2, Interpretation).

"banking business" means the business of either or both of the following:

receiving from the general public money on current, deposit, savings or other similar account repayable on demand or within less than [3 months] ... or with a period of call or notice of less than that period;

paying or collecting cheques drawn by or paid in by customers.[18]

Since the advent of EFTPOS (Electronic Funds Transfer at Point Of Sale), direct credit, direct debit and internet banking, the cheque has lost its primacy in most banking systems as a payment instrument. This has led legal theorists to suggest that the cheque based definition should be broadened to include financial institutions that conduct current accounts for customers and enable customers to pay and be paid by third parties, even if they do not pay and collect cheques .[19]

Standard business

Large door to an old bank vault.

Banks act as payment agents by conducting checking or current accounts for customers, paying cheques drawn by customers in the bank, and collecting cheques deposited to customers' current accounts. Banks also enable customer payments via other payment methods such as Automated Clearing House (ACH), Wire transfers or telegraphic transfer, EFTPOS, and automated teller machines (ATMs).

Banks borrow money by accepting funds deposited on current accounts, by accepting term deposits, and by issuing debt securities such as banknotes and bonds. Banks lend money by making advances to customers on current accounts, by making installment loans, and by investing in marketable debt securities and other forms of money lending.

Banks provide different payment services, and a bank account is considered indispensable by most businesses and individuals. Non-banks that provide payment services such as remittance companies are normally not considered as an adequate substitute for a bank account.

Banks issue new money when they make loans. In contemporary banking systems, regulators set a minimum level of reserve funds that banks must hold against the deposit liabilities created by the funding of these loans, in order to ensure that the banks can meet demands for payment of such deposits. These reserves can be acquired through the acceptance of new deposits, sale of other assets, or borrowing from other banks including the central bank.[20]

Range of activities

Activities undertaken by banks include personal banking, corporate banking, investment banking, private banking, transaction banking, insurance, consumer finance, trade finance and other related.

Channels

An American bank in Maryland.

Banks offer many different channels to access their banking and other services:

Branch, in-person banking in a retail location

Automated teller machine banking adjacent to or remote from the bank

Bank by mail: Most banks accept cheque deposits via mail and use mail to communicate to their customers

Online banking over the Internet to perform multiple types of transactions

Mobile banking is using one's mobile phone to conduct banking transactions

Telephone banking allows customers to conduct transactions over the telephone with an automated attendant, or when requested, with a telephone operator

Video banking performs banking transactions or professional banking consultations via a remote video and audio connection. Video banking can be performed via purpose built banking transaction machines (similar to an Automated teller machine) or via a video conference enabled bank branch clarification

Relationship manager, mostly for private banking or business banking, who visits customers at their homes or businesses

Direct Selling Agent, who works for the bank based on a contract, whose main job is to increase the customer base for the bank

Business models

A bank can generate revenue in a variety of different ways including interest, transaction fees and financial advice. Traditionally, the most significant method is via charging interest on the capital it lends out to customers.[21] The bank profits from the difference between the level of interest it pays for deposits and other sources of funds, and the level of interest it charges in its lending activities.

This difference is referred to as the spread between the cost of funds and the loan interest rate. Historically, profitability from lending activities has been cyclical and dependent on the needs and strengths of loan customers and the stage of the economic cycle. Fees and financial advice constitute a more stable revenue stream and banks have therefore placed more emphasis on these revenue lines to smooth their financial performance.

In the past 20 years, American banks have taken many measures to ensure that they remain profitable while responding to increasingly changing market conditions.

First, this includes the Gramm–Leach–Bliley Act, which allows banks again to merge with investment and insurance houses. Merging banking, investment, and insurance functions allows traditional banks to respond to increasing consumer demands for "one-stop shopping" by enabling cross-selling of products (which, the banks hope, will also increase profitability).

Second, they have expanded the use of risk-based pricing from business lending to consumer lending, which means charging higher interest rates to those customers that are considered to be a higher credit risk and thus increased chance of default on loans. This helps to offset the losses from bad loans, lowers the price of loans to those who have better credit histories, and offers credit products to high risk customers who would otherwise be denied credit.

Third, they have sought to increase the methods of payment processing available to the general public and business clients. These products include debit cards, prepaid cards, smart cards, and credit cards. They make it easier for consumers to conveniently make transactions and smooth their consumption over time (in some countries with underdeveloped financial systems, it is still common to deal strictly in cash, including carrying suitcases filled with cash to purchase a home).

However, with the convenience of easy credit, there is also an increased risk that consumers will mismanage their financial resources and accumulate excessive debt. Banks make money from card products through interest charges and fees charged to cardholders, and transaction fees to retailers[22] who accept the bank's credit cards and debit cards for payments.

This helps in making a profit and facilitates economic development as a whole.[23]

Recently, as banks have been faced with pressure from fintechs, new and additional business models have been suggested such as freemium, monetisation of data, white-labeling of banking and payment applications, or the cross-selling of complementary products.[24]

Products

A former building society, now a modern retail bank in Leeds, West Yorkshire.

