Among the new types of P2P currencies, Bitcoin has recently begun to attract the most attention from analysts and experts. But what exactly is it and how does it work? Bitcoin, as well as being an electronic currency created in 2009 by Satoshi Nakamoto (pseudonym for an identity that still remains a mystery), is also the name for the open source software developed to use thiscryptocurrency, a concept that was described for the first time in 1998 by Wei Dei in the cypherypunks mailing list. Bitcoin is not the only digital currency: users of Second Life pay in Linden Dollars; clients of Tencent in China QQ coins and Facebook has its Credits. What distinguishes Bitcoin, though, is the absence of any form of designated central authority at its genesis set up to control it, the importance of which is explained in the Economist report Mining Digital Gold. It is a peer-to-peer system that functions just like any other file sharing system. For this reason, experts of the field consider the Bitcoin story similar to that of Napster, the system created in 1999 by 18-year-old Shawn Fanning that changed the course of history for the music industry, because it allowed people to exchange music files rather than buying expensive CD’s. In 2001, after a series of legal controversies, Napster was forced to shut down. But the underlying philosophy of exchange through computer networks without intermediaries is, today, being represented in the form of currency, with BitTorrent and other virtual money systems.
How does it work?
Bitcoin is based on cryptography that controls the creation and transfer of money allowing for transactions worldwide that are managed directly by the users because a computer automatically generates the money through a process called mining. The mechanism functions in a way that the transactions generated and traced within the network cannot be duplicated. The limit of bitcoins tends asymptotically towards the limit of 21 million. This mechanism makes the cryptocurrency similar to gold: limited in quantity and with the decrease of resources its value goes up. The Nobel Prize economist Paul Krugman defined Bitcoin as “virtual gold” in his Times column Golden Cyberfetters. Bitcoin has truly created a new Golden Rule because, rather than setting its value with Dollars, it has a fixed total amount of money available and lets it value fluctuate. In November the value surpassed quota 1,200 Dollars: a record price registered on Mt. Gox, one of the main online exchanges specialized in the buying and selling of virtual money. Is Bitcoin one of the most promising investments or is it just another bubble blown up by social media? It is difficult to establish that now with certainty. However, the price could even be the least interesting aspect of the bitcoin phenomenon. As BitPay founder, Tony Gallippi, recently declared, its attraction is really the enormous potential for making e-commerce transactions much easier. This is why, though it can be stopped just like Napster was, the phenomenon regardless generates consequences destined to have a heavy and irreversible impact on online commerce and the future of money overall.
The Debate
Not everyone, though, is enthusiastic and the debate over bitcoins is full on. Some fear that it can be used for illegal activities and define it “internet cash” giving it negative connotations. The transactions, in fact, do not require any identification thus remaining in total anonymity . However, the recent closure of Silk Road, the online drug market, helped boost Bitcoin’s reputation because the cryptocurrency had been used to traffic illegal substances. In the meantime, the number of legal platforms that are beginning to accept payment in bitcoins (like Reddit and WordPress) are increasing. And the number of large retailers who are adopting it is also growing, in order to satisfy the growing demand for it from the public. The success of the virtual currency is pushing the giants of the Internet to create their own ecosystems in order to circulate respective cryptocurrencies. They may be different platforms but they all have the same goal of increasing online exchange. Google seemed to have demonstrated interest recently in accepting payment in bitcoins, but the rumor was denied though a future plan has not been excluded and, like Amazon has done, it may even create its own Google Coin. eBay is also active: in April, CEO John Donahoe stated to the Wall Street Journal that Bitcoin was a new and explosive technology that must be closely observed because there are ways to activate Bitcoin within PayPal. Today, it is already possible to buy and sell bitcoins on eBay. And eBay has even had a patent recently approved for a “gift token” that can be used by the receiver as payment for both online and physical acquisitions. The transaction, explains the patent, is defined through the checkout of payments through a provider: a characteristic that may bring it closer to creating a digital currency under the eBay name. BitPay, a payment service provider for bitcoins has announced an integration for users of Microsoft Dynamics Retail Management Systems (RMS). Those who possess this system can accept payments in bitcoins: a truly powerful tool, safe and scalable for retailers who are attracted, above all, to the lack of fees for bitcoin transactions.
