Hold on to Your Bitcoins: Why April 8th 2014 Might be a Defining Moment in Bitcoin History

Mark your calendars for April 8. It’s been a target day of dread for thousands of companies’ IT departments counting down the days before they cross the “finished” line. There are currently armies of IT folks throughout the world in a race to upgrade Microsoft Windows XP operating systems to modern versions of Windows before Microsoft officially pulls the plug. Windows XP is now a 13 year old operating system released only a month before the 9/11 attacks. This was arguably Microsoft’s most popular and longest lasting trusted version of Windows they’ve published. It is so popular that even though they stopped selling it to the public years ago, company IT departments have been s
low to migrate to new versions of Windows including Windows 7 or the unpopular Windows 8.
A recent PCWorld Magazine poll shows Windows XP still running on almost 30% of all installed PCs. This is over four times the install base of the 18 month old Windows 8. For the bitcoin community, this matters because of one extremely important factor: PCI compliance. April 8 is the last date Microsoft will publish the latest round of security fixes for Windows XP known in the IT departments as the monthly “Patch Tuesday”. The first reported vulnerability after that date means the computer is unsecured and no longer compliant with the laws established by the PCI organization that grants authority to use the credit card payment networks.
The credit card industry’s authority organization has issued rules and requirements designed to ensure that ALL companies that process, store or transmit credit card information maintain a secure environment. As of April 9, any PC continuing to run Windows XP without the expensive extended Microsoft support contract will likely be considered non compliant. https://www.pcisecuritystandards.org/documents/PCI-WindowsXPV4_(1).pdf
As such, they may be barred from being allowed on the payment network. This includes ATM machines, which the organization estimates to be over 420,000 in the US alone and 95% of them are estimated to be running various versions of Windows XP underneath. This could spell the end for many merchants and ATM machines throughout the world that rely on credit cards or the payment networks under the control of the PCI organization. This message has been communicated regularly by the PCI Security Council but has been largely ignored by the retail industry until the last few months. Visa credit card has been updating its merchant banks on the various security mandates since 2007.
With no legal ability to process credit card transactions, businesses that rely on credit cards to run their operations could be in serious jeopardy. The backup plan has traditionally been cash, or written checks for the few that continue to accept them. Since the internet age, credit cards and Paypal have been the only payment options available to merchants. Many merchants have been in a state of denial about the Windows XP and PCI Compliancy predicament. Without a large IT organization to advise them, smaller companies may find this deadline comes as an unwelcome surprise.
It may be a good time to  hold on to your bitcoins, or better yet – stock up/bitcoinmagazine.com/

What is Bitcoin? How does it work?

Bitcoin is a peer-to-peer payment system and digital currency introduced as open source software in 2009. It is a cryptocurrency, so-called because it uses cryptography to control the creation and transfer of [5] Conventionally, the capitalized word "Bitcoin" refers to the technology and network, whereas lowercase "bitcoin" refers to the currency itself.[6]
money.
Bitcoins are created by a process called mining, in which computer network participants, i.e. users who provide their computing power, verify and record payments into a public ledger in exchange for transaction fees and newly minted bitcoins.[7] Users send and receive bitcoins using wallet software on a personal computer, mobile device, or a web application. Bitcoins can be obtained by mining or in exchange for products, services, or other currencies.[8]
Bitcoin has been a subject of scrutiny amid concerns that it can be used for illegal activities.[9][10] In October 2013 the U.S. FBI shut down the Silk Road online black market and seized 144,000 bitcoins worth US$28.5 million at the time.[11] The U.S. is considered Bitcoin-friendly compared to other governments, however.[12] In China new rules restrict bitcoin exchange for local currency.[13] The European Banking Authority has warned that Bitcoin lacks consumer protections.[14] Bitcoins can be stolen and chargebacks are impossible.[15]
Commercial use of Bitcoin, illicit or otherwise, is currently small compared to its use by speculators, which has fueled price volatility.[16] Bitcoin as a form of payment for products and services has seen growth, however, and merchants have an incentive to accept the currency because transaction fees are lower than the 2–3% typically imposed by credit card processors.[17] The biggest transaction ever using Bitcoin was payment for buying a villa in Bali worth over $500,000.[18]

Transactions

When a Bitcoin user makes a purchase, the payment triggers a broadcast of the financial transaction to the Bitcoin network. The Bitcoin transaction is a digitally signed message transferring the ownership of bitcoins from one "Bitcoin address" to another. For the transaction to take effect it must be recorded in a public ledger or public transaction database called the block chain. Approximately every ten minutes a bundle of transactions, called a "block", is added to the block chain. The incentive for this accounting process, known as "mining", carries a reward of 25 bitcoins per block added to the block chain.[19] This 25 bitcoins reward maintains the integrity of the Bitcoin system by allowing the computers that confirm transactions to also mint new bitcoins in the process. Bitcoin payment processing fees are optional, and generally substantially lower than those of credit cards or money transfers.[20]

