A currency[a] is a standardization of money in any form, in use or circulation as a medium of exchange, for example banknotes and coins.[1][2] A more general definition is that a currency is a system of money in common use within a specific environment over time, especially for people in a nation state.[3] Under this definition, the British Pound Sterling (£), euros (€), Japanese yen (¥), and U.S. dollars (US$) are examples of (government-issued) fiat currencies. Currencies may act as stores of value and be traded between nations in foreign exchange markets, which determine the relative values of the different currencies.[4] Currencies in this sense are either chosen by users or decreed by governments, and each type has limited boundaries of acceptance; i.e., legal tender laws may require a particular unit of account for payments to government agencies.

Other definitions of the term "currency" appear in the respective synonymous articles: banknote, coin, and money. This article uses the definition which focuses on the currency systems of countries.

One can classify currencies into three monetary systems: fiat money, commodity money, and representative money, depending on what guarantees a currency's value (the economy at large vs. the government's physical metal reserves). Some currencies function as legal tender in certain jurisdictions, or for specific purposes, such as payment to a government (taxes), or government agencies (fees, fines). Others simply get traded for their economic value.

Digital currency has arisen with the popularity of computers and the Internet. Whether government-backed digital notes and coins (such as the digital renminbi in China, for example) will be successfully developed and implemented remains dubious.[5] Decentralized digital currencies, such as cryptocurrencies, are different because they are not issued by a government monetary authority; specifically, Bitcoin, the first cryptocurrency and leader in terms of market capitalization, has a fixed supply and is therefore ostensibly deflationary. The U.S. Commodity Futures Trading Commission has declared Bitcoin a commodity under the Commodity Exchange Act[6]. Many warnings issued by various countries note the opportunities that cryptocurrencies create for illegal activities such as scams, ransomware, money laundering and terrorism.[7] In 2014, the United States IRS issued a statement explaining that virtual currency is treated as property for Federal income-tax purposes, and it provides examples of how long-standing tax principles applicable to transactions involving property apply to virtual currency.[8]

History

Early currency

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Cowry shells being used as money by an Arab trader

Originally, currency was a form of receipt, representing grain stored in temple granaries in Sumer in ancient Mesopotamia and in Ancient Egypt.

In this first stage of currency, metals were used as symbols to represent value stored in the form of commodities. This formed the basis of trade in the Fertile Crescent for over 1500 years. However, the collapse of the Near Eastern trading system pointed to a flaw: in an era where there was no place that was safe to store value, the value of a circulating medium could only be as sound as the forces that defended that store. A trade could only reach as far as the credibility of that military. By the late Bronze Age, however, a series of treaties had established safe passage for merchants around the Eastern Mediterranean, spreading from Minoan Crete and Mycenae in the northwest to Elam and Bahrain in the southeast. It is not known what was used as a currency for these exchanges, but it is thought that oxhide-shaped ingots of copper, produced in Cyprus, may have functioned as a currency.

It is thought that the increase in piracy and raiding associated with the Bronze Age collapse, possibly produced by the Peoples of the Sea, brought the trading system of oxhide ingots to an end. It was only the recovery of Phoenician trade in the 10th and 9th centuries BC that led to a return to prosperity, and the appearance of real coinage, possibly first in Anatolia with Croesus of Lydia and subsequently with the Greeks and Persians. In Africa, many forms of value store have been used, including beads, ingots, ivory, various forms of weapons, livestock, the manilla currency, and ochre and other earth oxides. The manilla rings of West Africa were one of the currencies used from the 15th century onwards to sell slaves. African currency is still notable for its variety, and in many places, various forms of barter still apply.

Coinage

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Main article: Coin

The prevalence of metal coins possibly led to the metal itself being the store of value: first copper, then both silver and gold, and at one point also bronze. Today other non-precious metals are used for coins. Metals were mined, weighed, and stamped into coins. This was to assure the individual accepting the coin that he was getting a certain known weight of precious metal. Coins could be counterfeited, but the existence of standard coins also created a new unit of account, which helped lead to banking. Archimedes' principle provided the next link: coins could now be easily tested for their fine weight of the metal, and thus the value of a coin could be determined, even if it had been shaved, debased or otherwise tampered with (see Numismatics).

The world's oldest coin, created in the ancient Kingdom of Lydia

Most major economies using coinage had several tiers of coins of different values, made of copper, silver, and gold. Gold coins were the most valuable and were used for large purchases, payment of the military, and backing of state activities. Units of account were often defined as the value of a particular type of gold coin. Silver coins were used for midsized transactions, and sometimes also defined a unit of account, while coins of copper or silver, or some mixture of them (see debasement), might be used for everyday transactions. This system had been used in ancient India since the time of the Mahajanapadas. The exact ratios between the values of the three metals varied greatly between different eras and places; for example, the opening of silver mines in the Harz mountains of central Europe made silver relatively less valuable, as did the flood of New World silver after the Spanish conquests. However, the rarity of gold consistently made it more valuable than silver, and likewise silver was consistently worth more than copper.

Paper money

Main article: Banknote

In premodern China, the need for lending and for a medium of exchange that was less physically cumbersome than large numbers of copper coins led to the introduction of paper money, i.e. banknotes. Their introduction was a gradual process that lasted from the late Tang dynasty (618–907) into the Song dynasty (960–1279). It began as a means for merchants to exchange heavy coinage for receipts of deposit issued as promissory notes by wholesalers' shops. These notes were valid for temporary use in a small regional territory. In the 10th century, the Song dynasty government began to circulate these notes amongst the traders in its monopolized salt industry. The Song government granted several shops the right to issue banknotes, and in the early 12th century the government finally took over these shops to produce state-issued currency. Yet the banknotes issued were still only locally and temporarily valid: it was not until the mid 13th century that a standard and uniform government issue of paper money became an acceptable nationwide currency. The already widespread methods of woodblock printing and then Bi Sheng's movable type printing by the 11th century were the impetus for the mass production of paper money in premodern China.