An interior of a branch of National Westminster Bank on Castle Street, Liverpool

Retail

ATM card

Credit card

Debit card

Savings account

Recurring deposit account

Fixed deposit account

Money market account

Certificate of deposit (CD)

Individual retirement account (IRA)

Mortgage

Mutual fund

Personal loan (Secured and Unsecured Personal loan)

Time deposits

Current accounts

Cheque books

Automated teller machine (ATM)

National Electronic Fund Transfer (NEFT)

Real-time gross settlement (RTGS)

Business (or commercial/investment) banking

Business loan

Capital raising (equity / debt / hybrids)

Revolving credit

Risk management (foreign exchange (FX), interest rates, commodities, derivatives)

Term loan

Cash management services (lock box, remote deposit capture, merchant processing)

Credit services

Securities Services

Capital and risk

Specific banking frameworks

Market risk

FRTB

Internal models approach (IMA)

Standardized approach (market risk)

Credit risk

Internal ratings-based approach (IRB)

Foundation IRB (F-IRB)

Advanced IRB (A-IRB)

Standardized approach (credit risk)

Counterparty credit risk

Current exposure method (CEM)

Standardised method (SM)

Standardized approach (counterparty credit risk) (SA-CCR)

Operational risk

Advanced measurement approach (AMA)

Basic indicator approach

Standardized approach (operational risk)

Standardised measurement approach (SMA)

vte

Further information: Financial risk management § Banking

See also: Finance § Risk management, and Investment banking § Risk management

Banks face a number of risks in order to conduct their business, and how well these risks are managed and understood is a key driver behind profitability, and how much capital a bank is required to hold. Bank capital consists principally of equity, retained earnings and subordinated debt.

Some of the main risks faced by banks include:

Credit risk: risk of loss arising from a borrower who does not make payments as promised.[25]

Liquidity risk: risk that a given security or asset cannot be traded quickly enough in the market to prevent a loss (or make the required profit).

Market risk: risk that the value of a portfolio, either an investment portfolio or a trading portfolio, will decrease due to the change in value of the market risk factors.

Operational risk: risk arising from the execution of a company's business functions.

Reputational risk: a type of risk related to the trustworthiness of the business.

Macroeconomic risk: risks related to the aggregate economy the bank is operating in.[26]

The capital requirement is a bank regulation, which sets a framework within which a bank or depository institution must manage its balance sheet. The categorisation of assets and capital is highly standardised so that it can be risk weighted.

After the financial crisis of 2007–2008, regulators force banks to issue Contingent convertible bonds (CoCos). These are hybrid capital securities that absorb losses in accordance with their contractual terms when the capital of the issuing bank falls below a certain level. Then debt is reduced and bank capitalisation gets a boost. Owing to their capacity to absorb losses, CoCos have the potential to satisfy regulatory capital requirement.[27][28]

Banks in the economy

SEB main building in Tallinn, Estonia

See also: Financial system

Economic functions

The economic functions of banks include:

Issue of money, in the form of banknotes and current accounts subject to cheque or payment at the customer's order. These claims on banks can act as money because they are negotiable or repayable on demand, and hence valued at par. They are effectively transferable by mere delivery, in the case of banknotes, or by drawing a cheque that the payee may bank or cash.

Netting and settlement of payments – banks act as both collection and paying agents for customers, participating in interbank clearing and settlement systems to collect, present, be presented with, and pay payment instruments. This enables banks to economise on reserves held for settlement of payments since inward and outward payments offset each other. It also enables the offsetting of payment flows between geographical areas, reducing the cost of settlement between them.

Credit quality improvement – banks lend money to ordinary commercial and personal borrowers (ordinary credit quality), but are high quality borrowers. The improvement comes from diversification of the bank's assets and capital which provides a buffer to absorb losses without defaulting on its obligations. However, banknotes and deposits are generally unsecured; if the bank gets into difficulty and pledges assets as security, to raise the funding it needs to continue to operate, this puts the note holders and depositors in an economically subordinated position.

Asset liability mismatch/Maturity transformation – banks borrow more on demand debt and short term debt, but provide more long-term loans. In other words, they borrow short and lend long. With a stronger credit quality than most other borrowers, banks can do this by aggregating issues (e.g. accepting deposits and issuing banknotes) and redemptions (e.g. withdrawals and redemption of banknotes), maintaining reserves of cash, investing in marketable securities that can be readily converted to cash if needed, and raising replacement funding as needed from various sources (e.g. wholesale cash markets and securities markets).

Money creation/destruction – whenever a bank gives out a loan in a fractional-reserve banking system, a new sum of money is created and conversely, whenever the principal on that loan is repaid money is destroyed.

