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With the rise of digital wallets, mobile transactions, online shopping and e-trade, it’s only a matter of time before digital currencies become mainstream. While bitcoin and other digital currencies have perhaps not made it to the mainstream market just yet – instead being favoured by IT nerds and gaming geeks – they are on their way. If the Powers That Be don’t stop them first.
One of the big problems with bitcoin and other digital currencies is their associated anonymity. Users can make transactions and choose to be completely anonymous. This displeases the Powers That Be for a number of reasons, from the increased risk of nefarious activities, to the lack of accountability – i.e. non-traceable, non-taxable money changing hands.
What is bitcoin?
Digital currency is a form of electronic money that can be passed between individuals or businesses, without the use of a traditional banking or money transfer system. Some forms of digital currency are tied to an existing hard currency, while others – like bitcoin – fluctuate according to supply and demand.
At its creation four years ago, bitcoin was worth nothing. In April this year, more than $1 billion in bitcoin was traded. While one bitcoin trades at around $137 today, it was worth around $13 at the start of the year. It has been known to fluctuate wildly, growing to $275 in April, and falling to $105 in the same day.
Bitcoin is not managed by a single company or government. Users can buy bitcoins through exchanges that convert real money into the virtual currency, or they can ‘mine’ them. When mining for bitcoins, the user sets up his computer to solve a complex equation. Once it has been solved, the user is rewarded with a number of bitcoins.
There are currently 11 million bitcoins in existence, with the system designed so that only 21 million bitcoins can ever be mined. In this way, bitcoin is similar to gold – with a finite amount of gold available, and its value dependent on how much a buyer is willing to pay for it.
How do Bitcoin transactions work?
You can either mine or buy bitcoins. Once you have them, you can use them to buy stuff online. If you sell stuff online, you can choose to take bitcoins as payment. Any fees are negligible, and buyers don’t have to worry about currency conversion costs.
If a user wants to turn their bitcoins back into ‘real’ money, they just link their bitcoin wallet to their bank account, and the transaction will be processed into their local currency. Bitcoin transactions are logged in its own system, but the user’s IP address is not recorded, only the details that the user chooses to give are recorded. This is the very problem governments and regulators are taking issue with.
Worrying the ACC
This anonymity is causing all sorts of headaches for those in charge of policing the world’s nefarious under-dealings. While bitcoins are used to buy everything from dresses to cupcakes, they can also be used to pay for illicit goods, such as drugs, guns, child sex material, illegal gambling and hired hitmen.
The Australian Crime Commission’s acting chief executive, Paul Jevtovic said bitcoin has become a growing concern to the agency. “The ACC is currently working with partners to explore the Bitcoin market and other digital currencies, to better understand its size and criminal threat.”
NSW Police Minister Michael Gallacher said, “This is without question going to be one of the challenges that defines modern policing. But new technology moves at a much faster rate than government can possibly respond.”
In the US, digital currency firms have been issued with warnings by the FBI and the US Treasury Department, advising them to comply with the same anti-money laundering rules as other financial institutions. This would involve monitoring customers and reporting suspicious activity to the government.
And if that wasn’t warning enough, digital currency firm Liberty Reserve was closed down just last week; accused of creating a platform that enabled criminal gangs to launder more than $6.3 billion.
While digital currencies like bitcoin clearly have their benefits, they also pose a number of threats. Threats that could facilitate a criminal underworld, allowing easier payment for illicit items and services; threats to the financial world of taxable incomes; and threats to the individual user, whose bitcoin could be worth $100 one day, and $1 the next.
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