The English version of this paper can be found at: http://ssrn.com/abstract=2526472 . Italian Abstract: La grande diffusione dei bitcoin avvenuta negli ultimi due anni ha messo in luce una serie di questioni legate all'utilizzo degli strumenti di pagamento anonimo in internet. Se da un lato la rete vede in questa nuova utility una forma di moneta elettronica, l'analisi giuridica del fenomeno individua una concorrente natura di commodity, rispetto cui sono da sottolineare i risvolti di rischio legati all'uso degli strumenti derivati e al pericolo di bolla speculativa. Il forte incremento e la volatilità che caratterizzano il cambio dei bitcoin contro le monete tradizionali sembrano infatti da considerarsi legati, più che al grande successo riscosso in rete da questo efficiente strumento, alle attività di investimento di alcuni fondi hedge e a decisioni di tipo istituzionale intervenute nel corso del tempo. Nell'articolo che segue si analizzeranno i bitcoin nella loro duplice veste: la valutazione economica sarà relativa alle caratteristiche di volatilità peculiari del target di analisi mentre le considerazioni espresse a livello strutturale saranno riferibili agli strumenti di questo genere in quanto tali. English Abstract: The considerable diffusion of bitcoins over the Internet that took place in the last two years has highlighted some important issue about the use of anonym tools of payment in e-commerce. Even though bitcoins are largely considered to be a digital currency, the legal and economic analysis draws the attention to a concomitant structure of financial commodity with risky features related to derivative instruments making the possibility of a bubble a case to consider. The significant growth in value and the intense volatility characterizing bitcoins are more likely to be the consequence of remarkable investments made by hedge funds and the effect of specific Institutional measures, than the outcome this efficient instrument has achieved on the Internet. The following article is analyzing bitcoins in their twofold nature: the structural considerations we will express are referred to virtual coins in general, whereas the financial evaluation is related to the specific volatility of our analysis target.
Bitcoin is the world's first decentralized digital currency. According to Lawrence Lessig, cryptography is "the most important technological breakthrough in the last one thousand years" and will be transformative. Bitcoin, capitalizing on cryptography, is a revolutionary digital currency protocol--a software system capable of tracking financial transactions without the need for a third party intermediary. The Bitcoin software is a "community-driven open source project released under an MIT license.” This paper begins by briefly reviewing the mechanics of Bitcoin in Section I. Section II then surveys the rapidly expanding uses of Bitcoin, as well as the emerging application of Bitcoin. Since all new technologies face risk and downside, Section III will address a few of the risks and the highly publicized dark side of Bitcoin. Finally, Section IV will break down how the various governments have initially assessed this new technology and discuss policy implications going forward, as well as touch on the parameters for a twenty-first century regulatory framework by addressing emerging legal and policy issues. As the implementation of Bitcoin and other digital currencies continues, public policy makers should be encouraged to step back and assess the impact of the nascent technology prior to implementing regulatory schemes based upon pre-existing laws based upon outdated assumptions. The multiple applications of the emerging technology suggests policymakers take an innovative approach and adopt public policies and legal frameworks that accommodate the entire scope of its application. The new public policy formulates a regulatory scheme based upon a holistic understanding of the full range of characteristics of Bitcoin and digital currencies. Policymakers, starting with U.S. Congress and state legislatures, should develop public policies that recognize Bitcoin and digital currencies as possessing all of the following characteristics: currencies, payment systems, commodities, properties, investments, systems of commerce, and even systems of contracts. As this dynamic Smartmoney emerges, so emerges the requirement for a new innovative approach to laws and regulations: smart government.
This paper explores legal and economic issues related to a fascinating new technology called the blockchain protocol. The most popular and important blockchain commodity is currently bitcoin (Part I). Bitcoin is intuitively understood as a “virtual currency.” However, it is possible that bitcoin fails to meet an economist’s definition of money (Part II). In Part III, I survey the academic literature and conduct an empirical study of my own that compares bitcoin prices and other assets from July 12, 2013 until December 16, 2014. Ultimately, I conclude that bitcoin is not money and does not behave like money. Later, I analyze two potential legal questions connected to the question of whether bitcoin is money: how will bitcoin derivatives be regulated? (Part IV), and whether transferred bitcoins are free of security interests under Article 9 of the Uniform Commercial Code (Part V).
