Bitcoin has been added to the Oxford Dictionary, has its own exchanges and is becoming more popular every day.
Once the preserve of tech geeks, the virtual currency is breaking into more mainstream use and a multitude of businesses have been set up around it.
Perhaps that is why the authorities are now taking a closer look at Bitcoin.
New York’s Department of Financial Services has issued subpoenas to 22 firms using the digital currency, to decide whether new policies are needed to regulate its use.
Labelling Bitcoin a "virtual Wild West" for drug dealers and other criminals might be over the top, but the DFS wants to bring more transparency to the deals Bitcoin is financing – not least because of the rise in websites dealing in illegal substances and products, like Silk Road, which use the currency as a way of paying anonymously.
Then there’s the danger of security. Bitcoin is a decentralised currency, underpinned by a peer-to-peer network of computers belonging to Bitcoin users.
A Bitcoin – today worth $127.4 – is a mathematically-generated string of code, and is mined by a process called hashing – where vast computer power is used to solve a mathematical problem.
Once new Bitcoins are mined (or bought via an exchange) they are stored in a virtual wallet, for which a user must provide the ID for other users to pay into.
Last month developers found that an Android wallet contained critical weaknesses, leaving it vulnerable to data (read money) theft.
Users of Android wallets were quickly advised to update to the newest version, but some damage was done in terms of the public perception of the safety of the currency.
Here CBR speaks to two Bitcoin users and experts on the currency’s future, its safety, and the threats and benefits of regulation.
Jinyoung Englund works at CoinLab, a Bitcoin business incubator, and Kyle Drake was awarded a Bitcoin Foundation grant in August to work on his virtual wallet, Coinpunk.
How accessible is the currency, considering both it being open source and also that mining for coins is really the realm of computer experts. How could this affect the currency going forward?
JE: Bitcoin can currently be mined, bought on an exchange or paid for peer to peer. How accessible does that make it? If you want one Bitcoin, pretty accessible as long as you have cash and internet. If you want to buy one thousand however, there’s a problem. Currently, the two largest exchanges are Mt. Gox and BitStamp. If you want to buy en masse, you may be able to get your money in to buy, but exchanging for fiat is a problem, crippled by the lack of clear regulatory policy and banking.
Mining is also not what it used to be. In the early days – like 2009 to 2011, one could mine using their CPU’s extra processing power. As early as 2012, you could only make a profit by using FPGA and GPU cards – typically used in gaming. Today, good luck trying to earn a ROI without custom-designed ASIC chips. As more miners with greater hashing speeds get online, difficulty is increasing exponentially, as designed. The protocol is designed to release only 21m Bitcoins and to moderate the release over time so as not to crash the value.
KD: The currency is very accessible. You can download and run your own Bitcoin wallet right away, or you can use a web wallet service like Blockchain.info and get started really easily. Coinpunk is a project to provide a web wallet you can run yourself, which will give users and developers more code to help improve Bitcoin adoption. Using Bitcoin becomes easier with each passing day, we are working hard to improve the Bitcoin ecosystem for non-technical experts and we are making great progress.
What about the threats of competition from other digital currencies, or fluctuation in price?
JE: Competition is great and welcome. We want to grow the Bitcoin ecosystem and more competition means better service and options for consumers.
Since the value of Bitcoin is market-based, the price will fluctuate but as long as there is a market, the currency is secure and may stabilise over time. Definitely not at this stage as the ecosystem is still in its infancy. However, one cannot ‘print’ more Bitcoin so the value cannot be inflated like politically-backed currencies.
KD: Having multiple competing crypto-currencies is not a bad thing at all, and I expect that we will see a lot of this in the future. I think it’s really healthy, and provides less dependence on a single currency. In the future it will be easy to trade between these currencies. Competition is good for everybody.
Fluctuations are certainly an issue, but if you look at the general trend, you see that Bitcoin is increasing in value against fiat currencies at a very fast rate. I expect this trend to continue, because Bitcoin has a stronger value proposition than all of them right now. It’s a better currency, and the price increases reflect that.
How damaging is the announcement about the Android wallet app for the currency, and how much of a security threat is it?
Jinyoung Englund: This certainly has left users of Bitcoin vulnerable to theft. However, one of the advantages of having an open source network in an emerging technology is the plethora of incredibly talented coders operating in the space to provide a rapid response and solution to the situation.
Kyle Drake: In a sentence: It was a nasty bug isolated to Android, but it’s been fixed without too much damage, and I don’t expect to see this problem again because it’s very rare.
Cryptography depends on good random number generation, because we use that random number to ‘seed’ the cryptographic key generation. If you use a seed that is not sufficiently random, it makes it easier for attackers to guess what seed you used, which makes it easy for them to discover your private key after signing a few transactions.
A bug in Android was making it so that the random number generator was not being seeded properly on initialisation. That is the cause of this problem. It’s not Bitcoin-specific, it was on Google’s end, and it would affect a lot of software on Android doing cryptographic work, not just Bitcoin.
As a result of the Android flaw, I have been revisiting the random number generation in Coinpunk and re-writing the random number generator to improve its ability to generate random numbers. The new Coinpunk is a "web wallet", which means I need to generate good random numbers on the browser in order to prevent attacks like this.
Previously the browsers did not provide good ways to do this, but there are now better tools for generating good random numbers, and I’m showing the Coinpunk code how to use them.
How justified are fears it is being used mainly by criminals and does their presence present any dangers to legal users of the currency?
JE: Bitcoin, like all inanimate objects, in and of itself is not inherently evil – it is the user that determines that characteristic. In our experience, the only people that ever talk about using Bitcoin for illicit and illegal activities are those who know very little about it.
