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Bitcoin is the first cryptocurrency, a form of money that uses cryptography to control its creation and management, rather than relying on central authorities.[1] However, not all of the technologies and concepts that make up Bitcoin are new; Satoshi Nakamoto integrated many existing ideas from the cypherpunk community when creating Bitcoin.[2]

Regulatory issues

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On 18 March 2013, the Financial Crimes Enforcement Network (or FinCEN), a bureau of the United States Department of the Treasury, issued a report regarding centralized and decentralized "virtual currencies" and their legal status within "money services business" (MSB) and Bank Secrecy Act regulations.[3][4] It classified digital currencies and other digital payment systems such as Bitcoin as "virtual currencies" because they are not legal tender under any sovereign jurisdiction. FinCEN cleared American users of Bitcoin of legal obligations[4] by saying, "A user of virtual currency is not an MSB under FinCEN's regulations and therefore is not subject to MSB registration, reporting, and recordkeeping regulations." However, it held that American entities who generate "virtual currency" such as bitcoins are money transmitters or MSBs if they sell their generated currency for national currency: "...a person that creates units of convertible virtual currency and sells those units to another person for real currency or its equivalent is engaged in transmission to another location and is a money transmitter." This specifically extends to "miners" of the Bitcoin currency who may have to register as MSBs and abide by the legal requirements of being a money transmitter if they sell their generated bitcoins for national currency and are within the United States.[5]

Additionally, FinCEN claimed regulation over American entities that manage bitcoins in a payment processor setting or as an exchanger: "In addition, a person is an exchanger and a money transmitter if the person accepts such de-centralized convertible virtual currency from one person and transmits it to another person as part of the acceptance and transfer of currency, funds, or other value that substitutes for currency."[6][3]

In summary, FinCEN's decision would require Bitcoin exchanges where bitcoins are traded for traditional currencies to disclose large transactions and suspicious activity, comply with money laundering regulations, and collect information about their customers as traditional financial institutions are required to do.[4][7][8]

Patrick Murck of the Bitcoin Foundation criticized FinCEN's report as an "overreach" and claimed that FinCEN "cannot rely on this guidance in any enforcement action".[9][non-primary source needed]

Jennifer Shasky Calvery, the director of FinCEN said, “Virtual currencies are subject to the same rules as other currencies. … Basic money-services business rules apply here.”[4]

In its October 2012 study, Virtual currency schemes, the European Central Bank concluded that the growth of virtual currencies will continue, and, given the currencies' inherent price instability, lack of close regulation, and risk of illegal uses by anonymous users, the Bank warned that periodic examination of developments would be necessary to reassess risks.[10]

In 2013, the U.S. Treasury extended its anti-money laundering regulations to processors of bitcoin transactions.[11][12]

In June 2013, Bitcoin Foundation board member Jon Matonis wrote in Forbes that he received a warning letter from California's Department of Financial Institutions accusing the foundation of unlicensed money transmission, Matonis denying the foundation is engaged in money transmission and saying he viewed the case as "an opportunity to educate state regulators."[13]

In late July 2013, the industry group Committee for the Establishment of the Digital Asset Transfer Authority began to form to set best practices and standards, to work with regulators and policymakers to adapt existing currency requirements to digital currency technology and business models and develop risk management standards.[14]

Criminal activities

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Bitcoins have acquired a reputation for use by criminals to purchase drugs, launder money, and gamble. While there is some merit to these claims, as of 2013 Bitcoins do not appear to be extensively used in money laundering. Gambling with Bitcoins is popular and accounts for a large percentage of Bitcoin transactions (although a smaller percentage of transactions by value), and a significant proportion of Bitcoin activity can be linked to the purchase of illegal drugs.

