Is Bitcoin, the cryptocurrency of the underworld, poised to enter Main Street or be forever relegated to the shadows?
By the time the F.B.I. shut down Silk Road in early October by arresting its leader in a San Francisco public library, the online black market for illegal substances had amassed a million registered users and processed sales worth 1.2 billion dollars.
The site only accepted payment in the form of Bitcoin, which enabled transactions to remain anonymous. The creator and administrator of the site, Russ Ulbricht, also known as Dread Pirate Roberts, is said to be worth at least $80 million dollars… in bitcoins!
What is Bitcoin?
Bitcoin was created in January 2009 by a developer known as Satoshi Nakamoto. It’s a math-based currency, or cryptocurrency, that is traded using peer-to-peer technology.
Bitcoins are mathematically generated by any computer connected to the Internet executing a number-crunching procedure known as Bitcoin mining. The rate of new Bitcoin creation will be halved every four years until there are 21 million in circulation, which will happen in 2140. No central authority controls the currency.
Unless you decide to run the free software that mines Bitcoin, buying them (currently worth $144 each) is accomplished through several exchanges—a local favorite is Coinbase.com. Once you own one, you can trade it anonymously for goods or services through a digital wallet.
Benefits of Bitcoin
Immune to politics. In the past decade, we have witnessed our fair share of financial collapses. Speculation, human emotion, and more importantly politics influence monetary policy and thus the value of money. Bitcoin was designed to bypass all that.
Since bitcoins are not pegged to any world currency, no central authority can later devalue them by issuing new ones. Some people in Cyprus, Greece, Spain and other unstable economies have turned to Bitcoin to safeguard their savings.
Available to all. Anyone with an Internet connection can have a Bitcoin wallet. Bitcoin could therefore empower many of the 2.5 billion people who don’t have access to a bank account to finance schooling, housing, healthcare, and real estate.
Free and fast. Sending money internationally is expensive and takes time. Bitcoin makes the world flat, with transactions lasting seconds without any fees. In 2012, the flow of money from developed to developing countries was estimated at 414 billion dollars, a 6.3 percent increase from the previous year. With fees as high as five percent of remittance value, it’s easy to see the potential impact of Bitcoin.
Secure. When you send Bitcoin, you send the exact amount and not a penny more—a “push” transaction rather than “pull.” It’s those pull transactions that are the source of most of the fraud associated with credit card use.
Bitcoin economy heads mainstream
Bitcoin may be the currency of choice for drug dealers on sites such as Silk Road, but there’s a growing list of merchants and service providers accepting it for totally above board transactions.
WordPress and OkCupid now accept bitcoins as payment. You can make a donation in Bitcoin to Reddit, Khan Academy, and Wikileaks. There are plenty of exchanges that allow you to buy goods from regular establishments, and you can even use Bitcoin.travel to find brick and mortar shops on a map that accept the currency.
Could there be a Bitcoin-only economy? That’s what the citizens of the Kreuzberg neighborhood in Berlin are trying to do. Soon you might be able to use Bitcoin ATMs, currently in operation in Canada and coming to the US. Read Forbes’ Kashmir Hill’s effort to live on Bitcoin for an entire week.
Here’s a list of some West Coast companies innovating with Bitcoin and other cryptocurrencies:
Where government is wary, others hope for equality
Governments are starting to realize the implications of cryptocurrencies. Some economists even warn of the government backlash against them. While for now the focus has been on the use of these currencies for illegal transactions, the bigger question of taxation looms on the horizon.
The U.S. government has cracked down on the illegal side of Bitcoin transactions with the seizure warrant on the Bitcoin exchange market, Mt.Gox and the shutdown of Silk Road site. However, to date, the F.B.I. has been unable to seize the funds belonging to the site’s administrator and creator, Ross Ulbricht. Those are in bitcoins.
Germany recently defined Bitcoin as units of account, or a financial instrument, to which sales tax will follow. Thailand has moved to ban bitcoins altogether.
But what’s most significant about the shutdown of Silk Road, argue Bitcoin’s defenders, is the chance to disassociate the currency from illegal activities and bring it to the mainstream.
The promise of no middleman, fee-free transactions could make a difference to millions of people around the world, especially those in the developing world or areas of the world with unstable economic systems.
However, just as the Internet promised to revolutionize commerce and change our lives forever in the late 90s, it is likely that the era of cryptocurrencies has just begun. Perhaps Bitcoin heralds the arrival of still new entrants bringing in further economic disruption and potentially further innovation.
Update: On Friday, February 28, 2014, the Bitcoin exchange Mt. Gox filed for bankruptcy, calling into question the future of the currency.