Alphacoin. Litecoin. Hobonickles. Despite what you may be thinking, these are not new alternatives to Monopoly money or coins that Nintendo’s moustachio’d Mario can collect. These three entities are among some of the 80-plus market entrants vying to displace bitcoin as the leading virtual currency.
Unlike virtual cash that has value only within a specific online setting such as Facebook, Second Life, or World of Warcraft, currency such as bitcoin is as universal as the Euro or the US dollar. Much like cash, bitcoins can be purchased through currency exchanges, albeit ones that are available only online. The currency has many advantages, including payment freedom, low fees, and security. Users can send and receive money for small fees that are independent of the amount being transferred. This feature frees users from having to pay excessively high processing fees to banks and credit card companies. The lack of a middle man also means that currency can be transferred instantly to anyone at anytime, anywhere in the world, without regard to borders or to time limitations. Another benefit to bitcoin currency is protection. Users’ digital signatures are encrypted, meaning that transfers never contain sensitive or personal information.
Another reason bitcoin has emerged as a viable currency alternative is because the system that maintains it has solved the early design problem of “double-spending”. Early virtual currency candidates had no way of preventing users from copying and pasting a chunk of text and “spending” it indefinitely. Bitcoin created a public ledger called a “block chain” which records every bitcoin transaction ever processed. The strategy verifies the validity of a transaction and prevents double-spending because once a bitcoin is transferred, the user can no longer control it. Instead of banks and government bodies, the ledger is maintained by the public. Users can volunteer to process transactions for others using specialized hardware that solves cryptographic puzzles within the transaction chain. Such users are dubbed “miners” because the first one to solve a particular puzzle gains a set number of bitcoins—this is, in fact, how new bitcoins come into existence. Bitcoin also has built-in anti-inflation mechanisms: the number of bitcoins that can ever be created is capped at 21 million, and the rewards for solving puzzles will halve at regular intervals until the year 2140.
Software developers are introducing a flurry of new currencies that tweak the bitcoin concept with varying algorithms or rules. The litecoin network, for example, offers faster transaction processing than bitcoin, but less efficient mining.
While virtual currency has several key advantages, there are also many downsides associated with its use. One disadvantage is the currency market’s volatility. Due to the relatively few users and merchants accepting such money, small events, trades, or business activities can affect value. Bitcoin itself was worth only 30 US cents at the start of 2011 before fluctuating wildly until landing on its current value, which is pushing $1000 US dollars per coin. This volatility is one of the reasons why virtual currency trading is becoming a popular activity. Day traders hope to take advantage of rate discrepancies in the market in order to gain a windfall.
US Justice Department officials have also expressed concern about virtual currency’s vulnerability to money laundering. These concerns were explored in a recent US Senate congressional committee on digital currency and its possible need for regulatory scrutiny. In the hearing, US Treasury Department director Jennifer Shasky Calvery admitted that despite concerns about bitcoin use, “cash is still probably the best means for money laundering” due to its ubiquity. As well, virtual currency advocates are not averse to implementing appropriate customer due diligence programs. If anything, such mechanisms would legitimize virtual currency and make it an even more viable alternative to cash.
For media coverage from several sources and with a variety of perspectives, follow these links: The Globe and Mail
(November 18, 2013), The Wall Street Journal
(November 20, 2013), Reuters
(November 18, 2013), Wired Magazine
(November 23, 2011). One of the most recent and comprehensive articles in the mainstream press is from The Economist
in its Technology Quarterly
, November 30, 2013.
Summary by: Elena Iosef
Disclaimer: This Newsletter is intended to provide readers with general information on legal developments in the areas of e-commerce, information technology and intellectual property. It is not intended to be a complete statement of the law, nor is it intended to provide legal advice. No person should act or rely upon the information contained in this newsletter without seeking legal advice.
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