Named a "shady online currency [that] is starting to gain legitimacy in certain parts of the world" by CNN,[15] The Washington Post has labelled it "the currency of choice for seedy online activities."[16] The FBI stated in a 2012 report that "Bitcoins will likely continue to attract cybercriminals who view it as a means to move or steal funds".[17] Steven Strauss, a Harvard public policy professor, suggested in 2013 that "if Bitcoins facilitate too much drug-dealing or money laundering, the U.S. government could make their possession illegal."[18] A 2013 SEC filing made by a Bitcoin investment vehicle also mentioned the possibility that Bitcoins would become illegal.[19]

In 2013 The Guardian reported that the currency was primarily used to purchase illegal drugs and for online gambling,[20] and The Huffington Post stated that "online gambling accounts for a huge portion of Bitcoin activity."[21] Legitimate transactions are thought to be far less than the number involved in the purchase of drugs,[22] and roughly one half of all transactions made using Bitcoins are bets placed at a single online gaming website.[23] In 2012, an academic from the Carnegie Mellon CyLab and the Information Networking Institute estimated that 4.5 to 9% of all Bitcoins spent were for purchases of drugs at a single online market, Silk Road.[24] However, as the majority of the Bitcoin transactions were at this time speculative in nature, this academic asserts that drugs constituted a much larger percentage of the products and services bought using Bitcoins.[24]

Several news outlets assert that the popularity of Bitcoins hinges on the ability to use them to purchase illegal substances.[25] In addition to such utility, Bitcoins are thought by the FBI as a potential tool of money launderers,[17] and The Huffington Post stated in 2013 that Bitcoins are the "preferred currency of some online gun dealers," which allows the purchase of arms without background checks.[26] Such links to illicit activity have attracted the attention of financial regulators, legislative bodies, and law enforcement.[27]

Although there are fears that Bitcoins may be used to launder money, the FBI stated in 2012 that, while the potential for money laundering exists, there were no known instances of this occurring.[17] However, in 2013 US authorities seized assets belonging to Mt. Gox, a service that allowed users to exchange Bitcoins for US dollars.[28] Some say one obstacle to Bitcoins becoming widely used to launder money may be the fact that transaction history is public although the individuals themselves are thought to remain anonymous.[29]

Energy use and environmental impact

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An April 2013 estimate showed that the amount of electricity being used every day to mine bitcoins was about 982 megawatt hours, the amount capable of powering about 31,000 American homes.[30] This was estimated to be about USD $147,000 worth of energy. In comparison, profits made from a day's worth of bitcoin mining were given at about $681,000.

Theft and technical vulnerabilities

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There have been incidents of theft of bitcoin balances:

  • On 19 June 2011, a security breach of the Mt.Gox bitcoin exchange caused the nominal price of a bitcoin to fraudulently drop to one cent on the Mt.Gox exchange, after a hacker allegedly used credentials from a Mt.Gox auditor's compromised computer illegally to transfer a large number of bitcoins to himself. He used the exchange's software to sell them all nominally, creating a massive "ask" order at any price. Within minutes the price corrected to its correct user-traded value.[31][32][33][34][35][36] Accounts with the equivalent of more than 8,750,000 USD were affected.[33]
  • In June 2011, Symantec warned about the possibility of botnets engaging in covert mining of bitcoins,[37][38] consuming computing cycles, using extra electricity and possibly increasing the temperature of the computer. Some malware also used the parallel processing capabilities of the GPUs built into many modern-day video cards.[39] In mid-August 2011, Bitcoin miner botnets were detected again,[40]and less than three months later bitcoin-mining trojans infecting Mac OS X were also discovered.[41]
  • In July 2011, the operator of Bitomat, the third largest bitcoin exchange, announced that he lost access to his wallet.dat file with about 17,000 bitcoins (roughly equivalent to 220,000 USD at that time). He announced that he would sell the service for the missing amount, aiming to use funds from the sale to refund his customers.[42]
  • In August 2011, MyBitcoin, a now defunct bitcoin transaction processor, declared that it was hacked, which resulted in it being shut down, with paying 49% on customer deposits, leaving more than 78,000 bitcoins (roughly equivalent to 800,000 USD at that time) unaccounted for.[43][44]
  • In early August 2012, a lawsuit was filed in San Francisco court against Bitcoinica — a bitcoin trading venue — claiming about 460,000 USD from the company. Bitcoinica was hacked twice in 2012, which led to allegations of neglecting the safety of customers' money and cheating them out of withdrawal requests.[45][46]
  • In late August 2012, an operation titled Bitcoin Savings and Trust was shut down by the owner, allegedly leaving around 5.6 million USD in bitcoin-based debts; this led to allegations of the operation being a Ponzi scheme.[47][48][49][50] In September 2012, it was reported that the U.S. Securities and Exchange Commission had started an investigation on the case.[51]
  • In September 2012, Bitfloor, a bitcoin exchange, also reported being hacked, with 24,000 bitcoins (roughly equivalent to 250,000 USD) stolen. As a result, Bitfloor suspended operations.[52][53] The same month, Bitfloor resumed operations, with its founder saying that he reported the theft to FBI, and that he is planning to repay the victims, though the time frame for such repayment is unclear.[54]
  • On 3 April 2013, Instawallet, a web-based wallet provider, was hacked,[55] resulting in the theft of over 35,000 bitcoins.[56] With a price of 129.90 USD per bitcoin at the time, or nearly 4.6 million USD in total, Instawallet suspended operations.
  • On 11 August 2013, the Bitcoin Foundation announced that a bug in a pseudorandom number generator within the Android operating system had been exploited to steal from users' wallets, the vulnerability affecting wallets generated by any Android app; fixes were provided 13 August 2013.[57]