Bank crisis

OTP Bank in Prešov (Slovakia)

Banks are susceptible to many forms of risk which have triggered occasional systemic crises.[29] These include liquidity risk (where many depositors may request withdrawals in excess of available funds), credit risk (the chance that those who owe money to the bank will not repay it), and interest rate risk (the possibility that the bank will become unprofitable, if rising interest rates force it to pay relatively more on its deposits than it receives on its loans).

Banking crises have developed many times throughout history when one or more risks have emerged for the banking sector as a whole. Prominent examples include the bank run that occurred during the Great Depression, the U.S. Savings and Loan crisis in the 1980s and early 1990s, the Japanese banking crisis during the 1990s, and the sub-prime mortgage crisis in the 2000s.

The 2023 global banking crisis is the latest of these crises: In March 2023, liquidity shortages and bank insolvencies led to three bank failures in the United States, and within two weeks, several of the world's largest banks failed or were shut down by regulators

Size of global banking industry

Assets of the largest 1,000 banks in the world grew by 6.8% in the 2008–2009 financial year to a record US$96.4 trillion while profits declined by 85% to US$115 billion. Growth in assets in adverse market conditions was largely a result of recapitalisation. EU banks held the largest share of the total, 56% in 2008–2009, down from 61% in the previous year. Asian banks' share increased from 12% to 14% during the year, while the share of US banks increased from 11% to 13%. Fee revenue generated by global investment in banking totalled US$66.3 billion in 2009, up 12% on the previous year.[30]

The United States has the most banks in the world in terms of institutions (5,330 as of 2015) and possibly branches (81,607 as of 2015).[31] This is an indicator of the geography and regulatory structure of the US, resulting in a large number of small to medium-sized institutions in its banking system. As of November 2009, China's top four banks have in excess of 67,000 branches (ICBC:18000+, BOC:12000+, CCB:13000+, ABC:24000+) with an additional 140 smaller banks with an undetermined number of branches. Japan had 129 banks and 12,000 branches. In 2004, Germany, France, and Italy each had more than 30,000 branches – more than double the 15,000 branches in the United Kingdom.[30]

Mergers and acquisitions

Between 1985 and 2018 banks engaged in around 28,798 mergers or acquisitions, either as the acquirer or the target company. The overall known value of these deals cumulates to around 5,169 bil. USD.[32] In terms of value, there have been two major waves (1999 and 2007) which both peaked at around 460 bil. USD followed by a steep decline (-82% from 2007 until 2018).

Here is a list of the largest deals in history in terms of value with participation from at least one bank:

Date announced Acquiror name Acquiror mid industry Acquiror nation Target name Target mid industry Target nation Value of transaction ($mil)

2007-04-25 RFS Holdings BV Other financials Netherlands ABN-AMRO Holding N.V. Banks Netherlands 98,189.19

1998-04-06 Travelers Group Inc Insurance United States Citicorp Banks United States 72,558.18

2014-09-29 UBS AG Banks Switzerland UBS AG[clarification needed] Banks Switzerland 65,891.51

1998-04-13 NationsBank Corp, Charlotte, North Carolina Banks United States BankAmerica Corp Banks United States 61,633.40

2004-01-14 JPMorgan Chase & Co Banks United States Bank One Corp, Chicago, Illinois Banks United States 58,663.15

2003-10-27 Bank of America Corp Banks United States FleetBoston Financial Corp, Massachusetts Banks United States 49,260.63

2008-09-14 Bank of America Corp Banks United States Merrill Lynch & Co Inc Brokerage United States 48,766.15

1999-10-13 Sumitomo Bank Ltd Banks Japan Sakura Bank Ltd Banks Japan 45,494.36

2009-02-26 HM Treasury National agency United Kingdom Royal Bank of Scotland Group Banks United Kingdom 41,878.65

2005-02-18 Mitsubishi Tokyo Financial Group Banks Japan UFJ Holdings Inc Banks Japan 41,431.03

Regulation

Main article: Banking regulation

See also: Basel II

Currently, commercial banks are regulated in most jurisdictions by government entities and require a special bank license to operate.

Basel Framework

International regulatory standards for banks

Basel Committee on Banking SupervisionBasel Accords Basel IBasel IIBasel III LCRNSFRFRTBBasel 3.1

Background

Banking / RegulationMonetary policy / Central bankRisk / Risk management

Pillar 1: Regulatory capital

Capital requirement Capital ratioLeverage ratioTier 1Tier 2Credit risk SA-CRIRB F-IRBA-IRBEAD SA-CCRIMMCCFMarket risk StandardizedIMACVA volOperational risk BasicStandardizedAMA

Pillar 2: Supervisory review

Economic capitalLiquidity riskLegal risk

Pillar 3: Market disclosure

Disclosure

Business and Economics Portal

vte

Usually, the definition of the business of banking for the purposes of regulation is extended to include acceptance of deposits, even if they are not repayable to the customer's order – although money lending, by itself, is generally not included in the definition.