Song dynasty Jiaozi, the world's earliest paper money

At around the same time in the medieval Islamic world, a vigorous monetary economy was created during the 7th–12th centuries on the basis of the expanding levels of circulation of a stable high-value currency (the dinar). Innovations introduced by Muslim economists, traders and merchants include the earliest uses of credit,[9] cheques, promissory notes,[10] savings accounts, transaction accounts, loaning, trusts, exchange rates, the transfer of credit and debt,[11] and banking institutions for loans and deposits.[11]

In Europe, paper currency was first introduced on a regular basis in Sweden in 1661 (although Washington Irving records an earlier emergency use of it, by the Spanish in a siege during the Conquest of Granada). As Sweden was rich in copper, many copper coins were in circulation, but its relatively low value necessitated extraordinarily big coins, often weighing several kilograms.

The advantages of paper currency were numerous: it reduced the need to transport gold and silver, which was risky; it facilitated loans of gold or silver at interest, since the underlying specie (money in the form of gold or silver coins rather than notes) never left the possession of the lender until someone else redeemed the note; and it allowed a division of currency into credit- and specie-backed forms. It enabled the sale of investment in joint-stock companies and the redemption of those shares in a paper.

But there were also disadvantages. First, since a note has no intrinsic value, there was nothing to stop issuing authorities from printing more notes than they had specie to back them with. Second, because this increased the money supply, it increased inflationary pressures, a fact observed by David Hume in the 18th century. Thus paper money would often lead to an inflationary bubble, which could collapse if people began demanding hard money, causing the demand for paper notes to fall to zero. The printing of paper money was also associated with wars, and financing of wars, and therefore regarded as part of maintaining a standing army. For these reasons, paper currency was held in suspicion and hostility in Europe and America. It was also addictive since the speculative profits of trade and capital creation were quite large. Major nations established mints to print money and mint coins, and branches of their treasury to collect taxes and hold gold and silver stock.

At that time, both silver and gold were considered a legal tender and accepted by governments for taxes. However, the instability in the exchange rate between the two grew over the course of the 19th century, with the increases both in the supply of these metals, particularly silver, and in trade. The parallel use of both metals is called bimetallism, and the attempt to create a bimetallic standard where both gold and silver backed currency remained in circulation occupied the efforts of inflationists. Governments at this point could use currency as an instrument of policy, printing paper currency such as the United States greenback, to pay for military expenditures. They could also set the terms at which they would redeem notes for specie, by limiting the amount of purchase, or the minimum amount that could be redeemed.

By 1900, most of the industrializing nations were on some form of gold standard, with paper notes and silver coins constituting the circulating medium. Private banks and governments across the world followed Gresham's law: keeping the gold and silver they received but paying out in notes. This did not happen all around the world at the same time, but occurred sporadically, generally in times of war or financial crisis, beginning in the early 20th century and continuing across the world until the late 20th century, when the regime of floating fiat currencies came into force. One of the last countries to break away from the gold standard was the United States in 1971, an action which was known as the Nixon shock. No country has an enforceable gold standard or silver standard currency system.

Banknote era

Main articles: Banknote and Fiat currency

A banknote or a bill is a type of currency and it is commonly used as legal tender in many jurisdictions. Together with coins, banknotes make up the cash form of a currency. Banknotes were initially mostly paper, but Australia's Commonwealth Scientific and Industrial Research Organisation developed a polymer currency in the 1980s; it went into circulation on the nation's bicentenary in 1988.[12] Polymer banknotes had already been introduced in the Isle of Man in 1983. As of 2016, polymer currency is used in over 20 countries (over 40 if counting commemorative issues),[13] and dramatically increases the life span of banknotes and reduces counterfeiting.

Modern currencies

Name of currency units by country, in Portuguese

Further information: Tables of historical exchange rates to the United States dollar

For a list of which currency or currencies are used by present-day countries or regions, see List of circulating currencies.

The currency used is based on the concept of lex monetae; that a sovereign state decides which currency it shall use. (See Fiat currency.)

Currency codes and currency symbols

Main articles: List of currency codes and List of currency symbols

In 1978 the International Organization for Standardization published a system of three-digit alphabetic codes (ISO 4217) to denote currencies. These codes are based on two initial letters allocated to a specific country and a final letter denoting a specific monetary unit of account.[14]

Many currencies use a currency symbol. These are not subject to international standards and are not unique: the dollar sign in particular has many uses.

Alternative currencies

Main article: Alternative currency

Distinct from centrally controlled government-issued currencies, private decentralized trust-reduced networks support alternative currencies such as Bitcoin and Ethereum's ether, which are classified as cryptocurrency since the transfer of value is assured through cryptographic signatures validated by all users. There are also branded currencies, for example 'obligation' based stores of value, such as quasi-regulated BarterCard, Loyalty Points (Credit Cards, Airlines) or Game-Credits (MMO games) that are based on reputation of commercial products, or highly regulated 'asset-backed' 'alternative currencies' such as mobile-money schemes like MPESA (called E-Money Issuance).[15]

The currency may be Internet-based and digital, for instance, Bitcoin[16] is not tied to any specific country, or the IMF's SDR that is based on a basket of currencies (and assets held).

Possession and sale of alternative forms of currencies is often outlawed by governments in order to preserve the legitimacy of the constitutional currency for the benefit of all citizens. For example, Article I, section 8, clause 5 of the United States Constitution delegates to Congress the power to coin money and to regulate the value thereof. This power was delegated to Congress in order to establish and preserve a uniform standard of value and to insure a singular monetary system for all purchases and debts in the United States, public and private. Along with the power to coin money, the United States Congress has the concurrent power to restrain the circulation of money which is not issued under its own authority in order to protect and preserve the constitutional currency. It is a violation of federal law for individuals, or organizations to create private coin or currency systems to compete with the official coinage and currency of the United States.[17]

