Each user has a digital wallet, containing your Bitcoins, as well as a private key, like a unique digital fingerprint. When you buy a cup of coffee, you use your Bitcoin wallet to make the transaction, which is digitally signed by your private key. The “signature” is then checked by Bitcoin miners before being published on a transparent public ledger. The miners do mathematical calculations to check that it was really you that signed the transaction, and that you didn’t spend the same Bitcoin twice. If you want to learn more about the cryptography involved, the Bitcoin Wiki has a good explanation. The Bitcoin network works like most peer-to-peer software: users, also called nodes, can join and leave at will, and the “official” record is just the order of transactions that most nodes agree on. This does create the possibility of an attack on the Bitcoin network if a group of nodes made a concentrated effort to log inaccurate transactions. As Nakamoto says in his research paper, “The system is secure as long as honest nodes collectively control more CPU power than any cooperating group of attacker nodes.”
With Bitcoin worth $1190, new potential Bitcoin users might be wary of the peer-to-peer structure. Without a trusted third-party to oversee and mediate, there’s no money-back guarantee. And users have a high degree of anonymity, which provides opportunities for criminal activity, including black markets, money laundering, and tax evasion. Should Bitcoin be regulated? If so, who should step in? New York state created BitLicense, which requires that businesses obtain a license to deal in Bitcoin or other virtual currencies. This and other rules have been heavily criticized for imposing onerous conditions on Bitcoin operators, and making it difficult for small companies or startups to operate. You can read more about BitLicense here.
The IRS treats virtual currencies as property, so every Bitcoin user must track the gains or losses of each transaction to stay in compliance with IRS regulations. Tax Foundation, a tax policy research organization, claims that virtual currency should not be categorized as property. They say that the IRS ignores how virtual currency is used and treat them as something that people hold for an investment. The Federal Reserve does not currently have the jurisdiction to supervise or regulate virtual currency, but said in 2014 that “Bitcoin does not present a threat to economic activity by disrupting traditional channels of commerce; rather, it could serve as a boon. Its global transferability opens new markets to merchants and service providers” (Board of Governors meeting transcript).
I believe that regulating Bitcoin is a fruitless effort. It’s nearly impossible to stop someone downloading a Bitcoin wallet and connecting to the network. That’s because the Bitcoin network is completely decentralized. There’s no server to shut down and no one node that knows all. Even in areas where Bitcoin isn’t considered illegal, any regulations will inevitably restrict innovation. For a great overview of this debate, read this CoinDesk article.
I think that the way that bitcoin was designed would make it difficult to regulate. As Erik pointed out, the Bitcoin network is not centralized. This unfortunately does make Bitcoin useful for people who are engaging in illegal purchasing activities online. However, there are also aspects of Bitcoin that make it beneficial for people who have good intentions. For example, immigrants trying to send money back home wouldn't have to pay high money transfer fees if they could utilize Bitcoin. There are definitely pros and cons of Bitcoin, but I believe it does hold the potential to be good if utilized properly.
ReplyDeleteYes. Even though I agree that regulations will restrict innovation like Erik said. I think that the best way to approach this would be similar to what New York is doing where they have state created BitLicense, which requires that businesses obtain a license to deal in Bitcoin or other virtual currencies. I also agree with Hannah that the way that bitcoin was designed it seems hard to regulate but I think theres a lot of room for fraud with zero regulation. I actually didn't know that there were some areas were bitcoin was considered illegal.
ReplyDeleteRegulation to prevent illegal activities would be ideal, however since there is no central authority controlling Bitcoin it would be difficult. Creating a license requirement may help regulate virtual currency and prevent illegal uses of it. Without regulation, or a clear set of rules, I can see someone using Bitcoin without knowing they are supposed to report their gains/losses to the IRS. The regulations could be to enforce the legal use of Bitcoin, and present punishments to those who act illegally.
ReplyDeleteNo, I think it is a good idea to tax and monitor the use of bitcoins in one's country, but trying to regulate it is too costly and would be stepping out of bounds for any country. The issue is that bitcoin is not tied to any single government or entity. This means that it is impossible to regulate the collection of the currency and unless there was some kind of international entity it would be difficult to manage all transactions. All a government can do without completely invalidating bitcoins is to watch how they are used internally by its citizens.
ReplyDeleteNo,
ReplyDeleteOne of the best things about BitCoin is that it's a globally used currency (if sparsely collected). And without a doubt, that's a good step in the right direction. As just about everyone else has remarked, regulations for BitCoin collection/transaction are doomed to be ineffective. I support the idea that money and power should move away from large banks, and back into the hands of the people. I think BitCoin offers a good platform for that, and it gives us more control over our money at the same time.
