Introduced in 2009, Bitcoin is a new form of currency that exists in electronic form. According to Bitcoin.org, “Bitcoin is the first decentralized digital currency.” It is unregulated, open source, peer-to-peer currency that is not owned by any one person or entity and anyone can use it.
The currency is not subject to the standards of the modern central banking system. It can be transferred over the Internet without using any banks. Unlike paper currency backed by the world’s central banks, there are little or no fees for using or transferring Bitcoin and it cannot be manipulated by artificial means.
Bitcoins are created using an application known as a Bitcoin Miner. Anyone with enough computing power can mine or create Bitcoins. The software is “open source,” meaning that anyone can see the source code. Bitcoin production is regulated by the network so that the amount of Bitcoins produced is always limited and predictable. Bitcoins are stored in digital wallets and encrypted. No one knows who owns the coins or how many someone may have.
However, the question remains: Is Bitcoin a viable currency or a threat to the international banking system?
According to the first assessment by Bank of America Merrill Lynch, Bitcoin has become a “major means for e-commerce and may emerge as a serious competitor for money transfer providers.” But, both China and the U.S. have begun to severely restrict speculation in the digital currency.
The People’s Bank of China (PBOC) has outlawed third party companies from dealing with Bitcoin exchanges. As a result, the value of Bitcoins plummeted. According to David Woo, Head of Currencies Research for Bank of America Merrill Lynch, “The easiest way to understand this latest development is that China is adopting the same tougher regulatory stance as the U.S.”
However, China and the U.S. are not the only nations leery of the Bitcoin. India’s Central Bank has also issued warnings against the digital currency. The warnings outlined the dangers of using Bitcoin and caused India’s largest Bitcoin exchange, BuySellBitCo.in, to shut down. Indian authorities also raided the home of the BuySellBitCo.in operator. According to Indian authorities, the exchange is being investigated for possibly transferring money across borders illegally.
Officials in France and the European Union have also issued warnings regarding Bitcoins and the potential for speculation and money laundering.
In the U.S., no government agency has declared Bitcoin a currency or commodity. However, the U.S. Financial Crimes Enforcement Network (FinCEN), a Treasury Department bureau, requires that administrators and exchangers of digital currencies register with FinCEN as money service businesses. These businesses are required to comply with the Bank Secrecy Act of 1970 and the Patriot Act of 2001, which require stringent policies to prevent money laundering.
In 2012, the FBI launched the Virtual Currency Emerging Threats Working Group. The interagency task force is studying the threats of Bitcoin and methods law enforcement agencies can use to determine such threats.Global Financial Integrity, a group that studies illicit financial flows, argues that Bitcoin allows criminals to conduct business without going through intermediaries. These criminal activities includes human sex trafficking, drug smuggling, and poaching.
Law enforcement can still trace transactions of Bitcoins, but that is about to become even more difficult. According to the New York Times, a team of researchers at Johns Hopkins University are working an even more anonymous digital currency known as Zerocoin. Fagan claims that Zerocoin will allow criminals to launder massive amounts of cash. However, Matthew D. Green, who heads up the team, claims otherwise.
In an editorial, Green claims his team is only trying to repair a flaw in the Bitcoin technology. This flaw deprives users of Bitcoin of the same privacy users of credit cards and cash enjoy.
Currently, the U.S. is one of the largest holders of Bitcoin. The FBI seized the Bitcoin wallet of Ross Ulbrict, who allegedly operated the website Silk Road. It is alleged that Ulbrict, going under the name Dread Pirate Roberts, operated the website as an illicit marketplace for drugs deals, money laundering, and other illegal activities.
As a result of the investigation, the FBI controls a wallet containing 144,000 Bitcoins worth almost $100 million. Another site containing Silk Road Bitcoins was also seized containing 30,000 Bitcoins worth an additional $20 million. The largest Bitcoin wallet belongs to Bitcoin inventor Satoshi Nakamoto, who supposedly holds close to one million Bitcoins. The problem is no one knows who he is or even if he is a person.
Another major issue facing the Bitcoin is taxation.
The IRS continues to study virtual currencies and intends to provide some guidance on the tax consequences.
According to Cameron Keng of Forbes.com, Bitcoin is not anonymous and is taxable. Unless you can prove that your Bitcoins are in the U.S., they can be taxed under the Foreign Bank Account Recording rules or other offshore accounting regulations. According to Keng, Bitcoins are taxable “whenever a taxable event occurs.”
Users of Bitcoin should be extremely cautious when attempting to hide assets as Bitcoins. The IRS can audit any person or company whose spending outstrips their income. However, the rules for Bitcoin miners are far less vague. According to Keng, Bitcoin is considered a manufactured product and miners who sell their Bitcoins will be taxed on the profits made from the Bitcoin product.
Regardless of many unanswered questions, it looks like Bitcoin is here to stay. A growing number of companies now accept the digital currency, including Overstock.com. The company has decided to accept the digital currency for both business and philosophical reasons. Overstock CEO Patrick M. Byrne believes that the market of Bitcoin holders has reached the point where accepting Bitcoins makes good business sense. His philosophical reason is rooted in his belief in limited government. Overstock.com intends to convert Bitcoins into dollars.