Unlike most other regulated industries, the regulator is typically also a participant in the market, being either publicly or privately governed central bank. Central banks also typically have a monopoly on the business of issuing banknotes. However, in some countries, this is not the case. In the UK, for example, the Financial Services Authority licenses banks, and some commercial banks (such as the Bank of Scotland) issue their own banknotes in addition to those issued by the Bank of England, the UK government's central bank.

Global headquarters of the Bank for International Settlements in Basel

Banking law is based on a contractual analysis of the relationship between the bank (defined above) and the customer – defined as any entity for which the bank agrees to conduct an account.

The law implies rights and obligations into this relationship as follows:

The bank account balance is the financial position between the bank and the customer: when the account is in credit, the bank owes the balance to the customer; when the account is overdrawn, the customer owes the balance to the bank.

The bank agrees to pay the customer's checks up to the amount standing to the credit of the customer's account, plus any agreed overdraft limit.

The bank may not pay from the customer's account without a mandate from the customer, e.g. a cheque drawn by the customer.

The bank agrees to promptly collect the cheques deposited to the customer's account as the customer's agent and to credit the proceeds to the customer's account.

And, the bank has a right to combine the customer's accounts since each account is just an aspect of the same credit relationship.

The bank has a lien on cheques deposited to the customer's account, to the extent that the customer is indebted to the bank.

The bank must not disclose details of transactions through the customer's account – unless the customer consents, there is a public duty to disclose, the bank's interests require it, or the law demands it.

The bank must not close a customer's account without reasonable notice, since cheques are outstanding in the ordinary course of business for several days.

These implied contractual terms may be modified by express agreement between the customer and the bank. The statutes and regulations in force within a particular jurisdiction may also modify the above terms or create new rights, obligations, or limitations relevant to the bank-customer relationship.

Some types of financial institutions, such as building societies and credit unions, may be partly or wholly exempt from bank license requirements, and therefore regulated under separate rules.

The requirements for the issue of a bank license vary between jurisdictions but typically include:

Minimum capital

Minimum capital ratio

'Fit and Proper' requirements for the bank's controllers, owners, directors, or senior officers

Approval of the bank's business plan as being sufficiently prudent and plausible.

Different types of banking

An illustration of Northern National Bank as advertised in a 1921 book highlighting the opportunities available in Toledo, Ohio

Banks' activities can be divided into:

retail banking, dealing directly with individuals and small businesses;

business banking, providing services to mid-market business;

corporate banking, directed at large business entities;

private banking, providing wealth management services to high-net-worth individuals and families;

investment banking, relating to activities on the financial markets.

Most banks are profit-making, private enterprises. However, some are owned by the government, or are non-profit organisations.

Types of banks

National Bank of the Republic, Salt Lake City 1908

The BANK of Greenland, Nuuk

An office of Nordea bank in Mariehamn, Åland

ATM Al-Rajhi Bank

National Copper Bank, Salt Lake City 1911

A branch of Union Bank in, Visakhapatnam

Commercial banks: the term used for a normal bank to distinguish it from an investment bank. After the Great Depression, the U.S. Congress required that banks only engage in banking activities, whereas investment banks were limited to capital market activities. Since the two no longer have to be under separate ownership, some use the term "commercial bank" to refer to a bank or a division of a bank that mostly deals with deposits and loans from corporations or large businesses.

Community banks: locally operated financial institutions that empower employees to make local decisions to serve their customers and partners.

Community development banks: regulated banks that provide financial services and credit to under-served markets or populations.

Land development banks: The special banks providing long-term loans are called land development banks (LDB). The history of LDB is quite old. The first LDB was started at Jhang in Punjab in 1920. The main objective of the LDBs is to promote the development of land, agriculture and increase the agricultural production. The LDBs provide long-term finance to members directly through their branches.[33]

Credit unions or co-operative banks: not-for-profit cooperatives owned by the depositors and often offering rates more favourable than for-profit banks. Typically, membership is restricted to employees of a particular company, residents of a defined area, members of a certain union or religious organisations, and their immediate families.

Postal savings banks: savings banks associated with national postal systems.

Private banks: banks that manage the assets of high-net-worth individuals. Historically a minimum of US$1 million was required to open an account, however, over the last years, many private banks have lowered their entry hurdles to US$350,000 for private investors.[34]

Offshore banks: banks located in jurisdictions with low taxation and regulation. Many offshore banks are essentially private banks.

Savings banks: in Europe, savings banks took their roots in the 19th or sometimes even in the 18th century. Their original objective was to provide easily accessible savings products to all strata of the population. In some countries, savings banks were created on public initiative; in others, socially committed individuals created foundations to put in place the necessary infrastructure. Nowadays, European savings banks have kept their focus on retail banking: payments, savings products, credits, and insurances for individuals or small and medium-sized enterprises. Apart from this retail focus, they also differ from commercial banks by their broadly decentralised distribution network, providing local and regional outreach – and by their socially responsible approach to business and society.

Building societies and Landesbanks: institutions that conduct retail banking.

Ethical banks: banks that prioritize the transparency of all operations and make only what they consider to be socially responsible investments.

