By RNZ

MPs will hold an inquiry into cryptocurrencies like Bitcoin, looking into risks to users, the monetary system and the environment.

The Finance and Expenditure Committee, chaired by Labour's MP for Christchurch Duncan Webb, released the terms of reference for the inquiry this morning.

It will look at how such currencies are created and traded, their use and misuse, and implications they might have for the tax system and regulators.

The inquiry would also consider the environmental impact of mining cryptocurrencies, which had become an increasing concern for environmental advocates.

Implications for financial systems would also be looked at, including risks to financial stability, tax, use by criminal organisations.

MPs would also consider whether cryptocurrency regulation is possible for states, central banks or through multi-lateral co-operation.

The announcement follows the meteoric rise in the popularity of various cryptocurrencies over the past year, as some soared to record highs on the back of low interest rates, more institutional investment and greater regulatory attention.

The Finance and Expenditure Committee, chaired by Labour's MP for Christchurch Duncan Webb, released the terms of reference for the inquiry this morning. (Photo / Supplied)

This helped attract more women and older investors to the asset class, which had traditionally been the domain of young men.

Cryptocurrencies are a form of digital cash that is managed not by a central bank but instead ownership is verified by cryptographic equations. This usually means the regulation of those currencies is managed by those who own it, rather than by government manipulation.

In the case of Bitcoin, the verification process is performed by Bitcoin "miners" who provide proof of the transactions in return for some of the currency itself.

The total amount of Bitcoin that exists at a given time is also limited, however, and miners require huge amounts of computer power to be the first to complete the verification process which places pressure on power systems and leads more greenhouse gas emissions.

China accounts for more than 75 per cent of bitcoin mining around the world, according to recent research, and its carbon footprint is now as large as one of China's 10 largest cities.

That led Elon Musk to rule that Tesla would no longer accept Bitcoin for vehicle purchases.

Because the currencies are decentralised they are also difficult to trace, making them attractive for use by criminals. The hackers who demanded a ransom from Waikato DHB wanted to be paid in cryptocurrency.

The rise of cryptocurrencies had also given way to the emergence of various scams that use the asset to lure people into them.

Last year, the Commerce Commission issued a stop notice to a South Auckland woman who was promoting a suspected cryptocurrency pyramid scheme called Lion's Share.

No date was set for when the inquiry would be completed.

Webb said the committee would consult with some of the country's leading experts in the cryptocurrency field.

"This inquiry will give us a good opportunity to further our understanding of this increasingly important topic," he said.

As some cryptocurrencies grow in popularity and relative worth, more economies around the world are considering how to grapple with them and whether trading them or mining them should be legal.