Block chain

Integral to Bitcoin is a public ledger, a database with a sequential record of all transactions, known as the block chain, that records bitcoin ownership at present and at all points in the past. By keeping a record of all transactions, the block chain prevents double-spending, a problem particular to digital money.[19] The block chain identifies receivers by Bitcoin addresses, not individuals' names, but the flow of bitcoins can give clues as to who owns them.[21] Bitcoin intermediaries, such as exchanges, are required by law in many jurisdictions to collect personal customer data.[22]
Mining
Those who take part in maintaining the block chain are called miners and are rewarded with newly created bitcoins and transaction fee payments. Miners all over the world process payments by verifying each transaction as valid, adding it to the block chain and therefore secure the network.[23] Because the Bitcoin network is not controlled by a single repository, like a central bank, the US Treasury has called bitcoin a decentralized currency.[24] As of 2014 payment processing is rewarded with 25 newly created bitcoins per block. To claim the reward, the miner includes in the block a special transaction called the "coinbase" that assigns the reward bitcoins to an address of the miner's choosing. All bitcoins in circulation can be traced back to such coinbase transactions. The Bitcoin protocol specifies that the block reward will be halved to 12.5 bitcoins in 2017 and again approximately every four years thereafter. By 2140 there will be 21 million bitcoins, and transaction processing will only be rewarded by the transaction fees.[25] Users that pay a fee may have their transactions processed more quickly.[26] The most efficient mining hardware makes use of custom designed application-specific integrated circuits, which are much faster mining and have low power consumption compared to general purpose microprocessors, such as x86 processors.[27]

Buying and selling bitcoins

Bitcoin can be bought and sold for many different currencies from individuals and from companies. The fastest way to obtain bitcoins is to purchase them in person or at a Bitcoin ATM for cash.[28] Bitcoin ATMs allow bitcoins to be purchased for cash,[29] and some also allow cash withdrawals from Bitcoin wallets stored on smartphones.[30][31] Participants in online exchanges offer bitcoin buy and sell bids. Companies buy or sell bitcoin in bulk on exchanges and offer their customers the option via ATM to buy or sell bitcoin at market price.[32] Using an online exchange to obtain bitcoins entails some risk, since according to one study 45% of exchanges have failed and taken client bitcoins with them.[33] Since bitcoin transactions are irreversible, sellers of bitcoins must take extra measures to ensure they have received traditional funds from the buyer.

Wallets

Example of Casascius physical bitcoins[34]
A paper wallet with QR codes
Bitcoin uses public-key cryptography, in which a pair of a public and a private cryptographic key is generated.[35] A collection of keys is called a wallet. Note that sometimes the term is used to mean the software in the sense of digital wallet. A Bitcoin transaction transfers ownership to a new address, a string having the form of random letters and numbers derived from public keys by application of a hash function and encoding scheme. The corresponding private keys act as a safeguard for the owner; a valid payment message from an address must contain the associated public key and a digital signature proving possession of the associated private key. Because anyone with a private key can spend all of the bitcoins sent to the corresponding address, the essence of Bitcoin security is protection of private keys. Theft of bitcoins has occurred on numerous occasions,[36] and the practical day-to-day security of Bitcoin wallets is a concern like the security of other forms of payment.[37] Risk of theft can be reduced by generating keys offline on an uncompromised computer and saving them on external storage or paper printouts.[38] "Physical bitcoins", ubiquitous in media coverage of Bitcoin, are produced by various vendors. They store a private key on paper, metal,[39] wood,[40] or plastic. There are also digital products known as "Hardware Wallets" to store bitcoins securely on a physical device.[41] Bitcoins can be lost. In 2013 one user said he lost 7,500 bitcoins, worth $7.5m at the time, when he discarded a hard drive containing his private key.[42] Bitcoins can be found; In March 2014, former bitcoin exchange Mt. Gox reported it found an "old wallet, which was used before June 2011, [that] held about 200,000 bitcoins".[43]
Software
Electrum – sample Bitcoin client
Bitcoin wallet software, sometimes called a Bitcoin client software, allows a user to transact bitcoins. A wallet program generates and stores private keys, and communicates with peers on the Bitcoin network. The first wallet program called Bitcoin-Qt was released in 2009 by Satoshi Nakamoto as open source code.[44] It can be used as a desktop wallet for payments or as a server utility for merchants and other payment services. Bitcoin-Qt, also called "Satoshi client" is sometimes referred to as the reference client because it serves to define the Bitcoin protocol and acts as a standard for other implementations.[44] As of version 0.9, Bitcoin-QT has been renamed "Bitcoin Core" to more accurately describe its role in the network.[45] When making a purchase with a mobile device, QR codes are used ubiquitously to simplify transactions. Several server software implementations of the Bitcoin protocol exist. So-called "full" nodes on the network validate transactions and blocks they receive, and relay them to connected peers.[44]