Control and production

Currencies exchange logo

Most traded currencies by value

Currency distribution of global foreign exchange market turnover[18]vte

Rank Currency ISO 4217

code Symbol or

abbreviation Proportion of daily volume

April 2019 April 2022

1 U.S. dollar USD US$ 88.3% 88.5%

2 Euro EUR € 32.3% 30.5%

3 Japanese yen JPY ¥ / 円 16.8% 16.7%

4 Sterling GBP £ 12.8% 12.9%

5 Renminbi CNY ¥ / 元 4.3% 7.0%

6 Australian dollar AUD A$ 6.8% 6.4%

7 Canadian dollar CAD C$ 5.0% 6.2%

8 Swiss franc CHF CHF 4.9% 5.2%

9 Hong Kong dollar HKD HK$ 3.5% 2.6%

10 Singapore dollar SGD S$ 1.8% 2.4%

11 Swedish krona SEK kr 2.0% 2.2%

12 South Korean won KRW ₩ / 원 2.0% 1.9%

13 Norwegian krone NOK kr 1.8% 1.7%

14 New Zealand dollar NZD NZ$ 2.1% 1.7%

15 Indian rupee INR ₹ 1.7% 1.6%

16 Mexican peso MXN $ 1.7% 1.5%

17 New Taiwan dollar TWD NT$ 0.9% 1.1%

18 South African rand ZAR R 1.1% 1.0%

19 Brazilian real BRL R$ 1.1% 0.9%

20 Danish krone DKK kr 0.6% 0.7%

21 Polish złoty PLN zł 0.6% 0.7%

22 Thai baht THB ฿ 0.5% 0.4%

23 Israeli new shekel ILS ₪ 0.3% 0.4%

24 Indonesian rupiah IDR Rp 0.4% 0.4%

25 Czech koruna CZK Kč 0.4% 0.4%

26 UAE dirham AED د.إ 0.2% 0.4%

27 Turkish lira TRY ₺ 1.1% 0.4%

28 Hungarian forint HUF Ft 0.4% 0.3%

29 Chilean peso CLP CLP$ 0.3% 0.3%

30 Saudi riyal SAR ﷼ 0.2% 0.2%

31 Philippine peso PHP ₱ 0.3% 0.2%

32 Malaysian ringgit MYR RM 0.2% 0.2%

33 Colombian peso COP COL$ 0.2% 0.2%

34 Russian ruble RUB ₽ 1.1% 0.2%

35 Romanian leu RON L 0.1% 0.1%

36 Peruvian sol PEN S/ 0.1% 0.1%

37 Bahraini dinar BHD .د.ب 0.0% 0.0%

38 Bulgarian lev BGN BGN 0.0% 0.0%

39 Argentine peso ARS ARG$ 0.1% 0.0%

… Other 1.8% 2.3%

Total[note 1] 200.0% 200.0%

In most cases, a central bank has the exclusive power to issue all forms of currency, including coins and banknotes (fiat money), and to restrain the circulation alternative currencies for its own area of circulation (a country or group of countries); it regulates the production of currency by banks (credit) through monetary policy.

An exchange rate is a price at which two currencies can be exchanged against each other. This is used for trade between the two currency zones. Exchange rates can be classified as either floating or fixed. In the former, day-to-day movements in exchange rates are determined by the market; in the latter, governments intervene in the market to buy or sell their currency to balance supply and demand at a static exchange rate.

In cases where a country has control of its own currency, that control is exercised either by a central bank or by a Ministry of Finance. The institution that has control of monetary policy is referred to as the monetary authority. Monetary authorities have varying degrees of autonomy from the governments that create them. A monetary authority is created and supported by its sponsoring government, so independence can be reduced by the legislative or executive authority that creates it.

Several countries can use the same name for their own separate currencies (for example, a dollar in Australia, Canada, and the United States). By contrast, several countries can also use the same currency (for example, the euro or the CFA franc), or one country can declare the currency of another country to be legal tender. For example, Panama and El Salvador have declared US currency to be legal tender, and from 1791 to 1857, Spanish dollars were legal tender in the United States. At various times countries have either re-stamped foreign coins or used currency boards, issuing one note of currency for each note of a foreign government held, as Ecuador currently does.

Each currency typically has a main currency unit (the dollar, for example, or the euro) and a fractional unit, often defined as 1⁄100 of the main unit: 100 cents = 1 dollar, 100 centimes = 1 franc, 100 pence = 1 pound, although units of 1⁄10 or 1⁄1000 occasionally also occur. Some currencies do not have any smaller units at all, such as the Icelandic króna and the Japanese yen.

Mauritania and Madagascar are the only remaining countries that have theoretical fractional units not based on the decimal system; instead, the Mauritanian ouguiya is in theory divided into 5 khoums, while the Malagasy ariary is theoretically divided into 5 iraimbilanja. In these countries, words like dollar or pound "were simply names for given weights of gold".[19] Due to inflation khoums and iraimbilanja have in practice fallen into disuse. (See non-decimal currencies for other historic currencies with non-decimal divisions.)

Currency convertibility

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Subject to variation around the world, local currency can be converted to another currency or vice versa with or without central bank/government intervention. Such conversions take place in the foreign exchange market. Based on the above restrictions or free and readily conversion features, currencies are classified as:

Fully convertible

When there are no restrictions or limitations on the amount of currency that can be traded on the international market, and the government does not artificially impose a fixed value or minimum value on the currency in international trade. The US dollar is one of the main fully convertible currencies.

Partially convertible

Central banks control international investments flowing into and out of a country. While most domestic transactions are handled without any special requirements, there are significant restrictions on international investing, and special approval is often required in order to convert into other currencies. The Indian rupee and the renminbi are examples of partially convertible currencies.

Nonconvertible

A government neither participates in the international currency market nor allows the conversion of its currency by individuals or companies. These currencies are also known as blocked, e.g. the North Korean won and the Cuban peso.

According to the three aspects of trade in goods and services, capital flows and national policies, the supply-demand relationship of different currencies determines the exchange ratio between currencies.

Trade in goods and services

Through cost transfer, goods and services circulating in the country (such as hotels, tourism, catering, advertising, household services) will indirectly affect the trade cost of goods and services and the price of export trade. Therefore, services and goods involved in international trade are not the only reason affecting the exchange rate. The large number of international tourists and overseas students has resulted in the flow of services and goods at home and abroad. It also represents that the competitiveness of global goods and services directly affects the change of international exchange rates.

