A “Bit O’ Change” – Consider the Bitcoin
March 23, 2015
Written By Frank Murray
Bitcoin first developed out of 2008 software and a 2009 white paper published under the pseudonym Satashi Nakamoto. It began operating as a peer-to-peer digital currency in 2009. Bitcoin has no centralized authority, and transactions are tracked cryptographically after they are validated by a public listing known as a “blockchain.” A series of private computers are networked to process the payments and those people who process (known as “miners”) are rewarded with small transaction fees paid in newly-created Bitcoins they receive through competing to solve math problems. The Bitcoins are created at a decreasing rate, are pledged to cease being created in the year 2040, and are limited to 21 million.
Anyone who seeks to partake is assigned a Bitcoin address and collects and trades his Bitcoins in “wallets” at the publicly and privately disclosed addresses. Payment transaction fees between the heavily encrypted private wallet addresses are less than those for credit card or other electronic transfers, which makes it an attractive medium for businesses.
Bitcoin is sort of like your least favorite politician: controlled by, and/or presently regulated by no one, transacts business anonymously and is non-taxable and non-accountable but notorious. It has no intrinsic value, and is largely created by the media and technology; indeed it has become an item of economic “techno-idealism.”
There are two factors that drive the characteristics of Bitcoin: 1) its cryptographic nature, which due to its non-focalized creation and processing controls promises freedom from overseeing governments or regulation, which in turn breathes into it an air of anonymity and international fungibility, and 2) its essential deflationary quality – due to the fact that Bitcoins become more and more rare, and more and more valuable, owners of them will tend to not spend them for goods in markets where they may have alternative forms of currency that do not appreciate like Bitcoins. The latter characteristic has caused Bitcoins to achieve their reputation for speculation. The recent sudden increase in their value brings to mind a classic speculative “bubble” and reminds us of the explosive “dot com days.” The virtual currency is, as I write this, at 800 and up over 50 fold this year – an estimated 12 million Bitcoins are in circulation.
Bitcoin comes to the fore as a vehicle for savings in a world where prices of gold and silver are slumping, and people search for an alternative to the low interest rates in the world of state-sponsored currencies and/or encounter the risk of equity investing. Bitcoins have been referred to as “anonymous digital gold.”
It is unlikely that Bitcoins will be outlawed, but it is fairly certain they will be regulated. At least 2 legal areas are implicated by Bitcoins: securities laws and money laundering statutes. Ben Bernanke, Chairman of the Federal Reserve, has said his agency has no plans to regulate the currency in a pubic letter to the U.S. Senate Committee on Homeland Security and Governmental Affairs and the FBI has stated that “online payment systems… offer legitimate financial services,” but that issues relating to existing statutes created by “malicious actors” always would be addressed.
A “security” is considered to be an asset of any kind that is capable of being tracked. It needn’t be a physical “thing”; it can merely be represented by a book entry. The U.S. definition of a security is similar enough to Arizona’s, found at A.R.S. § 44-1801 (26) to enable each to embrace Bitcoins. Other statutes that proscribe money laundering, (A.R.S. § 13-2317) and, even perhaps pyramid schemes (A.R.S. § 44-1731 (3)) could be implicated. New regulatory guidelines make Bitcoin outlets and merchants “money services businesses” if they deal in Bitcoins, which means they must collect information from their customers, take steps to combat money laundering and register with the federal government. But this is the case with any alternative medium of trade. Bitcoin is treated legally as a means to an end – not precisely really a currency and perhaps not even an overly “bubbly” dot com stock, the legitimacy and usefulness of which will play out in the market place. No one doubts the brilliance of what Michael Santali calls the “intellectual impetus and technological structure behind bitcoins.”
Is it a “speculative frenzy” with a “techo-idealistic” overlay? Or is it more like Pokémon cards or beanie babies? Or is it the upstart electronic equivalent of paper money that transfers easily, appreciates in value, and offers some refuge from omnipresent governmental fiscal controls? At the moment, it is “all of the above.” However fascinating, the Bitcoin model is not yet any more significant than an economic “talking point.” In the six minutes or so that you have taken to read this, the maximum number of new Bitcoins minted will be 25, with a current value of $20,000. In the same period there has been an infusion of $8.5 million into the financial system by the Federal Reserve using its “financial steroid” of Quantitative Easing. But there are dynamics in place to grow the little Bitcoin a from minor process to miners processing rare earth.
As of this writing, over 100,000 merchants now accept Bitcoin, WordPress.com, the Pirate Bay, the social news and entertainment site Reddit, the domain site Namecheap, Lumifile, Ok Pay, and the European bed and breakfast site 9flats are some recognizable merchants who accept the “currency.” In Vancouver, an ATM offers Bitcoins. Additionally, many gift and debit card services accept Bitcoin, which enables numerous large merchants like Amazon.com to accept Bitcoin indirectly. Business and economic commentators expect that when innovative large merchants solve the pricing issue, there may be a wave of acceptance. Lastly, Bitcoin may yet achieve fiat money status, which would change the game. They are used by some Argentinians as an alternative to their own heavily inflationary official currency and Iranians use Bitcoins to evade currency sanctions. The Bitcoin is a highly acceptable medium in China, for example, and popular in Europe, and should any nation declare Bitcoin a “parallel currency” that could have resounding international effect.
1. Miners with powerful computers and skills at coding solve puzzles derived from an algorithm detailed in Satoshi’s white paper. At the same time, perforce, they track all the transactions in the universe of Bitcoin commerce – the individual purchases and expenditures for goods and services. Every nine minutes or so, on average, a miner validates the transaction list, the blockchain, and gets (currently) the modest sum of 25 Bitcoins. Then the puzzle resets, and the process repeats. The miners keep re-validating the transactions and the information is heavily encrypted – no names, addresses or phone numbers; it is a code of letters and numbers.
2. Bitcoin’s claim to be a currency is dubitable. Although it can be fractionalized almost infinitely to combat the increasing value of its units, and help it to be convenient to use, its speculative nature makes pricing very difficult. Persons who have tried to live for two weeks on Bitcoin, or travel internationally (usually as an exercise in journalism) have done so, but with difficulty.
3. “Bitcoin is No Longer a Currency,” O’Brien, Matthew, The Atlantic, 2013.
4. S.E.C. Chairman Mary Jo White has stated in a letter that the coins “likely would be securities and subject to our regulation.” U.S. agencies to Say Bitcoins Offer Legitimate Benefits, Max Raskin in Bloomberg.com, 11/17/13.
5. The Silk Road Hidden Website was shut down in October of this year and money that was both utilized and laundered in drug schemes was seized by the government under money laundering statutes. In an ultimate irony, as a result, the U.S. Government now owns about 174,000 Bitcoins with a value of about $140 million as of this date. “Is This Why Bitcoin is Surging?” Tyler Durden, Zero Hedge, 11/6/13.
6. Letter of Peter Kadzik Principal Deputy Assistant Attorney General, dated 11/17/13.
7. Bitcoin Price Beats One Apple Share, But is it Worth Buying?” Michael Santoli, Yahoo.com blogs, November 18, 2013.
9. Bitcoin Price Beats One Apple Share, But is it Worth Buying?” Michael Santoli, Yahoo.com blogs, November 18, 2013.
10. “Bitcoins Gain Traction in Argentina” http//archive.isLxHxE from the original on April 29, 2013.
11. “Dollar-Less Iranians Discover Virtual Currency” Raskin, Max, http//archive.is/nemdr from the original on April 17, 2013.