At the outset, it is essential to understand the difference between virtual currencies (VCs)—a term now synonymous with cryptocurrencies—and electronic money. While electronic money is legal tender that can be stored on a chip, VCs are a form of money or currency which does not derive its value from any sovereign authority, but by its technology. More specifically, cryptocurrency relies on principles of cryptography to implement a decentralized peer-to-peer ledger.

The key ideas that underpin bitcoin have been elaborated upon in its creator, Satoshi Nakamoto’s 2008 white paper, where bitcoin was introduced as an electronic, peer-to-peer, fully decentralized cash system, which does away with the need for a centralized entity. Since the validity of a transaction is arrived at through solving a computationally challenging exercise based on a cryptographic hash (known as proof of work), any malformed transaction is rejected by the participants (or miners) who keep working on finding the next valid block, after the successful completion of which they are rewarded with a transaction fee and a newly issued unit of currency. 
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source :http://www.livemint.com/Opinion/qIXLJ3abfggcJfYlL8REYO/Challenges-in-regulating-cryptocurrencies.html