History

Bitcoin was first mentioned in a 2008 paper published under the name Satoshi Nakamoto. In early 2009, the first open source client (or wallet software), called Bitcoin-Qt, was released and the first bitcoins were issued.[citation needed] In 2009, a feature in the Bitcoin-Qt software was exploited and large numbers of bitcoins were created.[46] This was due, in large part, because Bitcoin-Qt was the only software that facilitated Bitcoin transactions and mining.[citation needed][clarification needed] This feature was later[when?]removed because specialized mining software turned out to be more efficient.[44] Since then[when?], the bitcoin open-source software has been maintained and enhanced by a group of core developers and other contributors.
By May 2011, interest in Bitcoin was growing as were concerns.[citation needed] The price of bitcoin has fluctuated wildly since its inception, going through various cycles of appreciation and depreciation, which have been referred to by some as bubbles and busts.[47] In 2011, the value of one bitcoin rapidly rose from about US$0.30 to US$32 before returning to US$2.[48] In the latter half of 2012 and during the 2012-2013 Cypriot Financial Crisis, the bitcoin price[49] began to rise, reaching a peak of US$266 on 10 April 2013, before crashing to around US$50.[50]
In March 2013, a technical glitch caused a fork in the block chain, with one half of the network adding blocks to one version of the chain and the other half adding to another. For six hours two Bitcoin networks operated at the same time, each with its own version of the transaction history. The core developers called for a temporary halt to transactions, sparking a sharp sell-off. Normality was restored only when the majority of the network downgraded to version 0.7 of the Bitcoin software from the flawed version 0.8.[46]
Mainstream services began accepting bitcoins as a form of payment[51] as well as certain non-profit or advocacy groups such as the Electronic Frontier Foundation.[52] The first law enforcement events occurred in May 2013: Assets belonging to the Mt. Gox exchange were seized by Department of Homeland Security[53] and the Silk Road drug market website was shut down by the FBI.[54]
In October 2013, Chinese internet giant Baidu had allowed clients of website security services to pay with bitcoins.[55] During November 2013, the China-based bitcoin exchange BTC China overtook the Japan-based Mt. Gox and the Europe-based Bitstamp to become the largest bitcoin trading exchange by trade volume.[56] On 19 November 2013, the value of a bitcoin on the Mt. Gox exchange soared to a peak of US$900 after a United States Senate committee hearing was told that virtual currencies were a legitimate financial service.[57] On the same day, one bitcoin traded for over RMB¥6780 (US$1100) in China.[58] On 5 December 2013, the People's Bank of China prohibited Chinese financial institutions from using bitcoins.[13] After the announcement, the value of bitcoins dropped[59] and Baidu no longer accepted bitcoins for certain services.[60] Buying real-world goods with any virtual currency had been illegal in China since at least 2009.[61]
The first bitcoin ATM was installed in October 2013 in Vancouver, British Columbia, Canada.[62][63]
With roughly 12 million existing bitcoins as of November 2013,[64] the new price increased the market cap for Bitcoin to at least US$7.2 billion.[65] By 23 November 2013, the total market capitalization of Bitcoin exceeded US$10 billion for the first time.[66]
Since US bitcoin exchanges are regulated as money services businesses, they are obligated to report activity suspicious of money laundering (see Legal status and regulation). Two men were arrested in January 2014 on charges of money-laundering using bitcoins: Charlie Shrem, the head of defunct bitcoin exchange BitInstant and vice chairman of the Bitcoin Foundation, and Robert Faiella. Shrem allegedly allowed Faiella to purchase large quantities of bitcoins and to use them to buy illegal drugs on black-market websites.[67]
In early February 2014, one of the largest bitcoin exchanges, Mt. Gox, suspended withdrawals, citing technical issues related to "transaction malleability".[68] While the company worked on a fix, one week later the price of a bitcoin had come down from over US$800 on 1 February to US$400.[69] On 24 February 2014, Mt. Gox's website was taken offline and all trading stopped, amid reports that 744,408 bitcoins (worth $350 million at the time the loss was discovered) had been stolen over several years because of flaws in its payment software.[70] A class action lawsuit has been filed based on the questionable activity.[71]

Economics

According to economists, to qualify as money something must be a store of value, a medium of exchange, and a unit of account.[72] Bitcoins cannot be considered money because they don't hold all three properties.[72] This does not mean that bitcoins have none of the three, and bitcoin is generally recognized as being a medium of exchange.[73] About 1,000 brick and mortar businesses are willing to accept bitcoins as of November 2013[74] in addition to more than 35,000 online merchants.[75] It is unlikely that bitcoins have the other two properties of money. The bitcoin market currently suffers from volatility, limiting the ability of bitcoin to act as a stable store of value.[72] While bitcoins are legally classified as a unit of account in some countries, in practice the bitcoin is not often used as such. Where people are allowed to buy in bitcoins, prices are denominated in fiat currency at the amount of bitcoins paid is determined by the prevailing exchange rate.[72]

Price volatility

According to Mark T. Williams of Boston University, bitcoin is over 7 times as volatile as gold and over 8 times as volatile as the S&P 500.[76] The extremely volatile bitcoin exchange rate has led people to question its ability to function as a currency.[73] The Bitcoin Foundation contends that this is due to insufficient liquidity and claims volatility will lessen if its popularity continues to increase.[77] Volatility has little effect on the utility of Bitcoin as a payment processing system.[78] Volatility has damaged the ability of bitcoin to be a store of value; it has not hampered its function as a medium of exchange. Bitcoin volatility is linked to uncertainty about its long-term value per Forbes contributor Timothy B. Lee.[79]