Even in the political world, especially in the U.S., there are intentions to take this phenomenon seriously. The Federal Election Commission (FEC), the independent agency that controls federal elections, is conducting a survey to verify whether donations for electoral campaigns can be made with digital currency. The survey was requested by Republicans who are looking to meet the demands of their electoral group that is increasingly using bitcoins for online buying and selling. Acquisitions could soon be available in the physical world as well. There are already wallets on smartphones where bitcoins can be carried, money that is then easily exchangeable even in real shops where all that needs to be done is a scan of the QR code or by using the “tap to pay” (with NFC technology) method. As of today, Berlin is the city with the highest number of real shops that permit these forms of payment.
Regulation and Competition
Authorities, as well, are continuously more attentive to this phenomenon with the scope of safeguarding consumers. In July 2013 the Central Bank of Thailand announced that transactions using Bitcoin had become illegal, since the country’s laws regulating the virtual currency were still lacking. The Chinese Central Bank has also banned these transactions, Japan has banned acquisitions within its national territory, and Taiwan has ordered police to destroy eventual ATM machines created for bitcoin transactions. It is a phenomenon that exists, however, in the U.S., Canada, and Australia. In Europe, the ECB report in October declared, in substance, that the digital currency did not currently entail any risks for the real financial system but rather “for investors due to its instability and lack of regulation”. In the U.S., where the Department of Treasury released a series of guidelines regarding regulation of digital currency and held a Senate hearing during which the government demonstrated interest in the potentials of digital currency by ratifying it a legal means for conducting transactions. While world governments and bank institutions debate the regulation of Bitcoin, other digital currencies are coming to life as well as platforms that permit the direct generation of financial transactions and widely varied contracts, even property sales, without regard to central authorities or intermediaries. Like Ethereum.org, for example, that was created by 19-year-old ex-hacker Vitalik Buterin, born in Russia but grew up in Canada, who quit university to travel the world following the Bitcoin phenomenon and then creating his own platform that differs from Bitcoin in that operations are not boxed into determined specifics but can be personalized thanks to open programming. So, the true threat of the diffusion of Bitcoin seems to be, more than lack of regulation, the competition. The Wall Street Journal has listed 80 cryptocurrencies: Worldcoin, Namecoin, Gridcoin, Zeuscoin, Litecoin, Dogecoin, or Ripple an open source payment system created by Chris Larsen, Silicon Valley entrepreneur. For all of these, the main factor for success will be the faith placed by users who determine how many will actually use a specific system. And this, emphasizes Supriya Singh in his work Designing for Money across Borders, is true for any type of currency. What renders a currency system valuable is not the actual paper or plastic or electronic card but the faith in and value it is given by its users that allows for the increase of its use. In other words, only the expansion of its use and its acceptance will prove whether Bitcoin is strong enough to impose itself as the “only” internet currency.
In the meantime, for those in Italy who would like to follow the developments of this topic, there are numerous associations that are active in promoting the diffusion of this digital currency culture. CashlessWay founded in November 2013, has as its mission that of sustaining and promoting the use of payment tools that are an alternative to cash in order to increase awareness of the potentials at all levels that ePayments can offer as opposed to country-run systems. Bitcoin Foundation Italia, which also offers technological support for Bitcoin technology, responds to questions on how to buy and sell Bitcoin. As well, LUISS Guido Carli, a Roman university, has recently created a Bitcoin observatory (Discover Bitcoins) in collaboration with Google Developers in order to do in-depth studies of the phenomenon from an academic point of view.