Cryptocurrency – including a particular initial denomination known as Bitcoins – has received since 2009 wide and growing publicity in technology, finance, U.S. and international law enforcement, as well as general public journalism and popular press. This recent popular press coverage of cryptocurrency (how and from where do Bitcoins originate?, how much is one worth today or tomorrow?, will it last with all the stumbling implementation and technical intricacies?, purchasing illegal drugs and guns with Bitcoins!) overshadows cryptocurrency’s applicability to financial and currency system theories which have been developed and predicted for decades or more: the fundamental theory of currency; currency denationalization; a return to an international standard monetary unit (before nationalized fiat); the inefficiency of costly 3rd-party-trust currency models; and global concerns about currency hegemonies as well as political influence of monetary policy, and currency hedge/speculation. As the moral panic of Bitcoin and similar initial implementations of cryptocurrency fade and cryptocurrency systems gain traction underground or aboveground anywhere in the world, U.S. and international public policymakers and regulators will need to surveil, understand, and evolve public policy to accommodate any aspect of cryptocurrency which develops from technical novelty to realization of predicted grand monetary theories. Some of those areas of evolution include: national central bank monetary control; public sector dependence (oversight, taxing, fees) on private sector financial models and structures; and viability of traditional national and international law enforcement techniques U.S. federal and major subnational public sector policymakers and regulators must remain vigilant for and educated about cryptocurrency usage whether in nationalized or denationalized use cases or they risk missing early opportunities to shape the rapidly changing landscape of digital financial systems in the U.S and abroad. This vigilance and awareness could be in the form of continued congressional hearings and regulatory surveillance. But a more proactive approach including federal grants for research and study of cryptocurrency, promotion of national and international symposia regarding currency technology and implications should be pursued. The nature of cryptocurrency’s raison d'être and early-adopter motivation foretells a disruptive network-effect adoption despite entrenched interests’ efforts at preclusion similar to numerous recent technical innovations in the private sector like music or other intellectual property downloads, retail shopping, taxis services, hotel lodging, traditional print journalism, and traditional communication systems.
Bitcoins have the potential to fundamentally change the way value is transferred globally. Their rapid adoption over the past four years has led many to consider the possible results of such a technology. To be a viable currency, however, it is imperative that the market for trading Bitcoins is efficient. By examining the changes in availability of predictable outsized returns and market liquidity over time, this paper examines historical Bitcoin market efficiency and establishes correlations between market liquidity, price predictability, and return data. The results provide insight into the turbulent nature of Bitcoin market efficiency over the past years, but cannot definitively measure the magnitude of the change due to the limitations in efficiency analysis. The most meaningful result of this study, however, is the statistically significant short-horizon price predictability that existed over the duration of the study, which has implications for Bitcoin market efficiency as well as for continued research in short-horizon Bitcoin price forecasting models.
The considerable diffusion of bitcoins over the Internet that took place in the last two years has highlighted some important issue about the use of anonym tools of payment in e-commerce. Even though bitcoins are largely considered to be a digital currency, the legal and economic analysis draws the attention to a concomitant structure of financial commodity with risky features related to derivative instruments making the possibility of a bubble a case to consider. The significant growth in value and the intense volatility characterizing bitcoins are more likely to be the consequence of remarkable investments made by hedge funds and the effect of specific Institutional measures, than the outcome this efficient instrument has achieved on the Internet. The following article is analyzing bitcoins in their twofold nature: the structural considerations we will express are referred to virtual coins in general, whereas the financial evaluation is related to the specific volatility of our analysis target.
Bitcoin is actually a new kind of money. It is a brand new concept and it is a digital currency that is not issued by a central bank. Bitcoin is not created by a corporation. Instead, anyone who participates in the Bitcoin network - anyone who uses the Bitcoin software on his computer and communicates with a network of other people, who are doing the same thing, all these people together perform the function normally performed by a central bank. In this paper, we will try to bring closer the currency Bitcoin. Researchers are recommended to conduct research about Bitcoin, in order to receive objective advantages and disadvantages of Bitcoin as a currency.
Bitcoin is making near-daily headlines, whether about its volatile exchange rate, the regulatory issues it raises, or its criminal associations. As the public becomes familiar with the idea of virtual currencies, many people struggle to understand why users exchange government-backed (“real”) currencies for Bitcoin. This article explores the appeal and danger of investing in Bitcoin for speculative gain, for moral purposes, for its spending power, and for its criminal applications.
