Thursday, January 19, 2012

Bitcoins: Currency of the Future?

I was able to watch the latest episode of The Good Wife the other day. A digital information law practitioner was being harassed by the Treasury Department to reveal the identity of his client. His client is the creator of “bitcoin” and the Treasury Department considers such invention a crime because it is equivalent to inventing a new currency. One of the defenses brought up was that bitcoin is not a currency because it is not regulated by any central authority, like the Federal Reserve, as it is freely circulated on the Internet. A witness was presented by the Treasury Department; he was a manager of an inn, which as a promotional offer, allowed the rental of rooms in exchange for bitcoins. The defense argued that bitcoins are merely commodities that may be bought or sold. At the end of the show, I was curious whether the concept of bitcoins was just a product of the minds of the writers or was based on reality.

After googling “what is bitcoin”, about seven million results came up. I am not certain of the veracity and accuracy of all seven million websites, links and video, but bitcoin apparently is real. Bitcoin is a “digital internet currency.” This system has existed since January 3, 2009 and was designed by Satoshi Nakamoto. Bitcoins are the “first peer-to-peer currency; money created by people, instead of governments and banks.” As one blogger put it: “Think of it as an counterfeit-proof electronic dollar which is not manipulated by a central authority such as the Federal Reserve. It’s a basis of trade for goods, just as any other currency. Value is based on scarcity, and new BitCoins are only minted at a predictable rate once a Block is solved.” For a better, concise and animated explanation, I have found a video as one of the seven million results from the google search.

In his paper, Nakamoto stated the purpose of his invention as “a solution to the double-spending problem using a peer-to-peer network.” He expounded that “a purely peer-to-peer version of electronic cash would allow online payments to be sent directly from one party to another without going through a financial institution. Digital signatures provide part of the solution, but the main benefits are lost if a trusted third party is still required to prevent double-spending.” I am unsure of what to make of this system and how to take it as a part of our rapidly modernizing world. I understand that there are benefits to not being dependent on a paper-based economy: ease of transaction, less dependence on third-parties to facilitate exchange and values are set by the market, with zero interference from the government. There are also drawbacks: hacking will reach a new meaning (hacking into people’s bitcoin wallets might paralyze the entire system), it is high risk (the fact that it is unregulated scares people from availing of it) and it is virtual. As put byan analyst, “It exists in electrons, not atoms, so it's difficult to authenticate it. If you take cash out of my hand, my bank account or my wallet, I know it. You take it out of my digital wallet, I don't know it. I can't file a police report and say I lost 1,000 Bitcoins.” But we are at the age of digital technology. We live in a world where incomprehensible amounts of information may be stored in a tiny chip; where wars are conducted in darkened rooms operating a satellite-controlled drone; and where international businesses may be conducted through the exchange of bitcoins.

In the last scene of The Good Wife episode, the old-fashioned lawyer representing the inventor of bitcoin informed him that she went online and bought one bitcoin. The pleased inventor responded, “Really? It’s the future.” The lawyer replied with a shake of her head, “I don’t know. It didn’t feel right.” The inventor answered, “Real’s gonna change. Just watch.”


Candice See, Entry #5


Retta Matson said...

I think it’s the future… As far as I have researched and read via blogs everyone is willing that Bitcoin should become legal. In minority some of the people are willing to take Bitcoin payments too.

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