A direct or internet-only bank is a banking operation without any physical bank branches. Transactions are usually accomplished using ATMs and electronic transfers and direct deposits through an online interface.

Types of investment banks

Investment banks "underwrite" (guarantee the sale of) stock and bond issues, provide investment management, and advise corporations on capital market activities such as M&A, trade for their own accounts, make markets, provide securities services to institutional clients.

Merchant banks were traditionally banks which engaged in trade finance. The modern definition, however, refers to banks which provide capital to firms in the form of shares rather than loans. Unlike venture caps, they tend not to invest in new companies.

Combination banks

A Banco do Brasil office in São Paulo, Brazil, the bank is the largest financial institution in Brazil and Latin America.

Universal banks, more commonly known as financial services companies, engage in several of these activities. These big banks are very diversified groups that, among other services, also distribute insurance – hence the term bancassurance, a portmanteau word combining "banque or bank" and "assurance", signifying that both banking and insurance are provided by the same corporate entity.

Other types of banks

Central banks are normally government-owned and charged with quasi-regulatory responsibilities, such as supervising commercial banks, or controlling the cash interest rate. They generally provide liquidity to the banking system and act as the lender of last resort in event of a crisis.

Islamic banks adhere to the concepts of Islamic law. This form of banking revolves around several well-established principles based on Islamic laws. All banking activities must avoid interest, a concept that is forbidden in Islam. Instead, the bank earns profit (markup) and fees on the financing facilities that it extends to customers.

Challenges within the banking industry

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United States

Main article: Banking in the United States

Citibank, The People's Trust Company Building, Brooklyn, New York City.

The United States banking industry is one of the most heavily regulated and guarded in the world,[35] with multiple specialised and focused regulators. All banks with FDIC-insured deposits have the Federal Deposit Insurance Corporation (FDIC) as a regulator. However, for soundness examinations (i.e., whether a bank is operating in a sound manner), the Federal Reserve is the primary federal regulator for Fed-member state banks; the Office of the Comptroller of the Currency (OCC) is the primary federal regulator for national banks. State non-member banks are examined by the state agencies as well as the FDIC.[36]: 236  National banks have one primary regulator – the OCC.

Each regulatory agency has its own set of rules and regulations to which banks and thrifts must adhere. The Federal Financial Institutions Examination Council (FFIEC) was established in 1979 as a formal inter-agency body empowered to prescribe uniform principles, standards, and report forms for the federal examination of financial institutions. Although the FFIEC has resulted in a greater degree of regulatory consistency between the agencies, the rules and regulations are constantly changing.

In addition to changing regulations, changes in the industry have led to consolidations within the Federal Reserve, FDIC, OTS, and OCC. Offices have been closed, supervisory regions have been merged, staff levels have been reduced and budgets have been cut. The remaining regulators face an increased burden with an increased workload and more banks per regulator. While banks struggle to keep up with the changes in the regulatory environment, regulators struggle to manage their workload and effectively regulate their banks. The impact of these changes is that banks are receiving less hands-on assessment by the regulators, less time spent with each institution, and the potential for more problems slipping through the cracks, potentially resulting in an overall increase in bank failures across the United States.

The changing economic environment has a significant impact on banks and thrifts as they struggle to effectively manage their interest rate spread in the face of low rates on loans, rate competition for deposits and the general market changes, industry trends and economic fluctuations. It has been a challenge for banks to effectively set their growth strategies with the recent economic market. A rising interest rate environment may seem to help financial institutions, but the effect of the changes on consumers and businesses is not predictable and the challenge remains for banks to grow and effectively manage the spread to generate a return to their shareholders.

The management of the banks' asset portfolios also remains a challenge in today's economic environment. Loans are a bank's primary asset category and when loan quality becomes suspect, the foundation of a bank is shaken to the core. While always an issue for banks, declining asset quality has become a big problem for financial institutions.

Safra National Bank, New York

There are several reasons for this, one of which is the lax attitude some banks have adopted because of the years of "good times." The potential for this is exacerbated by the reduction in the regulatory oversight of banks and in some cases depth of management. Problems are more likely to go undetected, resulting in a significant impact on the bank when they are discovered. In addition, banks, like any business, struggle to cut costs and have consequently eliminated certain expenses, such as adequate employee training programs.

Banks also face a host of other challenges such as ageing ownership groups. Across the country, many banks' management teams and boards of directors are ageing. Banks also face ongoing pressure from shareholders, both public and private, to achieve earnings and growth projections. Regulators place added pressure on banks to manage the various categories of risk. Banking is also an extremely competitive industry. Competing in the financial services industry has become tougher with the entrance of such players as insurance agencies, credit unions, cheque cashing services, credit card companies, etc.

As a reaction, banks have developed their activities in financial instruments, through financial market operations such as brokerage and have become big players in such activities.

