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]
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
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
