Real Financial Innovation for the 21st Century

Bitcoin (BTC)

In early November 2008, Satoshi Nakamoto, whose identity has remained a mystery to this day, designed an untraceable digital currency with a real-time ledger of all transactions, made public to protect its users.

This open source, peer-to-peer software attempted to prevent fraud while simultaneously avoiding the need for third party administration, using their public ledger called a “block chain” to allow users to generate and collectively maintain or “mine” this currency through its own processes. This aspect of the software is how Bitcoin operates without the backing of a central bank.

Bitcoins take an extraordinary amount of effort to obtain and use. New users utilize personal wallet services which allow users to choose a wallet, each of which has a private key or what is known as a signature by which all transactions are broadcast and confirmed online between users of the network.

The Bitcoin network began small, as Nakamoto wanted to see the slow and gradual growth of his system to ensure that the program had time to develop properly. To this day there has only ever been one major security breach which was rectified in minimal time.

Bitcoins are created by a preset algorithm, 50 every 10 minutes, at a predictable rate. This process of “mining” creates a system of distributed consensus and helps users conform to the economic rules of Bitcoin which are embedded in the algorithm. The number of currency units is limited to $21 billion in circulation (approximately $1.3 billion), regulated by Bitcoin Foundation.

On April 25, 2010, Bitcoin (BTC) was publicly traded for the first time at a value of 0.3¢. This was the first step for Bitcoin to become a legitimate currency, leaving it subject to currency speculation and market fluctuation, dependent on unregulated centralized exchanges. Increased attention increased the demand and thus the value of BTC and as this popularity grew, so too did the Bitcoin network.

Bitcoin creator Satoshi Nakamoto’s vision was for the progressive growth of his brainchild and in December 2010, amidst the rise in interest and popularity in BTC, Nakamoto vanished. The path Bitcoin was taking was contrary to his original intention and his sudden disappearance furthered the conjecture related to his real identity and reason for disappearing.

The creator was gone but the code remained. It took only a year for BTC to reach dollar parity and by June 2011 its value had skyrocketed to a high of $29.57. But, like all commodities traded on the market, values are in a constant state of volatility as they are subject to external events and speculation. By July 29, 2011 BTC had sunk to $13.48 and values continued to oscillate for the next two years until July 29, 2013, when BTC reached $100.81 and remained strong.

These increasing values are the result of changing attitudes and public perception about Bitcoin and its uses in local and global communities. Although it has not always been public knowledge, it is no secret that there is an illicit side to Bitcoin and its network. Given Bitcoin’s anonymous, open source design, it falls outside the parameters of traditional currency regulations. Bitcoin operates according to the standards of the issuing entity and has no backing by other holdings, such as by a central bank. It establishes an environment in which criminal activities such as money laundering can be carried out. For example, Liberty Reserve, a centralized digital currency service based in Costa Rica, was shut down by the U.S. in accordance with the Patriot Act for its involvement in the laundering of $6 billion of criminal proceeds.

The Silk Road is one of the best known sites, known for its “black market” activity, essentially a secret internet that operates off of the Tor Network where any transaction imaginable can proceed based on anonymity and Bitcoin.

German Bitcoin CEO, Oliver Flaskämper, in response to the many calls against Bitcoin and its capacity for illegal activities, countered that all money, not simply digital currency, can be used for illegal purposes. Germany has been a forerunner in support of Bitcoin and has recently recognized Bitcoin as a legal unit of currency, as private money. This has not only contributed to the increased reputation Bitcoin has enjoyed, it has increased Bitcoin’s value and has been the first step in ensuring some compliance with government regulation. As private money holders, Bitcoin owners will be subject to taxation on sales and profits. Similarly, the acceptance of Bitcoin as private money also allows for more simplistic currency conversions from BTC to fiat money.

In the United States, each state has individual jurisdiction over the regulation of money as well as its own enforcement mechanisms. Although regulations vary state-to-state, all Bitcoin companies are required to comply with Anti-Money Laundering (AML), Office of Foreign Asset Control (OFAC), and Know Your Customer (KYC) procedures.

The real issues arise not from BTC to BTC transactions, but rather BTC to fiat transactions which require due diligence and compliance on the part of all Bitcoin companies. Those who are not licensed will need to become so, and quickly, as non-compliance will result in fines and the possibility of having funds frozen. That was the case with Bitcoin exchanger Mt. Gox, whose funds were frozen at Wells Fargo and Dwolla for non-compliance and as a result a total of $5 million was seized by the United Stated Department of Homeland Security. Money transmission licenses are quite difficult to obtain and those who are in non-compliance with these requirements should likely hurry to get up to licensing standards, meeting all the necessary criteria.

Bitcoin Foundation, a leading Bitcoin lobbyist, has recently met with U.S. authorities such as the Federal Reserve, FBI, Treasury Department, tax officials and other government enforcement agencies to help each party better understand Bitcoin and its processes and technology in order to find ways to take advantage of it as a legitimate currency while attempting to minimize its illegitimate uses. Ultimately, the goal of the dialogue that is being created is to establish a public / private partnership moving forward to allow for the further growth of Bitcoin. There is far more cooperation at the federal, as opposed to state level, in the United States, as states have been rushing to regulate reactively. In fact, New York and California have already sent cease and desist letters, as well as subpoenas, to several Bitcoin related services.

Unlike its southern counterparts, Canada’s Anti-Money Laundering agencies have chosen not to regulate Bitcoin for the time being – opting to gather information in the meantime and learn from the initial moves of other countries.

It is clear that Bitcoin, an open source digital currency, will continue to rise in value and popularity. As a result many regulatory bodies and legislative bodies will have to adjust to accept and to regulate Bitcoin as a legal digital currency, as well as make adjustments to accommodate the online market that accompanies it.

July 17, 2018, 7:21 AM EDT

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