Understanding the Two Sides of Bitcoin
Bitcoin was one of the hottest topics in finance last week due to the court ruling in Florida on its legitimacy as a currency, as well as the massive Bitcoin fraud that resulted in $60 million being stolen. The recent developments may have a huge impact on the world of finance going forward. At this point you may still be wondering, as many others are, “What exactly is Bitcoin?”
Bitcoin is actually a form of digital currency. Bitcoins are not printed; the system is run as a peer-to-peer network with no central bank. Basically, it is like a separate economy run by the users. The main benefit of bitcoin is decentralization. No single financial institution controls the network and users can send each other currency without ever having to go through any bank or clearinghouse. The result is fees that are much lower, being able to use Bitcoins in every country, your account cannot ever be frozen, and there are no prerequisites or arbitrary limits. There are several currency exchanges where you can buy Bitcoins for dollars, Euros, etc. Bitcoins are kept in a digital wallet via computer or mobile device. Bitcoin’s network is secured by individuals called “Miners.” These individuals verify transactions which are then posted on a public ledger for the purpose of transparency. Bitcoin’s biggest draw is the minimization of transaction fees and it costs users nothing to accept Bitcoins received from anyone else.
All this sounds great, so why all the recent controversy?
The court case in Miami saw a man put on trial for allegedly laundering money via Bitcoin transaction. The judge’s final decision was that Bitcoin was not the equivalent of true currency. The transaction was considered to be the selling of property directly to another rather than laundering money through an intermediary—which is all the law in Florida currently accounts for. The Judge went so far as to state that the court was not a place of expertise on economics and suggested lawmakers should more clearly define the issue. “The Florida Legislature may choose to adopt statutes regulating virtual currency in the future,” the judge wrote. “At this time, however, attempting to fit the sale of bitcoin into a statutory scheme regulating money services businesses is like fitting square peg in a round hole.” The result of this ruling will likely be a precedent used in many cases to come and an exposure of the fact that U.S. finance law is behind the times when it comes to cryptocurrency.
After being considered an illegitimate currency in a U.S. court, Bitcoin’s bad stretch continued by with a hack that created a historic 36% shared loss for users. Bitfinex, the largest and most advanced cryptocurrencies exchange company was taken for 120,000 BTC (Approx. $60 million). The result? The price of Bitcoin immediately crashed and the largest Bitcoin exchange company was forced to suspend trading. Unfortunately, Bitfinex was not the only victim. The hacker was able to override the company’s security keys and gain access to hundreds of customers’ digital wallets. The attack was well-planned and skillfully executed. Funds were instantly sent to thousands of addresses and Bitfinex, along with all their customers, could do nothing but watch. Despite the massive lost, Bitfinex has stated that trading will continue as they look for a way to compensate all their customers for their losses.
This is the dark side of Bitcoin. The currency is not insured by the FDIC or any other regulatory commission. With the ever imminent threat of hacking and cyber-terrorism in today’s increasingly digital world, your “money” is never guaranteed to be safe. There have even been cases where fraudulent companies posing as cryptocurrency exchanges have simply taken clients’ Bitcoins and fled. As to the transparency of the public ledger mentioned earlier, there is also a catch. Though each bitcoin transaction is recorded in a public log, names of buyers and sellers are never revealed – only their wallet IDs. While that keeps bitcoin users’ transactions private, it also lets them buy or sell anything without easily tracing it back to them. That’s why it has become the currency of choice for people online buying drugs or other illicit activities.
Though the deregulation and decentralization of Bitcoin definitely has its upsides, it also has its pitfalls. As of now, this type of “currency” is not guaranteed to be kept safe. Add to that fact that Bitcoin is still struggling to be viewed as legitimate currency in the courts and the result is great uncertainty going forward. We are still in the dark, early days of Bitcoin and it is too early to say whether we are looking at the future or just a blip on the radar.