Bitcoin and other cryptocurrencies are based on blockchain technology. These are revolutionary technologies that that can be utilized in many diverse fields such as finance and healthcare.
The use of Bitcoin and other cryptocurrencies is still in its early stages and is at present, like email in the 1990’s, or for those more technically astute, like modems when the technology transitioned from 28.8 kbps to 56.6 kbps right before the advent of high speed cable and DSL.
Bitcoin and other cryptocurrencies are also known as digital currencies.
Now, there at least 1,000 digital currencies, with a total market cap of approximately $150 billion.
Bitcoin was the first and is the most well known digital currency and has the largest market capitalization which is currently $70 billion. Numerous other digital currencies have arisen that have other functions. Ethereum is a digital currency that can be used with smart contracts that can be self-executing. A digital currency that has a much faster transaction time than Bitcoin is known as Litecoin. Banks can send international payments across networks in real-time with Ripple.
Bitcoin was first used in 2009. Bitcoin was created in order to provide more privacy, a lower transaction cost, and to offer protection from online thefts as occurred through providers such as PayPal.
The blockchain technology utilized by Bitcoin allows individuals and companies to establish a level of trust with unknown parties over the Internet. Bitcoin allows for transfers of any type of digital information in a quick, secure, and verifiable fashion anywhere in the world. Large corporations including IBM and NSADAQ, and even some governments around the world are in the process of utilizing blockchain technology.
Bitcoin is a digital currency that is created electronically. It utilizes peer-to-peer technology to operate which means that there is no central authority such as a government or bank involved in the transactions. Each transaction made with Bitcoin is recorded on an online ledger known as a blockchain that is very similar to a standard accounting ledger. Anyone in the world can check to verify that the transaction took place.
The production process (mining) for Bitcoin involves people and businesses from all around the world operating computers that use special software designed to solve mathematical problems.
Bitcoins can be obtained in many different ways. In addition to mining, Bitcoin can be obtained by exchanging a currency like the U.S. dollar for bitcoins on an online exchange such as Coinbase.
Bitcoins can also be obtained in exchange for goods or services. Even some law firms are accepting payment in bitcoins. Another method of obtaining Bitcoin is through a process known as “Bitcoin mining.” This involves using special software to solve complex math problems in order to validate the authenticity of new network transactions. Bitcoin miners are paid in Bitcoins.
While previous digital currencies suffered from the problem of double spending, where on could commit to one transaction, and if they were quick enough, able to commit to yet another transaction using the original amount spent, Bitcoin eliminates the possibility of the same Bitcoin being spent by more than user through the use of public-key cryptography in which both a public and private cryptographic key are generated.
Each user is assigned both a public and private key to conduct and authenticate all of their Bitcoin transactions. Using Bitcoin does allow for a certain level of privacy. However, it is not completely anonymous. It is closer to being considered as pseudo-anonymous.
Tracking transactions involving large quantities of Bitcoins is possible by using sophisticated computer analysis on the blockchain. Thus, it is possible for law enforcement using currently available technology to obtain information on individuals that are involved in Bitcoin transactions.
The use of Bitcoin is expanding rapidly. For example, the online Bitcoin exchange known as Coinbase currently has over 8.8 million users and 29 million wallets. At the present time, there are at least 46,000 merchants accepting Bitcoins via its payment network, including such well known companies as Dish Network, Expedia, and Overstock.com.
Bitcoin has increasingly become accepted around the world for its use in storing value, including derivatives, commodities, and securities products.
Consumers with low incomes have had difficulties accessing traditional banking opportunities not only in California and the United States, but also in other parts of the world, where the infrastructure simply does not exist otherwise. Venezuela is a current case study. Africa is expected to benefit most greatly from the technology underlying Bitcoin.
Bitcoin provides the billions of consumers around the world that do not have access to traditional banking opportunities a mobile platform to store and transact money. Bitcoin can be transacted outside of normal banking business hours and does not require a visit to a brick-and-mortar branch.
Bitcoin is also an excellent method for transferring money internationally. The transaction fees are lower than most currency exchange fees or Western Union.
Bitcoin offers more protection to merchants due to the fact that transactions cannot be reversed which eliminates the possibility for chargebacks or credit fraud, or data privacy leaks by hackers or scammers. Bitcoin also protects consumers, who ultimately have a lower risk of credit phishing scammers and/or hackers from collecting, and ultimately exploiting, sensitive financial data.
A common misconception is that digital currencies are lightly regulated and transactions are allegedly essentially anonymous. The truth is that digital currencies are highly regulated and it is possible for law enforcement to trace any particular Bitcoin transaction, much more so actually than paper currency.
Additionally, people and companies engaging in bitcoin-related business are heavily regulated by many regulatory authorities. The United States Department of Treasury – Financial Crimes Enforcement Network known as FinCEN regulates bitcoin businesses that operate like Coinbase in the same way it regulates traditional money services businesses. Coinbase complies with the same FinCEN reporting requirements as companies such as Western Union, by filing “Suspicious Activity Reports” meeting FinCEN-prescribed thresholds.
Numerous states such as Washington and New York, have regulations that cover Bitcoin-related businesses.
Many states are contemplating regulations even more stringent than those covering traditional financial services businesses. On July 25, 2017, the SEC issued guidance covering what are known as Initial Coin Offerings, and the CFTC has stated that its regulations can apply to Bitcoin-related transactions.
Bitcoin is also anything but anonymous. Bitcoin transactions can be tracked via the blockchain, which is a publicly viewable ledger. See Nicholas Godlove, Regulatory Overview of Digital Currency, 10 Okla. J. L. & Tech 71 (2014).
Because bitcoin transactions can be reverse-engineered via the blockchain, using bitcoin for money laundering or other illicit purposes “does not seem . . . particularly attractive.”
The European Union recently issued a report concluding that criminal use of digital currencies is “quite rare” due to transaction fees and a lack of sophistication when it comes to the technology tied to using them.
A recent case in the Northern District of California clearly demonstrates that Bitcoins are not anonymous or untraceable. In that case two former federal agents were charged on March 25, 2015 with Bitcoin money laundering and wire fraud – in that case Bitcoin tracing analysis was used.
Some argue that the way money transmission is regulated may impede or stifle the growth of such new technology. For example, payment companies in the United States are at present forced to have regulatory conversations with 53 states or territories rather than dealing with one federal body such as is done in the United Kingdom.
Any successful regulatory scheme will balance promoting the profound benefits of global banking via digital currency and protecting the public at large with sensible law making.
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