Bitcoin: A New Kind of Money That's Beyond the Reach of Bankers, Wall St. and Regulators?
Stay up to date with the latest headlines via email.
This July a computer developer who goes by the handle Doctor Nefario landed at the Seattle-Tacoma airport from China for a two-month mind-meld with various U.S. developers, which he planned to mostly fund using the increasingly popular decentralized digital currency bitcoin. After explaining to suspicious Customs and Border Protection agents that he had $600 in cash in his possession and another $1,500 to exchange in bitcoin -- plenty for a two-month visit, he insisted -- Nefario, founder of the Global Bitcoin Stock Exchange, was promptly sent back to China after agents spent hours trying to wrap their heads around the concept of real money that exists only in virtual reality.
"Avoid any mention of bitcoin," Nefario advised in a blog post recounting the tragicomic affair. "They don't like it at all."
Good luck with that. Founded in 2009 from a self-published 2008 white paper by developer Satoshi Nakamoto, whose actual identity still remains a mystery, bitcoin's peer-to-peer virtual currency has gone viral, from WikiLeaks to Google and beyond. It's a fascinating experiment in economic evolution, where goods and services can be exchanged using an opensourced mobile currency mostly outside the reach of regulators, speculators and central bankers. There are over six million in existence, pegged between $14-$17 per unit -- although their actual price can fluctuate wildly in a given day -- with a tentative cap of 21 million. Bitcoins are stored in a digital wallet, and can be used in any country to barter with a massive and growing list of sites that accept them.
Here's how it works: A public peer-to-peer transaction ledger, called a block chain, is stored on every computer running bitcoin and records every transaction ever made. The ledger weighs hundreds of megabytes in size, and is validated every 10 minutes by a computer working to secure the network, called a bitcoin miner, which wraps blocks of broadcasted message transactions in cryptographic hash functions. Transactions are entirely public, while those who transact are nearly private. The result? An emergent digital economy for the iGeneration.
"It's quite complex, even simplified," early bitcoin developer Jeff Garzik told AlterNet. "Bitcoin is a currency -- or, more specifically, a currency-like commodity -- that did not exist two years ago and is still in the early bootstrap phase. A lot of its economy is inevitably tied to the existing economy, and simple logic tells you that you will never have a completely separate money system, even if bitcoin is wildly successful. But bitcoin will be one among many currencies: Just like you exchange U.S. dollars for euros when travelling, you will exchange bitcoins for euros to meet the needs of a specific situation."
Not yet, of course, recalling the travails of Doctor Nefario. Or Senator Chuck Schumer, D-NY, who recently complained that buyers and sellers of "illegal drugs" were using bitcoins as "an online form of money laundering" on the anonymous online marketplace Silk Road. "The only method of payment for these illegal purchases is an untraceable peer-to-peer currency," Schumer wrote with Senator Joe Manchin, D-W.Va., in a letter to U.S. Attorney General Eric Holder and Drug Enforcement Agency administrator Michele Leonhart. "After purchasing bitcoins through an exchange, a user can create an account on Silk Road and start purchasing illegal drugs from individuals around the world and have them delivered to their homes within days."
Schumer and Manchin urged an immediate shutdown of Silk Road, stopping short of prescribing the same for bitcoin. But taken together with Nefario's treatment, it portends a clouded future for bitcoin anonymity and ubiquity. "I think we agree with Senator Schumer in principle," Garzik told AlterNet. "None of us want evildoers to use bitcoins for evil. But just like millions of U.S. dollars are used for buying drugs and guns, a currency is sometimes used for crime and violence. We hope that bitcoin's public transaction ledger tips the scales in favor of the good guys. Bitcoins are slightly more traceable and less anonymous than paper U.S. dollars."