References

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  1. ^ Jerry Brito and Andrea Castillo (2013). "Bitcoin: A Primer for Policymakers" (PDF). Mercatus Center. George Mason University. Retrieved 22 October 2013.
  2. ^ Weisenthal, Joe (19 May 2013). "Here's The Problem With The New Theory That A Japanese Math Professor Is The Inventor Of Bitcoin". Business Insider. Retrieved 19 May 2013.
  3. ^ a b "Application of FinCEN's Regulations to Persons Administering, Exchanging, or Using Virtual Currencies" (PDF). Department of the Treasury Financial Crimes Enforcement Network. Retrieved 19 March 2013.
  4. ^ a b c d Berson, Susan A. (2013). "Some basic rules for using 'bitcoin' as virtual money". Amercan Bar Association. Retrieved 2013-06-26.
  5. ^ Lee, Timothy (20 March 2013). "US regulator Bitcoin Exchanges Must Comply With Money Laundering Laws". Arstechnica. Archived from the original on 2013-04-07. Bitcoin miners must also register if they trade in their earnings for dollars.
  6. ^ "US govt clarifies virtual currency regulatory position". Finextra. 19 March 2013. Archived from the original on 2013-04-09.
  7. ^ Lee, Timothy (19 March 2013). "New Money Laundering Guidelines Are A Positive Sign For Bitcoin". Forbes. Archived from the original on 2013-04-10.
  8. ^ "The rise of the bitcoin: Virtual gold or cyber-bubble?". Washington Post. 4 April 2013. Archived from the original on 2013-04-29.
  9. ^ Murck, Patrick (19 March 2013). "Today, we are all money transmitters... (no, really!)". Bitcoin Foundation. Archived from the original on 2013-04-14.
  10. ^ "Virtual Currency Schemes". European Central Bank. October 2012. Archived from the original (PDF) on July 27, 2013.
  11. ^ "Bitcoin, the nationless electronic cash beloved by hackers, bursts into financial mainstream". Fox News. Archived from the original on 2013-04-29.. Fox News (11 April 2013). Retrieved on 20 April 2013.
  12. ^ "Bitcoin Currency, Hackers Make Money, Investing in Bitcoins, Scams – AARP". Archived from the original on 2013-04-29.. Blog.aarp.org (19 March 2013). Retrieved on 20 April 2013.
  13. ^ Coldewey, Devin (June 24, 2013). "Bitcoin losing shine after hitting the spotlight". NBC News. Archived from the original on July 27, 2013.
  14. ^ Tsukayama, Hayley (July 30, 2013). "Bitcoin, others set up standards group". The Washington Post. Archived from the original on August 1, 2013.
  15. ^ Sanati, Cyrus (December 18, 2012). "Bitcoin looks primed for money laundering". money.cnn.com. CNN. Retrieved 18 October 2013.
  16. ^ Timothy B. Lee and Hayley Tsukayama (October 2, 2013). "Authorities shut down Silk Road, the world's largest Bitcoin-based drug market". The Washington Post. Retrieved 21 October 2013.
  17. ^ a b c "Bitcoins Virtual Currency: Unique Features Present Challenges for Deterring Illicit Activity" (PDF). Cyber Intelligence Section and Criminal Intelligence Section. FBI. 24 April 2012. Retrieved 20 October 2013.
  18. ^ Strauss, Steven (April 14, 2013). "Nine Trust-Based Problems With Bitcoin". huffingtonpost.com. TheHuffingtonPost.com, Inc. Retrieved 20 October 2013.
  19. ^ Grocer, Stephen (Jul 2, 2013). "Beware the Risks of the Bitcoin: Winklevii Outline the Downside". Moneybeat. The Wall Street Journal. Retrieved 21 October 2013.
