In the span of a single day, Bitcoin has gone from being seen as “fake online money” (as succinctly described to me by an Electric Owl bouncer), to being recognized by the US Senate as a force to be reckoned with. After recently concluding their two-day hearing on the digital, decentralized currency, government officials ultimately came forward with positive comments on Bitcoin, sending its value skyrocketing to a peak of $900 in fiat money — for a few moments, anyway.
At the same time, the Vancouver Bitcoin Co-op was signing their incorporation papers, a milestone that was filmed by NHK, Japan’s national broadcasting channel. Some enthusiasts are saying that Bitcoin has reached its first tipping point. Its every move is tracked in the headlines of mainstream press, while governments around the world are acknowledging its legitimacy as a means of exchange for goods and services.
The Canada Revenue Agency has elected to treat Bitcoin like legal tender in terms of how businesses and individuals file their taxes, though there has been no discussion around additional legislation yet. Germany recognizes it as legal tender, while the Hong Kong Monetary Authority said they would not regulate it.
However, Bitcoin companies and entrepreneurs are still regularly being denied bank accounts. The press headlines aren’t always favourable. Still in its infancy, Bitcoin’s infrastructure is plagued by security concerns. Investor mania and shadowy acquaintances alike are cause for scepticism from the average person.
Where “real” money has failed us, I say, let cryptocurrencies lead the way.
Bitcoin’s reputation for being the currency of choice in online black marketplaces, particularly the Silk Road, often precedes it, even as the value of the global illegal trading system stands at $400 billion. Advocates argue that buying illegal drugs on Silk Road, which make up 70 per cent of their inventory, is the harm-reduced alternative to buying ecstasy from a street dealer. Because buyers could rate and review products, it was easy to find high-quality drugs at competitive prices.
Think a whole market of Walter Whites circa the first season of Breaking Bad. Big-scale cartels and drug lords aren’t the ones flocking to this particular corner of the Internet.
Even the Secret Service said during the Senate hearing that high-level criminals have not moved towards using Bitcoin and other P2P (peer-to-peer) currencies. Centralized currencies continue to be the go-to choice during criminal activity, because every transaction conducted in Bitcoin is recorded in the system’s public ledger. It is a common misperception that digital currencies can be completely anonymous and private.
“Bitcoin is not anonymous and cannot offer the same level of privacy as cash. The use of Bitcoin leaves extensive public records,” the FAQ of Bitcoin.org states. Forbes staff writer Andy Greenberg has also documented the ease of connecting his “experimental” purchases of marijuana through three separate markets. “On Silk Road […] our online drug buys were visible to practically anyone who took the time to look,” he writes.
This is certainly true for the average user, though — like cash — there are more sophisticated ways to launder bitcoins.
Yet precisely because of its decentralized nature, Bitcoin can never be completely untraceable and anonymous, though it still retains a reasonable measure of privacy compared to credit cards. If someone hacked into the transaction records of a merchant, they would have access to enough information on your credit card to use it. But because your Bitcoin wallet’s private key — which is required to gain control of the wallet — does not get recorded in the same system, your currency remains relatively safe.
The largest threats to the legitimacy of Bitcoin are the security loopholes and inefficiency of trading the currency. At this point in time, the quickest, easiest, and safest way to buy and sell Bitcoins is in person; ironic for a currency that is prized as being the high-tech way of the future. In the last month, there has also been a rash of trading platforms around the world being compromised, as well as the China-based GBL shutting down and taking $4.1 million in user money with them.
To be fair, it’s more accurate to call this an outright scam than hack. Bitcoin advocates say that the users involved could have easily prevented this snafu by immediately transferring their currency to an online “wallet,” created by a service explicitly for the purposes of storing bitcoins, such as Blockchain, or to a wallet created on their personal computer. After all, Bitcoin exchangers — like banks — have the power to move currency around in whichever way they please, and are not necessarily a secure way of storing your money.
Bitcoin is designed to bring us back to a decentralized currency of the people.”
– Gavin Anderson, chief scientist at the Bitcoin Foundation
However, even large-scale, reputable exchanges like Mt. Gox and Canadian Virtual Exchange have been taking inordinately long times to process user verifications and cashouts, leaving money vulnerable for longer than necessary.
For now, Bitcoin is still largely a playground for those with disposable income, much like the stock market. It would be a poor move to invest any money in Bitcoin that you couldn’t afford to lose. While general consensus is that digital currencies are an inevitable part of our future economy, it’s not a guarantee that Bitcoin will be the choice cryptocurrency that becomes adopted in the mainstream.
Since its inception, rival currencies (or hopeless clones, depending on how you see it) have been established, such as Litecoin, Peercoin, and Namecoin. Though less popular than Bitcoin, each of these currencies have their own advantages. Litecoin, like its name implies, allows for shorter transaction times, making it more feasible for transferring microtransactions.
The difference between buying Bitcoin and buying shares on the stock market is that you don’t have to buy one entire Bitcoin. Like fiat money, it can be broken down into millions of parts, and you can convert any dollar amount you want into the cryptocurrency.
So, in the end, the Electric Owl bouncer was right. Bitcoin is fake online money. But after all, Canadian dollars are fake money, too — they just use paper instead of code. Both currencies only have as much value as the people who use them think they do. Both can be easily lost or stolen.
Government policy may never get to a point where you can pay your taxes in bitcoins, but the widespread adoption of a secondary currency in a country is not unheard of. Peru, Uruguay, Cambodia, Vietnam, and Afghanistan accept US dollars as easily as if it were legal tender, and it may well be a developing country that finds itself at the forefront of the worldwide Bitcoin revolution.
The more unstable the national currency and the less a people trusts its government, the more visible the benefits of Bitcoin become. For example, the Cypress government wouldn’t be able to confiscate the money from a citizen’s Bitcoin wallet, because there is no one central power to influence and exert power over. Citizens can rest easy knowing that their money is relatively safe inside their digital pocketbooks.
As Gavin Anderson, the chief scientist at the Bitcoin Foundation, told Forbes magazine: “Bitcoin is designed to bring us back to a decentralized currency of the people.” The greatest success of digital currencies will be to keep the powers that be in check and allow people a way to gain more control of their finances. So where “real” money has failed us, I say, let cryptocurrencies lead the way.