Capital flows

National currencies will be traded on international markets for investment purposes. Investment opportunities in each country attract other countries into investment programs, so that these foreign currencies become the reserves of the central banks of each country. The exchange rate mechanism, in which currencies are quoted continuously between countries, is based on foreign exchange markets in which currencies are invested by individuals and traded or speculated by central banks and investment institutions. In addition, changes in interest rates, capital market fluctuations and changes in investment opportunities will affect the global capital inflows and outflows of countries around the world, and exchange rates will fluctuate accordingly.

National policies

The country's foreign trade, monetary and fiscal policies affect the exchange rate fluctuations. Foreign trade includes policies such as tariffs and import standards for commodity exports. The impact of monetary policy on the total amount and yield of money directly determines the changes in the international exchange rate. Fiscal policies, such as transfer payments, taxation ratios, and other factors, dominate the profitability of capital and economic development, and the ratio of national debt issuance to deficit determines the repayment capacity and credit rating of the country. Such policies determine the mechanism of linking domestic and foreign currencies and therefore have a significant impact on the generation of exchange rates.

Currency convertibility is closely linked to economic development and finance. There are strict conditions for countries to achieve currency convertibility, which is a good way for countries to improve their economies. The currencies of some countries or regions in the world are freely convertible, such as the US dollar, Australian dollar and Japanese yen. The requirements for currency convertibility can be roughly divided into four parts:

Sound microeconomic agency

With a freely convertible currency, domestic firms will have to compete fiercely with their foreign counterparts. The development of competition among them will affect the implementation effect of currency convertibility. In addition, microeconomics is a prerequisite for macroeconomic conditions.

The macroeconomic situation and policies are stable

Since currency convertibility is the cross-border flow of goods and capital, it will have an impact on the macro economy. This requires that the national economy be in a normal and orderly state, that is, there is no serious inflation and economic overheating. In addition, the government should use macro policies to make mature adjustments to deal with the impact of currency exchange on the economy.

A reasonable and open economy

The maintainability of international balance of payments is the main performance of reasonable economic structure. Currency convertibility not only causes difficulties in the sustainability of international balance of payments but also affects the government's direct control over international economic transactions. To eliminate the foreign exchange shortage, the government needs adequate international reserves.

Appropriate exchange rate regime and level

The level of exchange rate is an important factor in maintaining exchange rate stability, both before and after currency convertibility. The exchange rate of freely convertible currency is too high or too low, which can easily trigger speculation and undermine the stability of macroeconomic and financial markets. Therefore, to maintain the level of exchange rate, a proper exchange rate regime is crucial.

Local currency

Main article: Local currency

In economics, a local currency is a currency not backed by a national government and intended to trade only in a small area. Advocates such as Jane Jacobs argue that this enables an economically depressed region to pull itself up, by giving the people living there a medium of exchange that they can use to exchange services and locally produced goods (in a broader sense, this is the original purpose of all money). Opponents of this concept argue that local currency creates a barrier that can interfere with economies of scale and comparative advantage and that in some cases they can serve as a means of tax evasion.

Local currencies can also come into being when there is economic turmoil involving the national currency. An example of this is the Argentinian economic crisis of 2002 in which IOUs issued by local governments quickly took on some of the characteristics of local currencies.

One of the best examples of a local currency is the original LETS currency, founded on Vancouver Island in the early 1980s. In 1982, the Canadian Central Bank's lending rates ran up to 14% which drove chartered bank lending rates as high as 19%. The resulting currency and credit scarcity left island residents with few options other than to create a local currency.[21]

List of major world payment currencies

The following table are estimates of the 20 most frequently used currencies in world payments in July 2023 by SWIFT.[22]

20 major currencies in world payments (in % of world)

Rank Currency July 2023

World 100.00%

1 United States United States dollar 46.46%

2 European Union Euro 24.42%

3 United Kingdom Pound sterling 7.63%

4 Japan Japanese yen 3.51%

5 China Chinese renminbi 3.06%

6 Canada Canadian dollar 2.26%

7 Hong Kong Hong Kong dollar 1.75%

8 Australia Australian dollar 1.57%

9 Singapore Singapore dollar 1.09%

10 Thailand Thai baht 1.03%

11 Switzerland Swiss franc 0.99%

12 Sweden Swedish krona 0.76%

13 Norway Norwegian krone 0.75%

14 Poland Polish złoty 0.71%

15 Malaysia Malaysian ringgit 0.45%

16 Denmark Danish krone 0.39%

17 New Zealand New Zealand dollar 0.35%

18 Mexico Mexican peso 0.33%

19 Philippines Philippine peso 0.31%

20 South Africa South African rand 0.29%

See also

Numismatics portal

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History portal

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Related concepts

Counterfeit money

Currency band

Currency transaction tax

Debasement

Exchange rate

Fiscal localism

Foreign currency exchange

Foreign exchange reserves

Functional currency

History of banking

History of money

Mutilated currency

Optimum currency area

Slang terms for money

Virtual currency

World currency

Accounting units

Currency pair

Currency symbol

Currency strength

European Currency Unit

Fictional currency

Franc Poincaré

Local currencies

Petrocurrency

Special drawing rights

Lists

ISO 4217

List of alternative names for currency

List of currencies

List of circulating currencies

List of proposed currencies

List of historical currencies

List of historical exchange rates

List of international trade topics

List of motifs on banknotes

Notes

 From Middle English: curraunt, "in circulation", from Latin: currens, -entis, literally meaning "running" or "traversing"

 The total sum is 200% because each currency trade is counted twice: once for the currency being bought and once for the one being sold. The percentages above represent the proportion of all trades involving a given currency, regardless of which side of the transaction it is on. For example, the US dollar is bought or sold in 88% of all currency trades, while the euro is bought or sold in 31% of all trades.

References

 "Currency". The Free Dictionary. currency [...] 1. Money in any form when in actual use as a medium of exchange, especially circulating paper money.

 Bernstein, Peter (2008) [1965]. "4–5". A Primer on Money, Banking and Gold (3rd ed.). Hoboken, NJ: Wiley. ISBN 978-0-470-28758-3. OCLC 233484849.