  20. ^ Ball, James (22 March 2013). "Silk Road: the online drug marketplace that officials seem powerless to stop". theguardian.com. Guardian News and Media Limited. Retrieved 20 October 2013.
  21. ^ Wyher, Tommy (2013-10-19). "The Rise and Rise of Bitcoin". The Huffington Post. Thehuffingtonpost.com, Inc. Retrieved 21 October 2013.
  22. ^ John Jeffrey Mardlin (October 2, 2013). "How Will The FBI Shut Down Of Silk Road Affect Bitcoins?". Quora. Forbes. Retrieved 21 October 2013.
  23. ^ Geuss, Megan (Aug 24, 2013). "Firm says online gambling accounts for almost half of all Bitcoin transactions". Ars Technica. Conte Naste. Retrieved 21 October 2013.
  24. ^ a b Christin, Nicolas (2013). Traveling the Silk Road: A Measurement Analysis of a Large Anonymous Online Marketplace (PDF). Carnegie Mellon INI/CyLab. p. 8. Retrieved 22 October 2013.
  25. ^ "A Bit expensive". 1 March 2013. Archived from the original on 2013-04-29.
  26. ^ Smith, Gerry (2013-04-15). "How Bitcoin Sales Of Guns Could Undermine New Rules". huffingtonpost.com. TheHuffingtonPost.com, Inc. Retrieved 20 October 2013.
  27. ^ Lavin, Tim (Aug 8, 2013). "The SEC Shows Why Bitcoin Is Doomed". bloomberg.com. Bloomberg LP. Retrieved 20 October 2013.
  28. ^ Chen, Adrian (2013-05-15). "Feds Seize Assets of World's Largest Bitcoin Exchange". gawker.com. Gawker Media. Retrieved 20 October 2013.
  29. ^ Meiklejohn, Sarah; et al. (October 23, 2013). "A Fistful of Bitcoins: Characterizing Payments Among Men with No Names" (PDF). Association for Computing Machinery (ACM). • Paper is explained by Kirk, Jeremy (August 28, 2013). "Bitcoin offers privacy—as long as you don't cash out or spend it". PC World.
  30. ^ "Virtual Bitcoin Mining Is a Real-World Environmental Disaster". Bloomberg. Apr 12, 2013. Archived from the original on 2013-04-29. Retrieved Apr 19, 2013.
  31. ^ Karpeles, Mark (30 June 2011). "Clarification of Mt Gox Compromised Accounts and Major Bitcoin Sell-Off". Tibanne Co. Ltd. Archived from the original on 2012-12-08.
  32. ^ "Bitcoin Report Volume 8 – (FLASHCRASH)". YouTube BitcoinChannel. 19 June 2011.
  33. ^ a b Mick, Jason (19 June 2011). "Inside the Mega-Hack of Bitcoin: the Full Story". DailyTech. Archived from the original on 2013-01-02.
  34. ^ Lee, Timothy B. (19 June 2011) "Bitcoin prices plummet on hacked exchange". Archived from the original on 2012-07-09., Ars Technica
  35. ^ Karpeles, Mark (20 June 2011) [1], Mt.Gox Support [dead link‍]
  36. ^ Chirgwin, Richard (19 June 2011). "Bitcoin collapses on malicious trade – Mt Gox scrambling to raise the Titanic". The Register. Archived from the original on 2013-01-14.
  37. ^ Peter Coogan (17 June 2011). "Bitcoin Botnet Mining". Symantec.com. Archived from the original on 2012-09-14. Retrieved 24 January 2012.
  38. ^ "Researchers find malware rigged with Bitcoin miner". ZDNet. 29 June 2011. Archived from the original on 2013-01-05. Retrieved 24 January 2012.
  39. ^ Goodin, Dan (16 August 2011). "Malware mints virtual currency using victim's GPU". Archived from the original on 2012-12-23.