Alternative to national currencies

Bitcoins are accepted in this café in the Netherlands as of 2013
Bitcoin detractors and supporters have suggested that Bitcoin is gaining popularity in countries with problem-plagued national currencies because it can be used to circumvent inflation, capital controls, and international sanctions. For example, bitcoins are used by some Argentinians as an alternative to the official currency,[80] stymied by inflation and strict capital controls.[22] In addition, some Iranians use bitcoins to evade currency sanctions.[81] A link between higher Bitcoin usage in Spain and the 2012–2013 Cypriot financial crisis has been suggested.[82] Mistrust in traditional financial institutions and central banks fostered by the financial crisis of 2007–08 has probably helped to bolster Bitcoin popularity.[citation needed] Bitcoin has also gained recognition as a network able to serve the customers of international remittance business.[83]

Speculation and bubbles

Bitcoins are traded by speculators who want to profit on short to medium term price changes.[84] A separate organization offers futures contracts against multiple currencies allowing speculators to short bitcoin.[85] The European Banking Authority warned in December 2013, that the risks of engaging in speculation go beyond a potential loss of bitcoin value.[86] Unable to find any intrinsic value, former Federal Reserve Chairman Alan Greenspan has called it a speculative bubble[87] as has economist John Quiggin.[88] Two lead software developers of Bitcoin, Gavin Andresen[89] and Mike Hearn, had warned that bubbles may occur.[90] One financial journalist correctly predicted the bursting of one such bitcoin bubble in April 2013.[91] Nobel Laureate Robert Shiller said that bitcoin "exhibited many of the characteristics of a speculative bubble."[92] Others reject the existence of bubbles and see bitcoin's quick rise in price as nothing more than normal economic forces at work.[93]

Bitcoin as investment

One way of investing in Bitcoin is to buy bitcoins and hold them as a long-term, high-risk investment.[94] FINRA, a United States self-regulatory organization, has warned that investing in Bitcoin carries significant risks.[95] Bitcoins may be of limited value to unsophisticated investors.[96] Risk hasn't deterred all investors. The Winklevoss twins made a US$1.5 million personal investment[97] and attempted to launch a bitcoin ETF.[16] Some investors, like Peter Thiel's Founders Fund, which invested US$3 million, don't purchase bitcoins instead funding Bitcoin infrastructure like bitcoin exchanges, companies that provide Bitcoin payment systems to merchants, or Bitcoin wallet services, etc.[97] Investors also invest in Bitcoin mining.[98]

Money supply

Growth of the Bitcoin money supply is predefined by the Bitcoin protocol,[25] and in this way inflation is kept in check. Currently there are over twelve million bitcoins in circulation with an approximate creation rate of 25 bitcoins every ten minutes. The total supply is capped at the arbitrary limit of 21 million,[7] and every four years the creation rate is halved. This means new bitcoins will continue to be released for more than a hundred years.

Bitcoin value forecasts

Financial journalists and analysts, economists, and investors have attempted to predict the possible future value of bitcoin. Economist John Quiggin stated, "bitcoins will attain their true value of zero sooner or later, but it is impossible to say when."[88] In 2013, Bank of America FX and Rate Strategist David Woo forecast a maximum fair value per bitcoin of $1,300.[99] Bitcoin investor Cameron Winklevoss stated in 2013 that the "bull case scenario for bitcoin is... 40,000 USD a coin".[100] In late 2013, finance professor Mark Williams forecast a bitcoin would be worth less than ten US dollars by July 2014.[101]

Reception

Some economists have responded positively to Bitcoin, including François R. Velde, a senior economist at the Federal Reserve in Chicago, who described it as "an elegant solution to the problem of creating a digital currency."[102] Economists Paul Krugman and Brad DeLong have found fault with Bitcoin asking questions why bitcoins should be a reasonably stable store of value or whether there is a floor on their value.[103] Economist John Quiggin has criticized Bitcoin as "the final refutation of the efficient-market hypothesis".[88] Free software movement activist Richard Stallman has criticized the lack of anonymity and called for reformed development.[104] PayPal President David A. Marcus calls Bitcoin a "great place to put assets" but claims it will not be a currency until price volatility is reduced.[105] Magistrate Judge Amos Maazant of Texas federal court has classified bitcoin as currency.[106] A German court found bitcoin to be a unit of account. The Finnish Government judged it to be a commodity in January 2014[107] as did a WSJ journalist in December 2013[108] A Forbes journalist referred to bitcoins as "digital collectible".[109]
As bitcoins have proved so contentious, they have been increasingly covered by comics around the world. Australian comedian Michael Connell produced the first standup routine [110] on Bitcoin at the end of 2013 and a large number of parody songs have started to spring up. In November 2012 Kryp Tina created YouTube hit "Love You Like a Bitcoin". In April 2013 TheKoziTwo delivered an Adele parody "Blame it on MT.GOX". In December 2013 online publication Bitcoin Examiner wrote a list of the top seven Bitcoin songs of the year. [111] This saw "Coin Fever" [112] to the tune of "Goldfinger" by London writing team, Kathryn and Nick, take first position.