 "Currency". Investopedia.

 "Guide to the Financial Markets" (PDF). The Economist. p. 14. Determining the relative values of different currencies is the role of the foreign-exchange markets.

 "Electronic finance: a new perspective and challenges" (PDF). Bank for International Settlements. November 2001. Archived (PDF) from the original on October 9, 2022. Retrieved May 11, 2020.

 "Bitcoin Basics" (PDF). Commodity Futures Trading Commission. Retrieved September 9, 2023.

 "Regulation of Cryptocurrency Around the World". Library of Congress. August 16, 2019. p. 1. One of the most common actions identified across the surveyed jurisdictions is government-issued notices about the pitfalls of investing in the cryptocurrency markets. [...] Many of the warnings issued by various countries also note the opportunities that cryptocurrencies create for illegal activities, such as money laundering and terrorism.

 "Frequently Asked Questions on Virtual Currency Transactions". December 31, 2019.

 Banaji, Jairus (2007). "Islam, the Mediterranean and the Rise of Capitalism". Historical Materialism. 15 (1): 47–74. doi:10.1163/156920607X171591. ISSN 1465-4466. OCLC 440360743. Archived from the original on May 23, 2009. Retrieved August 28, 2010.

 Lopez, Robert Sabatino; Raymond, Irving Woodworth; Constable, Olivia Remie (2001) [1955]. Medieval trade in the Mediterranean world: Illustrative documents. Records of Western civilization.; Records of civilization, sources and studies, no. 52. New York: Columbia University Press. ISBN 978-0-231-12357-0. OCLC 466877309. Archived from the original on March 9, 2012.

 Labib, Subhi Y. (March 1969). "Capitalism in Medieval Islam". The Journal of Economic History. 29 (1): 79–86. doi:10.1017/S0022050700097837. ISSN 0022-0507. JSTOR 2115499. OCLC 478662641. S2CID 153962294.

 "History of Banknotes". Reserve Bank of Australia. Retrieved December 9, 2019.

 "The Future Is Plastic - Currency Notes - Finance & Development, June 2016". www.imf.org. Retrieved December 8, 2019.

 Staff writer (2015). "ISO 4217 - Currency Codes". www.iso.org. International Organisation for Standardisation. Retrieved June 27, 2022. The alphabetic code is based on another ISO standard, ISO 3166, which lists the codes for country names. The first two letters of the ISO 4217 three-letter code are the same as the code for the country name, and, where possible, the third letter corresponds to the first letter of the currency name.

 ● TED Video: Kemp-Robertson, Paul (June 2013). "Bitcoin. Sweat. Tide. Meet the future of branded currency". TED (conference). ● Corresponding written article: "10 alternative currencies, from Bitcoin to BerkShares to sweat to laundry detergent". TED (conference). July 25, 2013. Archived from the original on July 25, 2013.

 Hough, Jack. "The Currency That's Up 200,000 Percent". SmartMoney (The Wall Street Journal). Archived from the original on October 24, 2012. Retrieved December 14, 2012.

 "Defendant Convicted of Minting His Own Currency". FBI. March 18, 2011.

 "Triennial Central Bank Survey Foreign exchange turnover in April 2022" (PDF). Bank for International Settlements. October 27, 2022. p. 12. Archived (PDF) from the original on October 27, 2022. Retrieved October 29, 2022.

 Turk, James; Rubino, John (2007) [2004]. The collapse of the dollar and how to profit from it: Make a fortune by investing in gold and other hard assets (Paperback ed.). New York: Doubleday. pp. 43 of 252. ISBN 978-0-385-51224-4. OCLC 192055959.

 Linton, Michael; Bober, Jordan (November 7, 2012). "Opening Money". The Extraenvironmentalist (Interview). Interviewed by Seth Moser-Katz; Justin Ritchie. Retrieved December 29, 2016.

 "Opening Money" (MP3). The Extraenvironmentalist (Podcast). Retrieved December 29, 2016.[20]

 Tracker Monthly reporting and statistics on renminbi(RMB) progress towards becoming an international currency

Proof-of-stake (PoS) protocols are a class of consensus mechanisms for blockchains that work by selecting validators in proportion to their quantity of holdings in the associated cryptocurrency. This is done to avoid the computational cost of proof-of-work (POW) schemes. The first functioning use of PoS for cryptocurrency was Peercoin in 2012, although the scheme, on the surface, still resembled a POW.[1]

Description

For a blockchain transaction to be recognized, it must be appended to the blockchain. In the proof of stake blockchain the appending entities are named minters or validators (in the proof of work blockchains this task is carried out by the miners);[2] in most protocols, the validators receive a reward for doing so.[3] For the blockchain to remain secure, it must have a mechanism to prevent a malicious user or group from taking over a majority of validation. PoS accomplishes this by requiring that validators have some quantity of blockchain tokens, requiring potential attackers to acquire a large fraction of the tokens on the blockchain to mount an attack.[4]

Proof of work (PoW), another commonly used consensus mechanism, uses a validation of computational prowess to verify transactions, requiring a potential attacker to acquire a large fraction of the computational power of the validator network.[4] This incentivizes consuming huge quantities of energy. PoS is more energy-efficient.[5]

Early PoS implementations were plagued by a number of new attacks that exploited the unique vulnerabilities of the PoS protocols. Eventually two dominant designs emerged: so called Byzantine Fault Tolerance-based and chain-based approaches.[6] Bashir identifies three more types of PoS:[7]

committee-based PoS (a.k.a. nominated PoS, NPoS);

delegated proof of stake (DPoS);

liquid proof of stake (LPoS).

