BTCWires–We first need to distinguish between cryptocurrencies and virtual currencies. While both are digital means of exchange, cryptocurrencies are based on the encryption of information, protecting the identity of users of the cryptocurrency by means of a system. With current computing capabilities that is very difficult to crack. Virtual currencies do not by themself ensure decentralisation of their control or encryption.
Making the existence of a central body impracticable, supporters of cryptocurrencies base their value on privacy (i.e. the fact that the information is encrypted) and on the reduction in the number of intermediaries involved in executing a transaction.
Others point to technological advantages. For example the added value of cryptocurrencies, is said to come from their efficiency. Sending and receiving large sums of money in the traditional system, becomes a difficult task, whereas with cryptocurrencies it can be done quickly, cheaply, with fewer intermediaries and while also protecting one’s identity. By the excessive consumption of energy involved and the long settlement times these advantages are partly offset.
There could also be so-called financial advantages. Bitcoin for example is limited by means of its algorithm to 21 million Bitcoins in circulation while the money supply in conventional currencies grows, avoiding monetary inflation and loss of purchasing power. It could even be a deflationary currency, since the money supply base could be reduced due to the possibility of losing access to cryptocurrencies (because of the strength of encryption).
These advantages relate to one of the main criticisms: Precisely due to their decentralisation the difficulty of regulating them. Although cryptocurrencies protect identity, they also allow illicit trading. Since it would involve the emergence of a financial system based on decentralised individual transactions, with consequences that are difficult to foresee and with tax implications too (regarding money laundering, among other things), this is a challenge for governments and the current financial system.