Acceptance by merchants

Large, established firms that accept bitcoins include Overstock.com,[113] the Sacramento Kings,[114] TigerDirect,[115] Clearly Canadian,[116] and Zynga.[117] In November 2013, Richard Branson announced that Virgin Galactic would accept bitcoin as a method of payment.[118] In November 2013, the University of Nicosia became the first accredited university in the world to accept it as a method of payment for tuition and fees.[119]

Scepticism by banks

As of 2014, Bitcoin companies have had difficulties opening traditional bank accounts, because lenders have been leery of Bitcoin's contentious reputation and do not "share investors' enthusiasm for the virtual currency craze".[120] Yet Bank of America Merrill Lynch published a report beginning of December 2013 stating “We believe Bitcoin can become a major means of payment for e-commerce and may emerge as a serious competitor to traditional money-transfer providers. As a medium of exchange, Bitcoin has clear potential for growth” and that in a long-term fair-value analysis maximum market capitalization for bitcoins could be $15 billion.[121]

Legal status and regulation

While some governments have taken a hands-off approach, others have moved to regulate bitcoin and similar private currencies. Steven Strauss, a Harvard public policy professor, suggested governments could outlaw Bitcoin,[122] a possibility that was mentioned in a 2013 SEC filing made by a Bitcoin investment vehicle.[123]

Regulation

Because Bitcoin does not involve traditional financial actors, and both issuers of bitcoins and software/hardware owners are non-financial private companies, traditional financial sector regulation is not applicable.[124] In the US the first step of regulation occurred in July 2011, when the US Department of Treasury's Financial Crimes Enforcement Network added "other value that substitutes for currency" to its definition of Money services businesses.[125] In 2013 the Treasury issued an interpretive guidance regarding virtual currencies,[24] according to which, exchangers and administrators, but not users of convertible virtual currency are considered money transmitters, and must comply with rules to prevent money laundering/terrorist financing ("AML/CFT") and other forms of financial crime.[126] Besides checking the identification, the money transmitter needs to check the customer is not on the Office of Foreign Asset Control’s Specially Designated Nationals list.[127] There are no rules at the state level as of 3/2014. The U.S. Government Accountability Office reviewed virtual currencies upon request of the Senate Finance Committee and recommended [128] that the Internal Revenue Service formulate a tax guidance for bitcoin business.SEC Chairman Mary Jo White wrote in a letter to the Senate Committee dated August 30, 2013,“Whether a virtual currency is a security under the federal securities laws, and therefore subject to our regulation, is dependent on the particular facts and circumstances at issue” and “Regardless of whether an underlying virtual currency is itself a security, interests issued by entities owning virtual currencies or providing returns based on assets such as virtual currencies likely would be securities, and therefore subject to our regulation.”[64] The U.S.Commodity Futures Trading Commission stated in March 2014, that it has been considering regulation of digital currencies.[129] The 2013 G7's Financial Action Task Force(FATF) guidance for internet-based payment services[130] defines "exchangers buying or selling digital currency for cash (or other digital currencies) [...] as a virtual bureau de change"(p10) and warns "internet-based payment services that allow third party funding from anonymous sources may face an increased risk of ML/TF [money laundering/terrorist financing]"(p16) and that "such exchangers can circumvent an Internet-based payment service provider’s ban on certain funding methods (e.g. a ‘no cash funding’ policy) if they accept the banned payment methods when reselling the issued digital currency..." so "the provider will only see the exchanger´s name in its monitoring, but will not see who actually instructed the exchanger to fund the account"(p16) and this may "pose challenges to countries in AML/CFT regulation and supervision because their cross-border functionality"(p31), wherefore as a minimum countries "should be licensed or registered and subject to effective monitoring systems...."(p34)
The Monetary Authority of Singapore requires Bitcoin intermediaries to check the identity of their customers and report suspicious activities as of March 2014, similar to what it requires from money changers.[131] Hong Kong has laws already covering acts of fraud and money laundering involving “virtual commodities”.[132] In Canada, the federal government announced in February 2014 that it was going to regulate Bitcoin under its anti-money laundering and counter-terrorist financing legislation, the Proceeds of Crime (Money Laundering) and Terrorist Financing Act.[133] The Financial Markets Authority, the Autorité des marchés financiers (Québec), announced that it would prosecute violations of the Securities Act (Loi sur les valeurs mobilières), the Derivatives Act (Loi sur les instruments dérivés) and the Money Services Business Act (Loi sur les enterprises de services monétaires) for Bitcoin transactions, particularly those involving Bitcoin ATMs.[134]

Criminal activity

Bitcoins have become associated with online criminal behavior and so-called cybercriminals.[135] Used to obfuscate online transactions, bitcoins are seized when dark web black markets are shut by authorities.[136] This association with criminal activities has stigmatized the currency and attracted the attention of financial regulators, legislative bodies, and law enforcement.[137] CNN has referred to Bitcoin as a "shady online currency [that is] starting to gain legitimacy in certain parts of the world,"[138] and the Washington Post calls it "the currency of choice for seedy online activities."[139] The FBI stated in a 2012 report that "bitcoin will likely continue to attract cyber-criminals who view it as a means to move or steal funds".[135]
Criminal activity involving Bitcoin has largely centered around theft of the currency, money laundering, the use of botnets for mining, and the use of bitcoins in exchange for illegal items or services. "Like cash, it can be used for ill as well as for good."[7] Certain nation states may feel that its use in circumventing capital controls is also undesirable.[12]
Despite claims made by the non-profit Bitcoin Foundation that "cryptography is the reason no one can steal bitcoins," theft is widespread.[140]

