Media buzz surrounding Bitcoin has grown in recent months as the digital currency has gained wider acceptance among investors, retailers, economists and even regulators. The ongoing mainstreaming of the online currency, which was once thought attractive only to gold bugs, hardline libertarians, Federal Reserve critics and drug dealers, has driven up the value of the digital currency greatly. And while some skeptics say that Bitcoin fans should brace for a bust, individuals and institutions who are supporters of the new currency are working to ensure its longevity.
During a recent Senate hearing regarding Bitcoin and other digital currencies, Ben Bernanke told lawmakers that virtual currencies may hold “long-term promise.” Shortly thereafter, the value of Bitcoins broke the $1,000 mark.
Bitcoin is recognized as the world’s first completely open financial network. The virtual currency is decentralized, meaning that hundreds of computers all over the Internet process Bitcoin transactions in a peer-to-peer manner. The currency’s structure exempts it from much of the regulatory burden and central bank meddling that accompanies more traditional currencies.
The Washington Post explains:
…[H]undreds of computers scattered around the Internet work together to process Bitcoin transactions. These computers are called “miners,” and Bitcoin’s transaction-clearing process is called “mining.” It’s called that because every 10 minutes, on average, a Bitcoin miner wins a computational race and gets a prize. Currently, that reward is 25 bitcoins, worth around $12,500. These prizes provide a strong incentive for more people to join in Bitcoin’s transaction-clearing process, helping the currency to remain decentralized.
This reward declines on a fixed schedule: Every four years the reward falls by half. So, from 2009 to 2012, it was 50 BTC, now it’s 25 BTC, and starting in late 2016 it will fall to 12.5 BTC, and so forth. If you do the math, you’ll find that there will never be more than 21 million bitcoins in circulation. Right now, there are almost 12 million bitcoins in ciruclation, so the Bitcoin money supply will never be more than twice its current size.
Bitcoin’s decentralized nature and the ability to complete anonymous financial transactions have raised concerns among some regulators and Congressional surveillance hawks. Over the summer, Senate Homeland Security and Government Affairs Committee Chairman Senator Tom Carper (D-Del.) and ranking member Senator Tom Coburn (R-Okla.) penned a letter asking Federal agencies for feedback on Bitcoin, expressing concern that virtual currency “can be sent nearly anonymously, leaving little or no trail for regulators or enforcement agencies.”
“Their near anonymous and decentralized nature has also attracted criminals who value few things more than being allowed to operate in the shadows,” the letter said.
A subsequent Senate hearing about digital currency in November focused heavily on Bitcoin’s relationship to Silk Road, a hidden website that served as an online marketplace for a number of illicit activities recently shuttered by Federal officials.
“Today, a number of similar enterprises that accept Bitcoins are still in business, selling weapons, child pornography, and even murder-for-hire services,” Carper said.
But the FBI and other agencies noted that the potential for malicious use of Bitcoin doesn’t reasonably outweigh potential benefits associated with virtual currency.
“The FBI’s approach to virtual currencies is guided by a recognition that online payment systems, both centralized and decentralized, offer legitimate financial services,” Peter Kadzik, principal deputy assistant attorney general, wrote in a letter dated Oct. 23. “Like any financial service, virtual currency systems of either type can be exploited by malicious actors, but centralized and decentralized online payment systems can vary significantly in the types and degrees of illicit financial risk they pose.”
And as lawmakers continue to investigate possible legislative actions for regulating virtual currencies, they are racing the clock against a growing number of retailers and institutions that are beginning to accept Bitcoin as legitimate payment in the U.S. and abroad.
On Black Friday, a consortium of 250 retailers banded together for an event dubbed Bitcoin Black Friday to promote more widespread adoption of Bitcoin.
“Bitcoin Black Friday is an awesome way to bring the whole Internet community together at a time when Bitcoin needs as much mainstream attention as possible,” Holmes Wilson, cofounder of Fight for the Future, which organized the event, said last month. “Even though it seems like Bitcoin is going strong, it won’t be politically safe until it’s widely used by average Internet users — that’s already happening, but we’re speeding things up with Bitcoin Black Friday, and making it fun in the process.”
In Germany, lawmakers have made moves to accept Bitcoin as a “unit of account,” further legitimizing the online currency’s economic viability. And in Cyprus, where Bitcoins became popular amid financial turmoil, the University of Nicosia (UNic) has begun accepting the digital currency for payment of tuition and other fees, making it the first in the world to do so.
Late last month, another first for Bitcoin occurred. Vicco, Ky., Police Chief Tony Vaughn made headlines after requesting that his city make an effort to pay his salary via Bitcoin. After some inquiry by the city commission about the legality of doing so, Vaughn’s request was granted.
Bitcoin’s growing popularity and acceptance, according to some, could pose serious risks for the dollar in coming years.
Relentless Federal Reserve critic and former Congressman Ron Paul recently said that Bitcoin is indicative of many people searching for dollar alternatives. And, Paul noted, if people begin using Bitcoin en masse, it could “go down in history as the destroyer of the dollar.”
In an interview with Personal Liberty Digest™, Associate Scholar at the free-market advocating Ludwig Von Mises Institute Floy Lilley said that she would love to see the dollar destroyed by Bitcoin — but she also noted that there’s work to be done before digital currencies could trump the government’s fiat money supply. She also said that there will likely soon be a legislative attack on digital currency.
“It’s too much of a threat to central banks for Congress to leave it alone,” Lilley said.
Part of the problem with Bitcoin and other digital currencies is that they are still tied to traditional currencies in many ways that bar them from being truly defined as a competing currency, according to Lilley. For example, if you are not set up with the equipment to take part in the digital mining process that produces Bitcoins, you must purchase them with dollars.
Another problem, according to the researcher, is that recent revelations about the government’s spying efforts indicate that digital currencies are not as anonymous as advocates would like to believe.
But if lawmakers and regulators don’t completely hamstring the ability of digital currencies to proliferate in coming years, Lilley believes that Bitcoin and its digital currency competitors could have a long-term benefit in the overall economic sphere. If digital currencies prove successful and benefit from competition among one another, it could heighten public support for the elimination of legal tender laws which prohibit competing currencies in the physical realm in the United States.
“It’s possible,” she said. “That is part of the reason why digital currencies have the Fed hugely frightened and concerned.”
If the free-market dream of physical competing currencies were ever realized, according to Lilley, the dollar would face rapid extinction.
“Not a single person would want to use the dollar if there were other real options,” she said, “because at that point its lack of value would be made very clear.”