316 C H A P T E R 5    E - c o m m e r c e S e c u r i t y a n d P a y m e n t S y s t e m s

INSIGHT ON BUSINESS
BITCOIN

In recent years, a number of coun- is to avoid regulation. Bitcoin has also been lauded
tries around the world have experi- for its democratic structure, under which anyone
enced banking crises, eroding trust running the underlying software has a say in
in the system. Enter Bitcoin, a form making future changes. However, in 2016, Bitcoin
of electronic currency that can be trans- is embroiled in a bitter civil war. As the currency
ferred from one person to another via peer- continues to gain in popularity, limits on the Bitcoin
to-peer networks, without the need for a bank or transactions that can be processed each second,
other financial institution as intermediary. This originally imposed as a safeguard, have begun to
ability to operate outside the banking system has create backlogs and cripple transaction speed.
made Bitcoin a favorite of hackers and buyers Some of Bitcoin’s long-time supporters want to
and sellers of illicit goods and services; but more raise these limits to bring Bitcoin processing speed
recently, it has made Bitcoin a darling among in line with services like PayPal; others argue that
many in the technological elite who believe that doing so could abandon the decentralized nature
Bitcoin and the technology behind it could be the of the currency and place Bitcoin in the control of
next big thing in the payments industry. the few companies with the computing power to
Bitcoin has many unique attributes that dif- handle such a significant load, and out of the hands
ferentiate it from traditional currencies. Bitcoins of the people. In 2016, there are now competing
are not physically minted, but are generated by versions of Bitcoin, one which has removed transac-
computer software at a predetermined rate begin- tion limits, and the other which remains faithful to
ning in 2009. A finite amount of coins are “built the currency’s original vision, poor processing speed
into the software,” such that in the year 2140, notwithstanding. Because of Bitcoin’s uncertain-
all of the coins will be mined and present in the ties and legal quandaries, the governments of many
market. The program that is used to generate Bit- countries, including China, Denmark, Russia, and
coins runs on a peer-to-peer network and requires Israel, have taken a firm stand against digital cash.
powerful computer systems to operate. “Mining” Each of these developments has put downward
a Bitcoin is the result of these powerful comput- pressure on Bitcoin’s value and slowed its growth,
ers solving cryptographic problems in tandem although Chinese exchanges accounted for 42% of
with other similar computers—the computer that all Bitcoin transactions in 2016, suggesting that
hits upon the solution is awarded the coin, and a China’s attempts to limit Bitcoin’s usage have been
record of all of the involved computers’ attempts unsuccessful. A 2015 analysis of Bitcoin usage
at mining the coin is logged. Bitcoins derive some suggested that Bitcoins are still used primarily for
of their initial value because of the time and com- gambling, illicit goods, and hoarding by speculators.
putational effort required to mine them. Security concerns have also ravaged the largest
There are, however, many reasons to be skep- Bitcoin exchanges to date, including Mt. Gox and
tical of Bitcoin. Although law enforcement has Flexcoin. Hackers stole $425 million and $600,000
improved its ability to apprehend criminals using in Bitcoins from the two exchanges, respectively,
Bitcoin, including the founder of the online black and in 2016 the identity of the thieves and location
market Silk Road in 2015, governments are jus- of the Bitcoins stolen from Mt. Gox is still shrouded
tifiably concerned about the emergence of a new in mystery. These regulatory pressures and security
currency without any tangible form whose purpose concerns have driven Bitcoin’s dizzying volatility.