Black markets

Several news outlets assert that the popularity of bitcoin hinges on the ability to use them to purchase illegal goods.[141] C. 2013 Non-drug transactions were thought to be far less than the number involved in the purchase of drugs,[142] and roughly one half of all transactions made using Bitcoin were bets placed at a single online gaming website.[143] Some also state that online gun dealers use Bitcoin to sell arms without background checks.[144] In 2012, an academic from the Carnegie Mellon CyLab and the Information Networking Institute estimated that 4.5 to 9% of all bitcoins transacted were for purchases of drugs at a single online market, Silk Road.[145] As the majority of the Bitcoin transactions were then speculative, the academic asserts that drugs constituted a much larger percentage of the purchases with the currency.[145] Silk Road was later shut by US law enforcement. Some feel dark web black markets are operated in order to steal bitcoins from shoppers. The Bitcoin community branded one site, Sheep Marketplace, as a scam when it prevented withdrawals and shut down after an alleged bitcoins theft.[146] In a separate case, escrow accounts with bitcoins belonging to patrons of a different black market were hacked in early 2014.[147]

Money laundering

While some feel bitcoins are not ideal for money laundering because all transactions are public,[148] authorities have expressed concerns. The European Banking Authority and the FBI have both stated that Bitcoin may be used for money laundering.[149] In early 2014, an operator of a US bitcoin exchange was arrested for money laundering.[67]

Ponzi scheme

Critics have accused Bitcoin of being a Ponzi scheme,[150][151] though Bitcoin supporters disagree.[152] A 2012 case study report by the European Central Bank noted that Bitcoin shares some, but not all, characteristics of Ponzi schemes and concluded that "it [is not] easy to assess whether or not the Bitcoin system actually works like a pyramid or Ponzi scheme."[153]
In an alleged Ponzi scheme that utilized bitcoins, The Bitcoin Savings and Trust promised investors up to 7 percent weekly interest, and raised at least 700,000 bitcoins from 2011 to 2012.[154][155] In 2013, the SEC charged the company and its founder "with defrauding investors in a Ponzi scheme involving Bitcoin..."[155]

Thefts

While generating and storing keys offline mitigates theft of bitcoins, thefts occur on a regular basis.[32] Theft occurs when an unauthorized transfer of bitcoins is made from a wallet using the private key to unlock the wallet.[156] Most large-scale thefts occur at payment processors, exchanges, or online wallet services that store the private keys of many bitcoin users: The thief hacks an online wallet service by finding a bug in its website or spreading malware to computers holding the private keys.[157][158] When they have control of the website or its database, they gain access to many users' private keys and can thereby steal those users' bitcoins.
Many high-profile bitcoin thefts have been reported: In late November 2013, an estimated 96,000 bitcoins, then valued at around $100 million, were stolen from the online illicit goods marketplace Sheep Marketplace, which immediately closed.[159][160] Users tracked the coins as they were processed by the bitcoin exchange BTC-e, where they were apparently converted to cash, but no funds were recovered or culprits identified.[160] A black market called Silk Road 2, stated that during a February 2014 hack bitcoins valued at $2.7 million were taken from escrow accounts.[147] On 28 February 2014 Mt. Gox, one of the world's biggest virtual currency exchanges filed for bankruptcy in Tokyo after its computer system was hacked and lost 850,000 bitcoins (750,000 of customer bitcoins and 100,000 of Mt. Gox own bitcoins) worth approximately $477 million at the time, representing around 7 percent of the world's supply.[161] Flexcoin, an Alberta, Canada-based bitcoin storage specialist, shut down on 3 March 2014 after it said it discovered the theft of 896 bitcoins, worth roughly $650,000.[162] The theft exploited a software flaw handling multiple, rapid inter-account transfers.[162] The company differentiated itself by incentivizing users to store bitcoins on their website.[163] Only bitcoins stored in hot wallets (i.e., connected to the internet) were stolen, and the company said it would return customer bitcoins kept offline in cold storage, an optional service that was available for a 0.5% fee.[163] Poloniex, a digital currency exchange, reported on 4 March 2014 that it lost 76.69 bitcoins to hackers, or 12.3% of its bitcoin holdings, valued at around $50,000.[164] Multiple withdrawals were placed at nearly the same time in the attack, and the exchange did not adequately guard against negative balances.[164] Poloniex said it would reduce customer account balances by 12.3%, and repay the deductions in the future.[164]

Malware

Bitcoin-related malware includes software that steals bitcoins from users using a variety of techniques, software that uses infected computers to mine bitcoins, and different types of ransomware, which disable computers or prevent files from being accessed until some payment is made.