Attacks

The additional vulnerabilities of the PoS schemes are directly related to their advantage, a relatively low amount of calculations to be performed while constructing a blockchain.[8]

Long-range attacks

The low amount of computing power involved allows a class of attacks that replace a non-negligible portion of the main blockchain with a hijacked version. These attacks are called in literature by different names, Long-Range, Alternative History, Alternate History, History Revision, and are unfeasible in the PoW schemes due to the sheer volume of calculations required.[9] The early stages of a blockchain are much more malleable for rewriting, as they likely have much smaller group of stakeholders involved, simplifying the collusion. If the per-block and per-transaction rewards are offered, the malicious group can, for example, redo the entire history and collect these rewards.[10]

The classic "Short-Range" attack (bribery attack) that rewrites just a small tail portion of the chain is also possible.[9]

Nothing at stake

Since validators do not need to spend a considerable amount of computing power (and thus money) on the process, they are prone to the Nothing-at-Stake attack: the participation in a successful validation increases the validator's earnings, so there is a built-in incentive for the validators to accept all chain forks submitted to them, thus increasing the chances of earning the validation fee. The PoS schemes enable low-cost creation of blockchain alternatives starting at any point in history (costless simulation), submitting these forks to eager validators endangers the stability of the system.[8] If this situation persists, it can allow double-spending, where a digital token can be spent more than once.[10] This can be mitigated through penalizing validators who validate conflicting chains[10] ("economic finality"[11]) or by structuring the rewards so that there is no economic incentive to create conflicts.[3] Byzantine Fault Tolerance based PoS are generally considered robust against this threat.[12]

Bribery attack

Bribery attack, where the attackers financially induce some validators to approve their fork of blockchain, is enhanced in PoS, as rewriting a large portion of history might enable the collusion of once-rich stakeholders that no longer hold significant amounts at stake to claim a necessary majority at some point back in time, and grow the alternative blockchain from there, an operation made possible by the low computing cost of adding blocks in the PoS scheme.[10]

Variants

Chain-based PoS

This is essentially a modification of the PoW scheme, where the competition is based not on applying brute force to solving the identical puzzle in the smallest amount of time, but instead on varying the difficulty of the puzzle depending on the stake of the participant; the puzzle is solved if on a tick of the clock (|| is concatenation):

{\displaystyle Hash(ProposedNewBlock||ClockTime)<target*StakeValue}

The smaller amount of calculations required for solving the puzzle for high-value stakeholders helps to avoid excessive hardware.[13]

Nominated PoS (NPoS)

Also known as "committee-based", this scheme involves an election of a committee of validators using a verifiable random function with probabilities of being elected higher with higher stake. Validators then randomly take turns producing blocks. NPoS is utilized by Ouroboros Praos and BABE.[14]

BFT-based PoS

Main article: Byzantine fault tolerance

The outline of the BFT PoS "epoch" (adding a block to the chain) is as follows:[15]

A "proposer" with a "proposed block" is randomly selected by adding it to the temporary pool used to select just one consensual block;

The other participants, validators, obtain the pool, validate, and vote for one;

The BFT consensus is used to finalize the most-voted block.

The scheme works as long as no more than a third of validators are dishonest. BFT schemes are used in Tendermint and Casper FFG.[15]

Delegated proof of stake (DPoS)

Proof of stake delegated systems use a two-stage process: first,[16] the stakeholders elect a validation committee,[17] a.k.a. witnesses, by voting proportionally to their stakes, then the witnesses take tuns in a round-robin fashion to propose new blocks that are then voted upon by the witnesses, usually in the BFT-like fashion. Since there are fewer validators in the DPoS than in many other PoS schemes, the consensus can be established faster. The scheme is used in many chains, including EOS, Lisk, Tron.[16]

Liquid proof of stake (LPoS)

In the liquid PoS anyone with a stake can declare themselves a validator, but for the small holders is makes sense to delegate their voting rights instead to larger players in exchange for some benefits (like periodic payouts). A market is established where the validators compete on the fees, reputation, and other factors. Token holders are free to switch their support to another validator at any time. LPoS is used in Tezos.[18]

'Stake' definition

The exact definition of "stake" varies from implementation to implementation. For instance, some cryptocurrencies use the concept of "coin age", the product of the number of tokens with the amount of time that a single user has held them, rather than merely the number of tokens, to define a validator's stake.[4][13]

Implementations

The first functioning implementation of a proof-of-stake cryptocurrency was Peercoin, introduced in 2012.[3] Other cryptocurrencies, such as Blackcoin, Nxt, Cardano, and Algorand followed.[3] However, as of 2017, PoS cryptocurrencies were still not as widely used as proof-of-work cryptocurrencies.[19][20][21]

In September 2022, Ethereum, the world second largest cryptocurrency in 2022, switched from proof of work to a proof of stake consensus mechanism system,[22] after several proposals[23][24] and some delays.[24][25]

Concerns

Security

Critics have argued that the proof of stake model is less secure compared to the proof of work model.[26]

Centralization

Critics have argued that the proof of stake will likely lead cryptocurrency blockchains being more centralized in comparison to proof of work as the system favors users who have a large amount of cryptocurrency, which in turn could lead to users who have a large amount of cryptocurrency having major influence on the management and direction for a crypto blockchain.[27][28]

Energy consumption

In 2021 a study by the University of London found that in general the energy consumption of the proof-of-work based Bitcoin was about a thousand times higher than that of the highest consuming proof-of-stake system that was studied even under the most favorable conditions (Bitcoins)? or (Proof Of Stakes)?[clarification needed]and that most proof of stake systems cause less energy consumption in most configurations[specify]. The researchers also noted that the energy consumption for proof-of-stake with permissioned systems that used less validators (than Proof Of Work)? or (than other Proof Of Stakes)?[clarification needed] were more efficient than permission-less systems that don't use validators at all.[29][30] They also couldn't find the energy consumption of a proof-of-stake system on a large scale, as such a system did not exist at the time of the report.

In January 2022 Vice-Chair of the European Securities and Markets Authority Erik Thedéen called on the EU to ban the proof of work model in favor of the proof of stake model due to its lower energy consumption.[31]

On 15 September 2022, Ethereum transitioned its consensus mechanism from proof-of-work to proof-of-stake in an upgrade process known as "the Merge". This has cut Ethereum's energy usage by 99%.[32]

References

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 Tasca, Paolo; Tessone, Claudio J. (2019-02-15). "A Taxonomy of Blockchain Technologies: Principles of Identification and Classification". Ledger. 4. doi:10.5195/ledger.2019.140. ISSN 2379-5980.