No, but honestly I'm trying to grasp the concept of Bitcoin still. Money theory is difficult enough in concrete forms to understand. Molly raised some great points about the licensing idea. That would allow for a localizsed or partial regulation. However, overregulation of Bitcoin would potentially just make it like every other currency, thus eliminating the advantage of using it. It would become like paying for every business transaction in pesos, and eventually it would just become so much of a hassle that it would dissolve itself. I believe that this kind of currency ought to have some guidelines, especially as it relates to illegal purchases and activity on the Dark Web.
ReplyDeleteI think it is interesting that there is a high level of anonymity connected to this currency. I like the idea of a peer-to-peer structure. I get the feeling that Bitcoin is used for specific types of transactions or products. I think in order to ensure privacy surrounding this currency it shouldn't be regulated at the moment. I get the feeling that some people probably use Bitcoin for anonymity and the benefits of how it is currently structured.
ReplyDeleteI find myself agreeing with Alex here. One of the biggest pros of bitcoin is the ability to use it across nations. Seeing the overwhelming issues that we already face trying to create new policies just in our country, I can't imagine attempting to make financial policy that appeased to multiple nations. It simply doesn't seem realistic or very beneficial to attempt such regulation.
ReplyDeleteI think that regulating Bitcoin would be pointless. But then again maybe I don't completely understand the idea of Bitcoin. I think that the privacy issues posed with online currency can be shady and I would not feel comfortable using Bitcoin because of the anonymity of users and the fact that it is not going through a bank scares me a little bit. I like the idea of being able to send money across the nations but I'm just skeptical about how trusted it can be. That being said, just because I wouldn't use it personally doesn't mean that I think it should be illegal. The designers of this program obviously thought it could be useful and it seems like many others agree. I think that because the money is on the internet, it is almost like a separate entity or form of currency that is used worldwide. Because it does not use the American dollar, I don't see the need for banks or the government to regulate it. It is simply another app for the world to use.
ReplyDeleteI think that it is extremely interesting that Bitcoin has become a currency. I think that it is cool that it has become valuable to a certain group of people and they have made it valuable to the extent that it becomes a currency. Furthermore, since it is a currency, I believe that it should be taxed as such under respective governments of the people using the Bitcoin - Income and Sales Tax. Since it is a noncentralized, international currency, I have trouble thinking of anyone else capable of taxing Bitcoin than the governments of the people that own Bitcoin. I don't really see the United Nations doing something like that. I don't really see any international organization doing that.
ReplyDeleteBitcoin is fascinating, and while watching the video explaining it, I was excited of the prospect of no regulation, and minimal transaction fees. Living in a digital world, I feel that Bitcoin will become more prevalent in coming years. Although the Federal Reserve does not believe they affect the economy now, what about in ten years? The more people who are aware of Bitcoin will probably use it, and if that occurs, I believe regulation will become necessary. There is too much freedom with Bitcoin, and no regulation will inevitably lead to criminal activity.
ReplyDeleteLike others have said I can see a lot of benefits Bitcoin creates. However, I can also see that there are a disadvantages as well. Due to the anonymous nature of Bitcoin I can see it being a safe haven for criminal activity, including money laundering and funding for terrorism. I believe that Bitcoin should be regulated, but I do not know if it is a possibility due to its decentralized infrastructure. I think that the IRS taxing bitcoin and the licensing requirements in New York are a step in the right direction.
ReplyDeleteI agree with Kate's comment. I personally think purchasing things with Bitcoin sounds sketchy, so I don't think I would do it. But that doesn't mean it should be illegal. Like the article in the final link talked about, governments are basically powerless when it comes to regulating this online, so why use lawmakers' time in the attempt to do so? Because Bitcoin has so much potential for illegal activity, part of me wants to put some sort of regulation on it. But I can't really think of how it's possible to do so. Russia outlawed it, but that doesn't mean Bitcoin would be impossible to use in Russia. So, this sounds to me like an organization that people will continue to use at their own risk.
ReplyDeleteI have to agree that there are benefits to a bitcoin currency, as well as several risks, just like anything else. Even though its nature does make it difficult to regulate, I do believe that there should be at least a few regulations in place, because otherwise, the situation could get out of control. The potential long-term effects of this may need more study.
ReplyDeleteI have mixed feeling about Bitcoin. I dug into it when it was new and even spent some time mining. Since then, the ability to convert to real-world currencies has improved so it's easier to actually use the Bitcoins you have. At the same time, my basic understanding of why that conversion got easier is because people used it to buy/sell drugs and other illegal goods. It may be that since then, Bitcoin has become a little more mainstream, but that dirty birth still keeps me wary of it.
ReplyDeleteBased on this known historical danger, I would be in favour of some kind of regulation of crypto currency. However, I don't believe current policymakers have a good idea how to do this.