Another major challenge is the ageing infrastructure, also called legacy IT. Backend systems were built decades ago and are incompatible with new applications. Fixing bugs and creating interfaces costs huge sums, as knowledgeable programmers become scarce.[37]

Loan activities of banks

To be able to provide home buyers and builders with the funds needed, banks must compete for deposits. The phenomenon of disintermediation had to dollars moving from savings accounts and into direct market instruments such as U.S. Department of Treasury obligations, agency securities, and corporate debt. One of the greatest factors in recent years in the movement of deposits was the tremendous growth of money market funds whose higher interest rates attracted consumer deposits.[38]

To compete for deposits, US savings institutions offer many different types of plans:[38]

Passbook or ordinary deposit accounts  – permit any amount to be added to or withdrawn from the account at any time.

NOW and Super NOW accounts  – function like checking accounts but earn interest. A minimum balance may be required on Super NOW accounts.

Money market accounts  – carry a monthly limit of preauthorised transfers to other accounts or persons and may require a minimum or average balance.

Certificate accounts  – subject to loss of some or all interest on withdrawals before maturity.

Notice accounts  – the equivalent of certificate accounts with an indefinite term. Savers agree to notify the institution a specified time before withdrawal.

Individual retirement accounts (IRAs) and Keogh plans  – a form of retirement savings in which the funds deposited and interest earned are exempt from income tax until after withdrawal.

Checking accounts  – offered by some institutions under definite restrictions.

All withdrawals and deposits are completely the sole decision and responsibility of the account owner unless the parent or guardian is required to do otherwise for legal reasons.

Club accounts and other savings accounts  – designed to help people save regularly to meet certain goals.

Types of accounts

Suburban bank branch

Bank statements are accounting records produced by banks under the various accounting standards of the world. Under GAAP there are two kinds of accounts: debit and credit. Credit accounts are Revenue, Equity and Liabilities. Debit Accounts are Assets and Expenses. The bank credits a credit account to increase its balance, and debits a credit account to decrease its balance.[39]

The customer debits his or her savings/bank (asset) account in his ledger when making a deposit (and the account is normally in debit), while the customer credits a credit card (liability) account in his ledger every time he spends money (and the account is normally in credit). When the customer reads his bank statement, the statement will show a credit to the account for deposits, and debits for withdrawals of funds. The customer with a positive balance will see this balance reflected as a credit balance on the bank statement. If the customer is overdrawn, he will have a negative balance, reflected as a debit balance on the bank statement.

Brokered deposits

One source of deposits for banks is deposit brokers who deposit large sums of money on behalf of investors through trust corporations. This money will generally go to the banks which offer the most favourable terms, often better than those offered local depositors. It is possible for a bank to engage in business with no local deposits at all, all funds being brokered deposits. Accepting a significant quantity of such deposits, or "hot money" as it is sometimes called, puts a bank in a difficult and sometimes risky position, as the funds must be lent or invested in a way that yields a return sufficient to pay the high interest being paid on the brokered deposits. This may result in risky decisions and even in eventual failure of the bank. Banks which failed during 2008 and 2009 in the United States during the global financial crisis had, on average, four times more brokered deposits as a percent of their deposits than the average bank. Such deposits, combined with risky real estate investments, factored into the savings and loan crisis of the 1980s. Regulation of brokered deposits is opposed by banks on the grounds that the practice can be a source of external funding to growing communities with insufficient local deposits.[40] There are different types of accounts: saving, recurring and current accounts.

Custodial accounts

Custodial accounts are accounts in which assets are held for a third party. For example, businesses that accept custody of funds for clients prior to their conversion, return, or transfer may have a custodial account at a bank for these purposes.

Globalisation in the banking industry

In modern times there have been huge reductions to the barriers of global competition in the banking industry. Increases in telecommunications and other financial technologies, such as Bloomberg, have allowed banks to extend their reach all over the world since they no longer have to be near customers to manage both their finances and their risk. The growth in cross-border activities has also increased the demand for banks that can provide various services across borders to different nationalities. Despite these reductions in barriers and growth in cross-border activities, the banking industry is nowhere near as globalised as some other industries. In the US, for instance, very few banks even worry about the Riegle–Neal Act, which promotes more efficient interstate banking. In the vast majority of nations around the globe, the market share for foreign owned banks is currently less than a tenth of all market shares for banks in a particular nation. One reason the banking industry has not been fully globalised is that it is more convenient to have local banks provide loans to small businesses and individuals. On the other hand, for large corporations, it is not as important in what nation the bank is in since the corporation's financial information is available around the globe.[41]

See also

Further information: Category:Banking terms

Terms and concepts:

Anonymous banking

Automated teller machine

Banking

Banking agent

Bank regulation

Banking license

Bankers' bonuses

CAMELS rating system

Cash advance

Credit Card

Call report

Cheque

Coin

Deposit account

Deposit creation multiplier

Electronic funds transfer

Ethical banking

Factoring (finance)