 Zhang, Rong; Chan, Wai Kin (Victor) (2020). "Evaluation of Energy Consumption in Block-Chains with Proof of Work and Proof of Stake". Journal of Physics: Conference Series. 1584 (1): 012023. Bibcode:2020JPhCS1584a2023Z. doi:10.1088/1742-6596/1584/1/012023. ISSN 1742-6596.

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 Hissong, Samantha (July 9, 2021). "The Crypto World Is Getting Greener. Is It Too Little Too Late?". Rolling Stone.

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A central bank digital currency (CBDC; also called digital fiat currency[1] or digital base money[2]) is a digital currency issued by a central bank,[3] rather than by a commercial bank. It is also a liability of the central bank and denominated in the sovereign currency, as is the case with physical banknotes and coins.

A sign on the Hangzhou Metro advertising acceptance of the Digital Renminbi

A sign on the Hangzhou Metro advertising acceptance of the digital renminbi, the first CBDC adopted by a major economy (China)

Rather than a new currency, CBDC is a form of central bank electronic money that could be used by households and businesses to make payments. A report by the Bank for International Settlements states that, although the term "central bank digital currency" is not well-defined, "it is envisioned by most to be a new form of central bank money [...] that is different from balances in traditional reserve or settlement accounts.".[4]

The present concept of CBDCs differs from virtual currency and cryptocurrency in that a CBDC is or would be issued by a state.[4][5][6][7] Most CBDC implementations will likely not use or need any sort of distributed ledger such as a blockchain.[8][9][10]

In 2023, the central banks of 114 countries accounting for 95% of the world’s GDP were said to be in various stages of evaluating the launch of a national digital currency.[11][12] These included the ECB, the UK, and the US.[13][14] China's digital RMB was the first digital currency to be issued by a major economy.[15][16] Six central banks have launched a CBDC: the Central Bank of The Bahamas (Sand Dollar), the Eastern Caribbean Central Bank (DCash), the Central Bank of Nigeria (e-Naira), the Bank of Jamaica (JamDex), People's Bank of China (Digital renminbi), the Reserve Bank of India (Digital Rupee), and Bank of Russia (Digital Ruble).[17] The ECB/Eurozone is preparing decision by end of 2023, following a study phase since 2021 regarding the possibilities of a digital euro.

Some states have also issued, or have considered issuing, cryptocurrencies: these include Venezuela (Petro) and the Marshall Islands (Sovereign). These cryptocurrencies are often considered with the intent of increasing a state's independence from global financial systems, such as by reducing dependence on a foreign currency or by evading international sanctions.[18][19]

Contrasting attitudes towards digital currencies were demonstrated by developments in the UK and Switzerland in February 2023. The UK Treasury and the Bank of England said a state-backed digital pound was likely to be launched some time after 2025. Two weeks later, a Swiss lobby group triggered a national vote on maintaining a "sufficient quantity" of cash in circulation over fears that electronic payments make it easier for the state to monitor its citizens' actions.[20] In a comment on the British government’s plans, the BBC's Faisal Islam said the issue was about access to the data attached to every spending transaction, and whether people might choose to trust a global company more than the state: "The eye here is on maintaining UK monetary sovereignty against upheaval from the likes of Big Tech."[21]

History

See also: History of CBDCs by country

Central banks have directly implemented e-money previously, such as Finland's Avant stored value e-money card in the 1990s.[22] In 2000, the I LIKE Q [cs] project was launched in Czechia,[23][self-published source?] enabling the implementation of so-called micropayments on the Internet. For payments, users used the virtual currency Q, the fair value of which is tied to a fixed exchange rate against the Czech koruna in the ratio of 100 Q = CZK 1. The two currencies are fully convertible. Project I LIKE Q was terminated in 2003 due to an amendment to Czech law, which at that time did not provide for this form of payment. In 2021, the same group introduced project Corrency [cs] which is a type of digital currency enriched with smart contracts aka drone money.

The present concept of "central bank digital currency" is known concept in the field of economics, whereby the central bank enables citizens to hold accounts with it, providing a reliable and safe public savings or payments medium ("retail" or "general-purpose" CBDC).

The Bank for International Settlements (BIS) published a report in December 2020 listing the known CBDC wholesale and retail projects at that time.[24] By April 2021, there would be "at least 80 central banks around the world that are looking at digital currencies."[13]

Another 2020 BIS survey found that 86% of central banks were examining the advantages and disadvantages of launching CBDCs,[25] although only 14% were in advanced stages of development (such as pilot programs).[26]

Implementation

A central bank digital currency would likely be implemented using a database run by the central bank, government, or approved private-sector entities.[8][9][10] The database would keep a record (with appropriate privacy and cryptographic protections) of the amount of money held by every entity, such as people and corporations.[8]

In contrast to cryptocurrency, a central bank digital currency would be centrally controlled (even if it was on a distributed database), and so a blockchain or other distributed ledger would likely not be required or useful - even as they were the original inspiration for the concept.[8][9][10]

Characteristics

A CBDC is a high-security digital instrument; like paper banknotes, it is a means of payment, a unit of account, and a store of value.[27] And like paper currency, each unit is uniquely identifiable to prevent counterfeiting.[28] CBDC will have implications for commercial banks, probably in the field of lowering banks' commissions, no big customer data-selling ability, accumulating the deposits and deposit policies and credit policies due to higher funding costs for banks.[29]

Digital fiat currency is part of the base money supply,[30] together with other forms of the currency. As such, DFC is a liability of the central bank just as physical currency is.[31] It is a digital bearer instrument that can be stored, transferred and transmitted by all kinds of digital payment systems and services. The validity of the digital fiat currency is independent of the digital payment systems storing and transferring the digital fiat currency.[32]

Proposals for CBDC implementation often involve the provision of universal bank accounts at the central banks for all citizens.[33][34]

Benefits and impacts

Governments and central banks are studying CBDCs and their implications for financial inclusion, economic growth, technology innovation, and the efficiency of bank transactions.[35][36] Potential advantages include:

Technological efficiency: instead of relying on intermediaries such as banks and clearing houses, money transfers and payments could be made in real time, directly from the payer to the payee. Being real time has some advantages:

Reduces risk: payment for goods and services often needs to be done in a timely manner and when payment verification is slow, merchants usually accept the risk of some payments not succeeding in exchange for faster service to customers. When these risks are eliminated with instant payment verifications, merchants no longer need to use intermediaries to handle the risk or to absorb the risk cost themselves.