We cannot control how people choose to use currency. Stifling an emerging technology poised to modernise the archaic financial services system is not productive for anyone. Chasing US Bitcoin entrepreneurs offshore is even less productive.
Innovation waits for no regulator and they need to start thinking productively as to how this is going to spur economic growth, reinvigorate existing industries, help us help the least fortunate and better connect us to the global economy while minimising negative consequences. Every country has the opportunity to either lead in this field or be left behind.
KD: Bitcoin is just a better designed currency. It’s not special to criminals in any way, and does not provide any special benefits to criminals that are not provided by existing currencies. If you can break the law with government-issued currencies, you can break the law with Bitcoin. Criminals will use Bitcoin, just like they use the US dollar or the sterling to conduct illegal activities, which is where the vast majority of illegal activities are conducted.
Most of the tools we use to prevent things like money laundering and illegal activities already work on Bitcoin, and no new requirements are needed. For example, in the United States the KYC (Know Your Customer) compliance laws can be used to check Bitcoin customers as easily as they are used for customers using existing currencies. Most Bitcoin merchant providers are already doing this.
We don’t need new regulations here, we can use the existing ones. We need to strike a balance that does not ruin economic growth because of trumped-up fears of illegal activity.
And the threat of being hacked and your money being stolen?
JE: Cybersecurity is one of the fastest-growing fields in developed nations. As we become more digitalised in every aspect of life, the threat of digital theft increases. In the Bitcoin ecosystem, more people lose Bitcoin because of forgotten or lost private keys than cyber theft.
However, that is not to say this is not a pressing issue for the success of the ecosystem. In fact, the opposite. If you are looking for a business idea – there’s one.
What advantages does Bitcoin have over fiat currencies and/or vice versa?
JE: As we become a more globally interconnected world, Bitcoin has clear advantages over fiat as a modern and global currency. It’s borderless, has low to zero transaction fees, near instantaneous transactions, and empowers the least fortunate to have access to capital – previously ostracised by risk-averse bankers.
The current advantages fiat currency has over Bitcoin is mainstream acceptance and indomitable infrastructure. Almost every single nation has adopted the idea of transacting in paper money and its more mobile cousin, plastic. Unlearning a habit or way of life and picking up a new one is hard for everybody involved.
In addition, entire systems have been built to support this method of transacting, with multiple layers of intermediaries. One of the many opportunities in Bitcoin is the modernisation of this very infrastructure.
KD: Bitcoin has rules that are enforced by cryptographic laws, rather than political ones. Politicians and banks like to mess with things. Sometimes they make things better, but with that comes a risk that they can make things worse. Or that they can change things in a way that benefits their political benefactors, but harms you.
You see this to a certain extent with every government-issued currency, but an extreme example of this is in Zimbabwe, where the political rulers printed a lot of extra Zimbabwean dollars and gave it to their political benefactors, which created massive inflation, ruined their economy, and made everyone’s savings worthless. That is not a very secure system, because someone else was able to ruin your life savings. With Bitcoin, this type of currency manipulation is impossible.
Bitcoin provides a form of currency stability that allows businesses to determine the best plan for going ahead, which to me is a form of security that could potentially improve our ability to produce sustainable economic growth. That’s why I’m very excited about Bitcoin, and why I am working on Coinpunk.
How secure can a digital currency be, and how does that compare with the dollar, say, or sterling?
JE: Like any asset, Bitcoin can be lost or stolen. There is great opportunity for entrepreneurs to build new companies around Bitcoin security. In the meantime, Bitcoin users are safeguarding their assets in a variety of ways, not unfamiliar to how the dollar or sterling is secured – for example, in safes or safety deposit boxes in undisclosed locations.
KD: Cryptocurrencies are more secure than government-issued currencies in a lot of ways. They don’t require trust in a third party (such as a bank) to conduct a transaction correctly, they are not prone to fraud like bank wire transfers and credit card purchases are, their design and implementation are not secretive and are thus observable, and they change in value based on market demand, rather than through political manipulation.
These are benefits you can’t get from existing currencies, or from existing payment methods. Bitcoin is much more secure than the currencies we are using today.
What are the advantages and disadvantages of regulating Bitcoin and how could it affect the way it is used in future?
JE: Advantages include a policy aimed at maximising beneficial returns while minimising negative or illicit consequences. This would serve its country well by spurring entrepreneurism, contributing to economic growth, creating jobs and improve the quality of life for the world’s poorest.
However, the US is on the verge of becoming the global example of what happens when emerging technology such as Bitcoin is too aggressively regulated or passively unregulated. Without clear and reasonable legislation, Bitcoin entrepreneurs and users are forced to either go to countries that are receptive or operate underground. If the goal of regulation is to minimise negative consequences, by chasing Bitcoiners elsewhere, you now have lost jurisdiction over criminal activity.
Bitcoin can’t be shut down – there is no Bitcoin building or Bitcoin company. It will continue to exist and thrive and countries can either decide to embrace and be cooperative or completely lose all authority and jurisdiction.
KD: Bitcoin is already regulated to a certain extent by existing laws, so we’re already seeing a lot of problems with regulation. In the United States, most states require you to get a money transmitter license if you’re doing Bitcoin exchange work, which means you need to get one for 48 different states, which costs a lot of time and money to do. It’s a terrible burden that is slowing the growth of Bitcoin.
Most people would rather not see regulations on Bitcoin (for very good reasons), but there are actually ways that regulation could help us out too. For example, if the federal government creates regulations that supercede the states, it means we only need to get one license for money transmitter work instead of 48, which could streamline the process. But another way they could approach this is to say that Bitcoin exchanges don’t need to get a money transmitter license, which would also be excellent.