Finance

Fractional-reserve banking

Full-reserve banking

Internet banking

International Bank Account Number

Investment banking

Loan

Pre-qualification

Pre-approval

Subprime

Mobile banking

Money

Money laundering

Narrow banking

Overdraft

Overdraft protection

Piggy bank

Pigmy Deposit Scheme

Private banking

Private credit

Shell corporation

Soft probe

Stock statement

Substitute check

SWIFT

Tax haven

Treasury management § Banks

Venture capital

Wealth management

Wire transfer

Types of institutions:

Bad bank

Bankers' bank

Building society

Central bank

Cooperative bank

Credit union

Ethical bank

Industrial loan company

Investment bank

Boutique investment bank

Bulge bracket

Independent advisory firm

Islamic banking

Mortgage bank

Mutual savings bank

Merchant bank

National bank

Non-bank financial institution

Offshore bank

Person-to-person lending

Private bank

Public bank

Savings and loan association

Savings bank

Shadow bank

Sparebank

Zombie bank

Crime:

Bank fraud

Bank robbery

Cheque fraud

Cyber Crime

Mortgage fraud

Usury

White-collar crime

Related lists:

List of largest banks

List of accounting topics

List of bank mergers in the United States

List of bank runs

List of banking crises

List of banks

List of economics topics

List of finance topics

List of largest U.S. bank failures

List of oldest banks

List of stock exchanges

Banking by country

Banking in Australia

Banking in Austria

Banking in Bangladesh

Banking in Belgium

Banking in Canada

Banking in China

Banking in France

Banking in Germany

Banking in Greece

Banking in Hong Kong

Banking in Iran

Banking in India

Banking in Israel

Banking in Italy

Banking in Japan

Banking in Pakistan

Banking in Qatar

Banking in Russia

Banking in Spain

Banking in Singapore

Banking in Switzerland

Banking in Tunisia

Banking in Turkey

Banking in the United Kingdom

Banking in the United States

Portals:

icon Banks

icon Money

References

 Compare: "Bank of England". Rulebook Glossary. 1 January 2014. Retrieved 20 July 2020. bank means:

(1) a firm with a Part 4A Permission to carry on the regulated activity of accepting deposits and is a credit institution, but is not a credit union, friendly society or a building society; or

(2) an EEA bank.

 Hoggson, N. F. (1926) Banking Through the Ages, New York, Dodd, Mead & Company.

 Goldthwaite, R. A. (1995) Banks, Places and Entrepreneurs in Renaissance Florence, Aldershot, Hampshire, Great Britain, Variorum

 Macesich, George (30 June 2000). "Central Banking: The Early Years: Other Early Banks". Issues in Money and Banking. Westport, Connecticut: Praeger Publishers (Greenwood Publishing Group). p. 42. ISBN 978-0-275-96777-2. Retrieved 12 March 2009. The first state deposit bank was the Bank of St. George in Genoa, which was established in 1407.

 Compare: Story, Joseph (1832). "On Deposits". In Schouler, James (ed.). Commentaries on the Law of Bailments: With Illustrations from the Civil and the Foreign Law (9 ed.). Boston: Little, Brown, and Company (published 1878). p. 87. Retrieved 20 August 2020. In the ordinary cases of deposits of money with banking corporations, or bankers, the transaction amounts to a mere loan or mutuum, or irregular deposit, and the bank is to restore, not the same money, but an equivalent sum, whenever it is demanded.

 Lord Chancellor Cottenham, Foley v Hill (1848) 2 HLC 28.

 Richards, Richard D. (1929). "The Goldsmith bankers and the evolution of English paper money". The Early History of Banking in England. Routledge Library Editions: Banking and Finance. Vol. 30 (reprint ed.). London: Routledge (published 2012). p. 40. ISBN 9780203116067. Retrieved 20 August 2020. [...] the promissory note originated as a receipt given by the goldsmith for money, which he took charge of for a customer but was not allowed to use. Such a note was relly a warehouse voucher which could not be assigned. When, however, it became a receipt for a money deposit, which the goldsmith was allowed to use for the purpose of making advances to his customers, it developed into an assignable instrument. Ultimately such notes were issued by the goldsmiths in the form of loans and were not necessarily backed by coin and bullion.

 Richards. The usual denomination was 50 or 100 pounds, so these notes were not an everyday currency for the common people.

 Richards, p. 40

 "A History of British Banknotes". britishnotes.co.uk.

 "A short history of overdrafts". eccount money. Archived from the original on 5 November 2013.

 "The History of Banks | How They've Changed through the Years". www.worldbank.org.ro. Retrieved 6 May 2020. International financing in the 19th Century took hold due to the Rothschilds.

 "History of banking". History World. Retrieved 20 August 2020. The Danish loan [1803] is the first of many such transactions on behalf of governments which rapidly establish the Rothschild family as Europe's most powerful bankers, rising to a pre-eminence comparable to that of the Medici and the Fugger in earlier centuries.

The family is soon represented in all the important centres of the continent.

 "A History of Banking". www.localhistories.org. Retrieved 6 May 2020.

 de Albuquerque, Martim (1855). Notes and Queries. in: George Bell. p. 431.