Unauthorized mining

In June 2011, Symantec warned about the possibility that botnets could mine covertly for bitcoins.[165] Malware used the parallel processing capabilities of GPUs built into many modern video cards.[166] In mid-August 2011, bitcoin mining botnets were detected again,[167] and less than three months later, bitcoin mining trojans had infected Mac OS X.[168] In April 2013, electronic sports organization E-Sports Entertainment was accused of hijacking 14,000 computers to mine bitcoins; the case was settled in November with a fine of $325,000 increasing to US$1 million if the organization were to break the law within the following ten years.[169] While bitcoin mining on an average PC is no longer lucrative, botnet networks of tens of thousands of infected computers can mine for bitcoins without concern for power costs.[170] German police arrested two people in December 2013 who customized existing botnet software to perform bitcoin mining, which police said had been used to mine at least $950,000 worth of bitcoins.[171][172] For four days in December 2013 and January 2014, Yahoo's European servers served an ad that contained Windows bitcoin mining malware which infected an estimated 2 million PCs.[170] Bitcoin-mining botnet software called Sefnit, first detected in mid-2013, was bundled with many software packages; Microsoft has been removing the malware through its Microsoft Security Essentials and other security software since January 2014.[173]

Malware stealing bitcoins

Security company Dell SecureWorks said in February 2014 that they had identified 146 strains of bitcoin malware in circulation, almost all of it targeting Windows users, and about half of the malware undetected by standard antivirus scanners.[174] The most common type searches computers for cryptocurrency wallets to upload to a remote server, where they can be cracked and their coins stolen.[174] Many of these also log keystrokes to record passwords, often avoiding the need to crack the keys.[174] A different approach taken by some malware is to detect when Bitcoin addresses are copied to a clipboard, and replace it with a different address, tricking people into sending bitcoins to the wrong address.[174]
One virus, spread through the Pony botnet, was reported in February 2014 to have stolen up to $220,000 in cryptocurrencies, including 335 bitcoins, from 85 wallets.[163] Security company Trustwave tracked the malware since September 2013, reporting that it had also stolen millions of passwords to various websites, and that its latest version was able to steal from 30 types of digital currency wallets.[163][175]
A trojan horse for Mac OS X, called CoinThief, hidden in versions of some cryptocurrency apps on Download.com and MacUpdate, was reported in February 2014 to be responsible for multiple bitcoin thefts, including one user who lost 20 bitcoins.[176] It bore similarities to a piece of Mac malware active in August 2013, Bitvanity, which posed as a vanity wallet address generator, and stole addresses and private keys from other Bitcoin client software.[176]

Ransomware

Another type of Bitcoin-related malware is a type of ransomware. A program called Cryptolocker, typically spread through legitimate-looking email attachments, encrypts the hard drive of an infected computer, then displays a countdown timer and demands a ransom, usually two bitcoins, to decrypt it.[177] Police in Massachusetts said they paid a 2 bitcoin ransom in November 2013, worth more than $1300 at the time, to decrypt one of their hard drives.[178] Linkup, a combination ransomware and bitcoin mining program that surfaced in February 2014, disables a user's internet access and demands credit card information to restore it, while secretly mining bitcoins.[177] Researchers at Emsisoft did not test whether entering the information really restored internet access/wikipedia
image bitcoinmagazine.com

A BETTER WAY TO BUY BITCOIN?