  40. ^ "Infosecurity – Researcher discovers distributed bitcoin cracking trojan malware". Infosecurity-magazine.com. 19 August 2011. Archived from the original on 2013-01-03. Retrieved 24 January 2012.
  41. ^ "Mac OS X Trojan steals processing power to produce Bitcoins – sophos, security, malware, Intego – Vulnerabilities – Security". Techworld. 1 November 2011. Archived from the original on 2012-09-18. Retrieved 24 January 2012.
  42. ^ Dotson, Kyt (1 August 2011) "Third Largest Bitcoin Exchange Bitomat Lost Their Wallet, Over 17,000 Bitcoins Missing". Archived from the original on 2012-07-30.. SiliconAngle
  43. ^ Jeffries, Adrianne (8 August 2011) "MyBitcoin Spokesman Finally Comes Forward: "What Did You Think We Did After the Hack? We Got Shitfaced"". Archived from the original on 2013-01-18.. BetaBeat
  44. ^ Jeffries, Adrianne (19 August 2011) "Search for Owners of MyBitcoin Loses Steam". Archived from the original on 2013-01-18.. BetaBeat
  45. ^ Geuss, Megan (12 August 2012) "Bitcoinica users sue for $460k in lost bitcoins". Archived from the original on 2013-01-17.. Arstechnica
  46. ^ Peck, Morgen (15 August 2012) "First Bitcoin Lawsuit Filed In San Francisco". Archived from the original on 2013-04-15.. IEEE Spectrum
  47. ^ "Bitcoin ponzi scheme – investors lose $5 million USD in online hedge fund". RT. 29 August 2012. Archived from the original on 2012-12-06.
  48. ^ Jeffries, Adrianne (27 August 2012). "Suspected multi-million dollar Bitcoin pyramid scheme shuts down, investors revolt". The Verge. Archived from the original on 2013-01-05.
  49. ^ Mick, Jason (28 August 2012). ""Pirateat40" Makes Off $5.6M USD in BitCoins From Pyramid Scheme". DailyTech. Archived from the original on 2013-01-02.
  50. ^ Mott, Nathaniel (31 August 2012). "Bitcoin: How a Virtual Currency Became Real with a $5.6M Fraud". PandoDaily. Archived from the original on 2013-01-31.
  51. ^ Foxton, Willard (2 September 2012) "Bitcoin 'Pirate' scandal: SEC steps in amid allegations that the whole thing was a Ponzi scheme". Archived from the original on 2013-04-21.. The Telegraph
  52. ^ "Bitcoin theft causes Bitfloor exchange to go offline". BBC News. 25 September 2012. Archived from the original on 2013-04-19.
  53. ^ Goddard, Louis (5 September 2012). "Bitcoin exchange BitFloor suspends operations after $250,000 theft". The Verge. Archived from the original on 2013-02-04.
  54. ^ Chirgwin, Richard (25 September 2012). "Bitcoin exchange back online after hack". PC World. Archived from the original on 2013-01-31.
  55. ^ Cutler, Kim-Mai (3 April 2013). "Another Bitcoin Wallet Service, Instawallet, Suffers Attack, Shuts Down Until Further Notice". TechCrunch. Archived from the original on 2013-04-29. Retrieved 12 April 2013.
  56. ^ "Transaction details for bitcoins stolen from Instawallet". Archived from the original on 2013-04-29.. Blockchain.info (3 April 2013). Retrieved on 20 April 2013.
  57. ^ Chirgwin, Richard (12 August 2013). "Android bug batters Bitcoin wallets / Old flaw, new problem". The Register. Archived from the original on 17 August 2013. ● Original Bitcoin announcement: "Android Security Vulnerability". bitcoin.org. 11 August 2013. Archived from the original on 17 August 2013.
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