 "bank | Origin and meaning of bank by Online Etymology Dictionary". www.etymonline.com.

 United Dominions Trust Ltd v Kirkwood, 1966, English Court of Appeal, 2 QB 431

 (Banking Ordinance, Section 2, Interpretation, Hong Kong) In this case the definition is extended to include accepting any deposits repayable in less than 3 months, companies that accept deposits of greater than HK$100 000 for periods of greater than 3 months are regulated as deposit taking companies rather than as banks in Hong Kong.

 e.g. Tyree's Banking Law in New Zealand, A L Tyree, LexisNexis 2003, p. 70.

 McLeay, Michael; Radia, Amar; Thomas, Ryland (8 March 2014). "Money creation in the modern economy". Bank of England Quarterly Bulletin. Retrieved 9 July 2022.

 "How Do Banks Make Money?". GOBankingRates. 27 October 2017.

 "Banking Channels | Bankedge". BANKEDGE | Professional Certification Courses In Banking. 8 February 2016. Retrieved 5 July 2020.

 "How Banks Make Money". The Street. 24 October 2007. Retrieved 8 September 2011.

 Pejic, Igor (28 March 2019). Blockchain Babel: The Crypto-craze and the Challenge to Business (1st ed.). Kogan Page. ISBN 9780749484163.

 Basel Committee on Banking Supervision (30 November 1999). "Principles for the Management of Credit Risk" (PDF). Bank for International Settlements. p. 1. Retrieved 28 January 2016. Credit risk is most simply defined as the potential that a bank borrower or counterparty will fail to meet its obligations in accordance with agreed terms.

 Bolt, Wilko; Haan, Leo de; Hoeberichts, Marco; Oordt, Maarten van; Swank, Job (September 2012). "Bank Profitability during Recessions" (PDF). Journal of Banking & Finance. 36 (9): 2552–64. doi:10.1016/j.jbankfin.2012.05.011. Archived from the original (PDF) on 3 October 2020. Retrieved 13 December 2019.

 Raviv, Alon (13 August 2014). "Bank Stability and Market Discipline: Debt-for-Equity Swap versus Subordinated Notes" (PDF). EconPapers. The Hebrew University Business School. p. 59. Archived from the original (PDF) on 13 July 2018. Retrieved 13 July 2018.

 Flannery, Mark J. (November 2002). "No Pain, No Gain? Effecting Market Discipline via "Reverse Convertible Debentures"" (PDF). University of Florida. p. 31. Retrieved 13 July 2018.

 Rustici, Chiara. "Personal Data And The Next Subprime Crisis". Forbes.

 "Banking 2010" (PDF). TheCityUK. pp. 3–4. Archived from the original (PDF) on 15 June 2012. Retrieved 20 June 2011.(638 KB) charts 7–8

 "FDIC: HSOB Commercial Banks". www5.fdic.gov. Archived from the original on 26 March 2010. Retrieved 4 September 2016.

 "M&A by Industries - Institute for Mergers, Acquisitions and Alliances (IMAA)". Institute for Mergers, Acquisitions and Alliances (IMAA). Retrieved 28 February 2018.

 TNAU. "Land Development Bank". TNAU Agritech Portal. Retrieved 8 January 2014.

 "List of Commercial Banks in Nepal". Retrieved 6 June 2019.

 Scott Besley and Eugene F. Brigham, Principles of Finance, 4th ed. (Mason, OH: South-Western Cengage Learning, 2009), 125. This popular university textbook explains: "Generally speaking, U.S. financial institutions have been much more heavily regulated and faced greater limitations ... than have their foreign counterparts."

 Van Loo, Rory (1 February 2018). "Making Innovation More Competitive: The Case of Fintech". UCLA Law Review. 65 (1): 232.

 Irrera, Anna. "Banks scramble to fix old systems as IT 'cowboys' ride into sunset". U.S. Retrieved 2 November 2018.

 Mishler, Lon; Cole, Robert E. (1995). Consumer and business credit management. Homewood: Irwin. pp. 128–29. ISBN 978-0-256-13948-8.

 Statistics Department (2001). "Source Data for Monetary and Financial Statistics". Monetary and Financial Statistics: Compilation Guide. Washington D.C.: International Monetary Fund. p. 24. ISBN 978-1-58906-584-0. Retrieved 14 March 2009.

 Lipton, Eric; Martin, Andrew (3 July 2009). "For Banks, Wads of Cash and Loads of Trouble". The New York Times. Macon, Ga. Retrieved 13 July 2018.

 Berger, Allen N; Dai, Qinglei; Ongena, Steven; Smith, David C (1 March 2003). "To what extent will the banking industry be globalized? A study of bank nationality and reach in 20 European nations". Journal of Banking & Finance. 27 (3): 383–415. doi:10.1016/S0378-4266(02)00386-2. Retrieved 28 January 2016 – via Google Scholar.