When Zach and Josh Harvey opened a guitar store in Tel Aviv, in 2006, they only sold instruments made by
musicians who viewed the pieces as works of art. To the brothers, who were twenty-six and thirty-two at the time, the idea of plugging in a mass-produced electric guitar wasn’t in keeping with the spirit of rock and roll. But their idealism was expensive. The instruments the brothers sold were made by little-known foreign manufacturers, and the Israeli government’s regulatory branch requires safety tests for many products when they are imported for the first time.
By 2011, the brothers had heard about Bitcoin, the digital currency produced through a computerized process called “mining,” known for its ability to facilitate anonymous online transactions. Bitcoins are generally unregulated, a fact that appealed to the Harveys, who were fed up with the government’s role in their business. They began accepting bitcoins at their store. In December, 2011, they decided to move to the United States. They settled in New Hampshire, a popular destination for Bitcoin-loving advocates of small government.
By then, Bitcoin had begun attracting mainstream attention, and the Harveys began to see a business opportunity in the currency itself. (In October, 2011, Joshua Davis wrote about Bitcoinand its mysterious creator in the magazine.) In February, 2013, Zach unfurled a plastic tarp on the floor of his new guitar store in Manchester, New Hampshire. Using materials from Home Depot, he started to assemble and paint a wooden prototype for a machine that would sell bitcoins. Such machines are often called Bitcoin A.T.M.s, which is a misnomer: they don’t allow people to deposit bitcoins or withdraw them from their own accounts. Instead, you put a few dollars into the Harveys’ construction, watch as they are converted into bitcoin, and tell the machine where to deposit the resulting encrypted-currency funds. (Typically, the bitcoins are deposited into an online account called a “wallet,” where they can be used to make purchases.)
The Harveys unveiled their prototype, programmed by Josh, at the Liberty Forum, a conference for anarchists and libertarians just a short drive from their guitar store. By that time, bitcoins cost thirty dollars each—up significantly from the twenty-five cents they cost when the Harveys first began accepting them in their Tel Aviv store, several years earlier. After the conference, the brothers closed the guitar shop and set up a new company called Lamassu, named after the Mesopotamian sculptures of winged lions meant to protect the ancient civilization’s wealth and commerce.
Lamassu began manufacturing the machines, which were about a foot and a half tall and included a custom steel case and a Nexus tablet computer screen, at a plant in Portugal. Since the machines were intended to sell only bitcoins—which exist digitally—they did not require a supply of cash; their lockboxes are big enough to hold only three hundred bills at a time. Lamassu has since sold two hundred and twenty bitcoin dispensers, costing up to five thousand dollars each, mostly to entrepreneurs who buy a single one. A Bitcoin evangelist named Doug Scribner was one of the first people to purchase bitcoins from the Lamassu prototype, in February, 2013. He’s since used the machines several more times, including at last year’s PorcFest, a festival for small-government advocates, where he spent the encrypted currency on a blanket made from bacon strips. He gave away the remaining funds to Bitcoin newcomers.
Lamassu is now turning a profit, according to Zach. Its machines operate in locations as far-flung as Helsinki, Bratislava, and, as of February, Albuquerque, the company’s first U.S. location. Zach says that he expects to ship a hundred and ten additional machines over the next three months, units that have already been sold to locations in Saudi Arabia, Korea, China, Singapore, and Atlanta.
The Harveys aren’t the only ones who had the idea to build a bitcoin-dispensing machine. Two days after Lamassu’s Albuquerque launch, a competitor called Robocoin unveiled its first U.S. machine in Austin, Texas. Robocoin’s machines, unlike Lamassu’s, let customers convert their bitcoins into cash (along with turning cash to bitcoin). Other, lesser-known companies are also selling similar machines. But Lamassu got a burst of attention earlier this year, when it sold what the New York Post called the first-ever Bitcoin A.T.M. intended for New York City, to a Brooklyn resident named Willard Ling. If all goes according to plan, Ling says, he will charge a fee of three to five per cent of the price of the bitcoins he sells, to generate revenue, a practice typical of foreign-exchange brokers. But before Ling’s machine could be installed in its planned East Village location—a candy shop called Just Sweets—he told me that he had decided to wait and see how ongoing plans to regulate encrypted currency businesses in New York shake out.
Bitcoin trading once took place largely between individuals. Today, it is increasingly conducted under the auspices of a few international exchanges. Until a few weeks ago, one of the largest of these exchanges was Mt. Gox, based in Tokyo, which, in addition to facilitating trades, stored bitcoin for its customers. Owners of Lamassu machines were allowed to stock their machines however they saw fit, including through Mt. Gox. Then, last month, the exchange froze transactions and began offering bitcoins for well below their market value. Within six days, Mt. Gox had shut down and filed for bankruptcy, and its C.E.O., Mark Karpeles, admitted that seven hundred and fifty thousand of his customers’ bitcoins, valued at nearly half a billion dollars at the time, had gone missing. Karpeles blamed a bug in Bitcoin itself for the disappearance of his customers’ currency. (Earlier this month, Karpeles said he had found some of the lost bitcoins in a forgotten digital wallet.)
The collapse of Mt. Gox doesn’t seem to have had any impact on Lamassu’s sales, Zach said. In fact, he feels the collapse gives people even more reason to use his machines—if they haven’t abandoned bitcoins after the Mt. Gox scare. Two of the biggest faults Zach found with Mt. Gox were its too-concentrated authority over the funds and the fact that users were storing their money on a site that was best suited for exchange. Lamassu machines are owned by independent operators, who, according to the Harveys, are free to either supply the bitcoins from their own reserves or allow them to be withdrawn from an exchange site. Unlike Mt. Gox, owners of Lamassu machines do not store money for their users.
Earlier this month, Benjamin Lawsky, the superintendent of financial services for New York, requested applications from virtual-currency exchanges interested in doing business in the state. Applications from companies whose Bitcoin businesses are not virtual-currency exchanges, like Lamassu, will be accepted in the near future. “I think the most important thing regulation can do is strike the appropriate balance between encouraging innovation and not strait-jacketing the technological development that we want to see continue,” Lawsky told me.
Carol Van Cleef, an attorney and electronic-payments specialist at the law firm Manatt, Phelps & Phillips, said that owners of machines like those manufactured by Lamassu could have a hard time meeting financial regulations that might apply to them, such as a rule requiring that financial institutions report transactions in excess of ten thousand dollars or other activities that might be signs of money laundering. “That’s where I see the biggest challenge for these A.T.M. operators, especially the one-off operations,” she said. “Will they be able to support the compliance regime required to be put in place, not only to comply with the law but to protect themselves from being abused by criminal elements?”
Zach doesn’t think the industry needs any regulation at all. He sees a future in which centralized bitcoin exchanges like Mt. Gox are replaced by disparate machines made by him and his competitors, individually owned by local businesspeople. Bitcoin-machine maps would let people shop on their mobile devices for the most competitive exchange rates in their neighborhoods, in much the same way drivers shop for the cheapest gas prices. “It takes the pressure away from all these single failure points,” he said. “And so, if something goes down, you will always have a place to buy bitcoin.”/newyorker.com/
Photograph: Jan Koller/AP