Reduces complexity: merchants will not need to separately keep track of transactions that are slow (where the customer claims to have paid but the money has not arrived yet), therefore eliminate the waiting queue, which could simplify the transaction process from payment to rendition of goods/services.

Reduces (or eliminates) transaction fees: current payment systems like Visa, Mastercard, American Express etc. have a fee attached to each transaction and lowering or eliminating these fees could lead to widespread price drops and increased adoption of digital payments.

Financial inclusion: safe money accounts at the central banks could constitute a strong instrument of financial inclusion, allowing any legal resident or citizen to be provided with a free or low-cost basic bank account.

Preventing illicit activity: A CBDC makes it feasible for a central bank to keep track of the exact location of every unit of the currency (assuming the more probable centralized, database form)[37]

Tax collection: It makes tax avoidance and tax evasion much more difficult, since it would become impossible to use methods such as offshore banking and unreported employment to hide financial activity from the central bank or government. However, cryptos like Bitcoin risk undermining effort to crack down on corporate tax avoidance.[38]

Combating crime: It makes it much easier to spot criminal activity (by observing financial activity), and thus put an end to it.[37] Furthermore, in cases where criminal activity has already occurred, tracking makes it much harder to successfully launder money, and it would often be straightforward to instantly reverse a transaction and return money to the victim of the crime.

Proof of transaction: a digital record exists to prove that money changed hands between two parties which avoids problems inherent to cash such as short-changing, cash theft and conflicting testimonies.

Protection of money as a public utility: digital currencies issued by central banks would provide a modern alternative to physical cash – whose abolition is currently being envisaged.[39]

Safety of payments systems: A secure and standard interoperable digital payment instrument issued and governed by a Central Bank and used as the national digital payment instruments boosts confidence in privately controlled money systems and increases trust in the entire national payment system[40][41] while also boosting competition in payment systems.

Preservation of seigniorage income: public digital currency issuance would avoid a predictable reduction of seigniorage income for governments in the event of a disappearance of physical cash.[42]

Banking competition: the provision of free bank accounts at the central bank offering complete safety of money deposits could strengthen competition between banks to attract bank deposits, for example by offering once again remunerated sight deposits.

Monetary policy transmission: the issuance of central bank base money through transfers to the public could constitute a new channel for monetary policy transmission[43][44][45] (i.e. helicopter money[46]), which would allow more direct control of the money supply than indirect tools such as quantitative easing and interest rates, and possibly lead the way towards a full reserve banking system.[47] In digital Yuan trial in Shenzhen, the CBDC was programmed with an expiration date, which encouraged spending and discouraged money from sitting in a saving account. In the end, 90% of vouchers were spent in shops.[48] Demurrage could be implemented, such as by shaving off fractions of the value on a scheduled basis, as a supplement to traditional inflation targets.[49]

Financial safety: CBDC would provide an alternative to fractional reserve banking for daily uses, for those who want to avoid all risk of bank runs, despite the relative safety provided by deposit insurance.[50]

Risks

Despite having potential advantages, CBDCs remain a controversial topic, and there are risks associated with their implementation.

Banking system disintermediation: With the ability to provide digital currency directly to its citizens, one concern is that depositors would shift out of the banking system. Customers may deem the safety, liquidity, solvibility, and publicity of CBDCs to be more attractive,[51] weakening the balance sheet position of commercial banks.[52] In the extreme, this could precipitate potential bank runs[53] and thus make banks' funding positions weaker. However, the Bank of England found that if the introduction of CBDC follows a set of core principles, the risk of a system-wide run from bank deposits to CBDC is addressed.[54] A central bank could also limit the demand of CBDCs by setting a ceiling on the amount of holdings.[51]

Centralization: Since most central bank digital currencies are centralized, rather than decentralized like most cryptocurrencies, the controllers of the issuance of CBDCs can add or remove money from anyone's account with a flip of a switch. In contrast, cryptocurrencies with a distributed ledger such as Bitcoin prevent this unless a group of users controlling more than 50% of mining power is in agreement.[55][unreliable source?]

Digital dollarization: A well-run foreign digital currency could become a replacement for a local currency for the same reasons as those described in dollarization.[56] The announcement of Facebook's Libra contributed to the increased attention to CBDCs by central bankers,[57] as well as China's progress with DCEP to that of several Asian economies.[51]

Privacy:

"Governments have direct visibility of financial transactions",[58] an "eagle-eyed view on the spending of everyone".[59]

Digital currency would give a country "broad new powers when it comes to surveillance and controlling its population."[59]

Data from tracing money routes could lead to losing financial privacy if the CBDC implementation does not have adequate privacy protections. This could lead to encouraging of self-censorship, deterioration of freedom of expression and association, and ultimately to stalling social developments.[60]

Government Social Manipulation:

Digital currency "will simply become an extension of the surveillance state" and "it could see citizens fined in a split second for behaviors deemed undesirable. Dissidents and activists could see their wallets emptied or taken offline."[58]

Limiting individual freedom: "Digital currencies could also empower the state to make it impossible to donate to a vocal NGO"[58]

Limiting or prohibiting purchases of products: Digital currency could prohibit a "purchase alcohol on a weekday. "[58]

Digital currency " is also programmable. The government could theoretically give out money that expires within a certain period of time or money that could only be used on certain items, which could be used to induce behaviour that the government is seeking."[59]

Direct interaction with individuals: "In times of crisis, they enable governments to send aid and stimulus payments directly to the smartphones of affected citizens, regardless of whether the recipients have a bank account or not."[58]

Forcing consumer behavior: "Digital currencies can also be tailored to specific purposes. For example, in the Chinese pilot program, money has an expiration date of a few weeks because authorities are hoping to drive consumption"[58]

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