DEFINITION of 'Peer-To-Peer (Virtual Currency)'
The exchange or sharing of information, data, or assets between parties without the involvement of a central authority. Peer-to-peer, or P2P, takes a decentralized approach to interactions between individuals and groups. This approach has been used in computers and networking (peer-to-peer file sharing), as well as with currency trading (virtual currencies).
BREAKING DOWN 'Peer-To-Peer (Virtual Currency)'
The evolution of money from gold, to banknotes, to fiat currencies, and finally virtual currencies like bitcoins has been developing for thousands of years. In the context of currencies, P2P refers to the exchange of currencies that are not created by a central banking authority. Currencies that are not traded through a physical exchange, such as through the use of coins and banknotes, are considered virtual currencies. Virtual currencies are transferred between parties electronically.
Peer-to-peer exchanges allow individuals to move currencies from their accounts to the account of others without having to go through a financial institution. P2P networks rely on digital transfers, which in turn rely on the availability of an internet connection. This allows individuals to use computers as well as mobile devices, such as tablets and phones.
Peer-to-peer currencies are not created or exchanged in the same manner as those created by central banks. The creation of new currency as well as the recording of transactions between parties is managed through a network of computers that is not maintained by a government authority, and is thus maintained by the collective.
While privacy advocates may appreciate how peer-to-peer currency exchanges allow individuals to conduct business without government interference, the lack of transparency in virtual currencies may allow individuals and groups engaged in illegal activities to launder money without detection or oversight.