EC13_CH05.indd 316 11/25/2016 10:53:49 AM

In 2012, Bitcoin’s value was $6; in 2013, it rose to chain, which is updated and maintained by
$1,200; and in 2016, it has surged back to $650 all of the members of the network. Contrast
after plummeting to nearly $200 in 2015. this with a bank, which is a central hub where
Despite all of these drawbacks, Bitcoin con- all currency and financial information resides.
tinues to move forward, and more banks and With the blockchain, there isn’t a single point
regulators are recognizing that the underlying of failure or vulnerability the way there may be
technology may be here to stay. In 2015, Goldman with a bank, and no single entity must update
Sachs invested heavily in Circle Internet Financial, and maintain the ledger. For Bitcoin to truly gain
a Bitcoin peer-to-peer payment platform, noting acceptance, regular people will need to begin using
that Bitcoin could gain international acceptance it for everyday transactions. In countries where
over time. In September 2015, New York issued the banking system is less developed than in the
the first license to operate a virtual currency busi- United States, this has already begun to happen.
ness, called a BitLicense, to Circle Internet, giving In Argentina, the Philippines, Kenya, and other
it the right to operate in the state, while subject- similar countries, banking regulations have made
ing it to strict capital, consumer protection, and Bitcoin a more appealing alternative for ordinary
anti-money laundering requirements. Many large people making normal commercial transactions.
U.S. banks, the New York Stock Exchange, Japa- A number of high-profile online businesses
nese telecom giant DoCoMo, the Bank of Tokyo, accept Bitcoin, such as Dell, Microsoft Expedia,
and other companies have invested in Coinbase, and Newegg, as well as reportedly over 80,000
an intermediary for Bitcoin transactions. The first other merchants around the world. Bitcoin trading
Bitcoin bank and the first Bitcoin investment volume is still down significantly from its peak in
fund launched in 2015 and the IRS began taxing 2014, but by July 2016, volume had spiked up
Bitcoin earnings, further legitimizing it in the eyes again. Industry analysts predict that the number
of regulators. The EU, Japan, and a host of other of active Bitcoin users will grow to 4.7 million in
countries proposed rules for the regulation, use, 2019, up from roughly 1.3 million today. Analysts
and trading of virtual currencies in 2016. also believe that the number of transactions per
Companies like Circle Internet Financial day will grow to 200,000 per day in 2016, with
hope to harness Bitcoin’s decentralized network a value of more than $92 billion, up from $27
of computers to enable frictionless and inexpen- billion in 2015. For Bitcoin to continue to grow,
sive movement of currencies across international however, it must become more than just a trading
borders. Bitcoins and Bitcoin transactions are commodity and prove itself to be a useful tool to
all logged on a public ledger known as the block- actually purchase goods and services.

SOURCES: “Coinbase Eyes Japan Expansion After Landing Investment from Bank of Tokyo,” by Jon Russell, [Link], July 8, 2016; “EU Pro-
poses Stricter Rules on Bitcoin, Prepaid Cards, Terrorism Fight,” by Foo Yun Chee, [Link], July 5, 2016; “How China Took Center Stage in Bitcoin’s Civil
War,” by Nathaniel Popper, New York Times, June 29, 2016; “Bitcoin Transactions Values to Triple This Year, Reaching Over $92BN,” by Juniper Research, June
4, 2016; “Bitcoin Is on the Verge of Splitting in Two,” by Ben Popper, [Link], February 9, 2016; “Mt. Gox Creditors Seek Trillions Where There Are Only
Millions,” by Nathaniel Popper, New York Times, May 25, 2016; “We Must Regulate Bitcoin. Problem Is, We Don’t Understand It,” by Primavera De Filippi,
[Link], March 1, 2016; “A Bitcoin Believer’s Crisis of Faith,” by Nathaniel Popper, New York Times, January 14, 2016; “BitCoin’s Big Challenge in 2016:
Reaching 100 Million Users,” by Michael Jackson, [Link], January 1, 2016; “Circle Gets First ‘BitLicense,’ Releases Circle Pay, New Service,” by Paul
Vigna, Wall Street Journal, September 22, 2015; “Goldman and IDG Put $50 Million to Work in a Bitcoin Company,” by Nathaniel Popper, New York Times,
April 30, 2015; “Bitcoin Behemoth Coinbase launches in the UK,” by Alex Hern, The Guardian, April 29, 2015; “The World’s First Proper Bitcoin Exchange Will
Go Live in a Month,” by Kieren McCarthy, The Register, April 29, 2015; “Final New York Bitcoin Regulation Released: Bitlicense,” by P.H. Madore, Cryptocoin-
[Link], April 6, 2015; “Bitcoin’s Golden Moment: BIT Gets FINRA Approval,” by Brian Kelly, [Link], March 4, 2015; “Tokyo Court: Bitcoin Exchange
Mt. Gox Will Liquidate,” by Donna Leinwand, USA Today, April 16, 2014; “China Cracks Down on Bitcoin,” by Chao Deng and Lingling Wei, Wall Street
Journal, April 1, 2014; “The Mt. Gox Bitcoin Scandal Is the Best Thing to Happen to Bitcoin In Years,” by Heidi Moore, [Link], February 26, 2014;
“Israel’s Central Bank Warns on Potential Fraud With Bitcoin,” by Calev Ben-David, [Link], February 19, 2014; “Russian Authorities Say Bitcoin
Illegal,” by Gabriela Baczynska, [Link], February 9, 2014; “Bitcoin Pitchman Busted for ‘Selling $1M in Currency to Silk Road,’” by Kaja Whitehouse and
Rich Calder, New York Post, January 27, 2014; “Following the Bitcoin Trail,” [Link], August 28, 2013.

EC13_CH05.indd 317 11/25/2016 10:53:49 AM