The use of and interest in cryptocurrencies like Bitcoin have grown substantially.

In the 24 hours from 1 to 2 June 2015, 130 632 Bitcoin transactions occurred globally with a total value of ZAR 611 321 864.85 (or USD 59 079 000.24 at exchange rates of USD 1 to ZAR 12.21).

What is a cryptocurrency?

A cryptocurrency is a form of virtual currency that uses cryptography (the encryption and decoding of data) to verify transactions.

Virtual currencies are not the same as internet-based payment systems like PayPal which facilitate transactions denominated in real currencies. Many cryptocurrencies can however be purchased or exchanged for their real currency equivalent.

Bitcoin was the first cryptocurrency and is still the most popular, but there are hundreds of others in circulation (such as Litecoin, Peercoin and Darkcoin). One Bitcoin was worth about ZAR 2 768.77 on 2 June 2015.

How does it work?

Cryptocurrency transactions occur online directly between users, without the involvement of a bank or central authority and are recorded on a decentralised public ledger called a blockchain. Once transactions are recorded, they are irreversible.

Most cryptocurrencies have a limited number of units in circulation and can be acquired in four ways:

  1. purchased from a cryptocurrency exchange;
  2. exchanged directly with another user;
  3. received as payment for goods or services by businesses who accept them; or
  4. earned through competitive mining (using software to verify transactions and retrieve new units of the currency).

Cryptocurrency units are deposited in and withdrawn from the user’s digital wallet. When purchased or exchanged for real currency, the transaction typically includes an electronic funds transfer to the seller or exchange’s bank account.

Our global cryptocurrency team has produced a guide to the legal and regulatory framework within which cryptocurrencies operate. The guide will be published in eight chapters. Click here to read the first chapter, Introduction to cryptocurrencies.