The practical and theoretical meaning of the rise and fall of new local and virtual currencies suggest that two basic theories of money both have their validity and reasons for coexistence. The drive for increasing efficiency in the payment mechanisms is in full swing and still presents many opportunities for improvement.
In the last few years the efficiency of secure multi-party computation (MPC) increased in several orders of magnitudes. However, this alone might not be enough if we want MPC protocols to be used in practice. A crucial property that is needed in many applications is that everyone can check that a given (secure) computation was performed correctly – even in the extreme case where all the parties involved in the computation are corrupted, and even if the party who wants to verify the result was not participating. This is especially relevant in the clients-servers setting, where many clients provide input to a secure computation performed by a few servers. An obvious example of this is electronic voting, but also in many types of auctions one may want independent verification of the result. Traditionally, this is achieved by using non-interactive zero-knowledge proofs during the computation. A recent trend in MPC protocols is to have a more expensive preprocessing phase followed by a very efficient online phase, e.g., the recent so-called SPDZ protocol by Damgard et al. Applications such as voting and some auctions are perfect use-case for these protocols, as the parties usually know well in advance when the computation will take place, and using those protocols allows us to use only cheap information-theoretic primitives in the actual computation. Unfortunately no protocol of the SPDZ type supports an audit phase. In this paper, we show how to achieve efficient MPC with a public audit. We formalize the concept of publicly auditable secure computation and provide an enhanced version of the SPDZ protocol where, even if all the servers are corrupted, anyone with access to the transcript of the protocol can check that the output is indeed correct. Most importantly, we do so without significantly compromising the performance of SPDZ i.e. our online phase has complexity approximately twice that of SPDZ.
Bitcoin, a virtual currency invented in 2009, was created as a peer-to-peer currency that eliminated the need for a third party authority, such as banks or government, to be involved in monetary transactions. Having no intrinsic value but carrying no government guarantees relegates bitcoin and its competitors to the perpetual role of investment opportunity, deriving value not from a practical use, but from a nominal, dollar value. This will continue to be the case until the U.S. Government sanctions virtual currency as a viable store of value. Because the dollar plays such a large role in the world’s economy, other countries will not adopt virtual currency technology unless the U.S. does so first. Substantial populations around the world must embrace bitcoin as a significant source of value before any monetary authority will relinquish the power associated with fiat currency. There are, however, many aspects of the virtual-currency model created by bitcoin that could be useful in improving the efficiency of money movement around the United States and the globe, through transaction memory, low transaction cost, and secure account information.
Some forms of money have been used since 2,200 BC. What constitutes money evolved from commodities with intrinsic value, such as gold, to commodity- backed paper money. In the United States, this was replaced by “fiat” money issued by the Federal government that is “legal tender” for all debts public and private. Eventually, payments evolved to credit cards, debit cards, and various forms of electronic payments. Virtual currencies, such as Bitcoin, are the latest innovation. They act like money but have no intrinsic value and are not legal tender. This article examines the pros and cons of Bitcoins.
Bitcoin is the first decentralized peer-to-peer crypto-currency founded in 2009. Its main specificity is the fact that there is no issuer of this currency. On the other hand, the supply of this currency is software-programmed and limited. Among other things, its main features are relatively secure payments, low transaction costs, anonymity, inability of counterfeiting, irreversibility of transactions, but also extremely unstable exchange rate. Despite many advantages, the use of this currency is subject of numerous discussions, as this currency offers the possibility of performing various abuses and criminal activities. The future of this and other currencies in this regard depends on both security and privacy of these currencies, and legal regulation of such payments.
Bitcoin, a peculiar crypto-currency has been the loudest buzzword in global finance over the last year or so, both for its spectacular and seemingly robust appreciation trend as well as for more recent equally ostentatious demise. After reviewing the history of bitcoin and \nspecificities of its cyber-construct, this paper adds to the critical analysis of bitcoin as an international \ncurrency alternative. Lately, its volatility has been so excessive that it arguably cannot serve as a store \nof value. In addition, notwithstanding bitcoin's rising if bumpy credibility as a medium of exchange, since it has been immediately converted (by chief vendors) in either of the leading world currencies upon payment due to its extraordinary exchange rate volatility, bitcoin's unit of account potential appears to be dubious too. Moreover, bitcoin's next to none correlation with other major currencies' movements renders it unsuitable for managing FX risk or hedging purposes. Finally, having in mind that it lacks formal reserves or deposit-insurance scheme to back it up yet it's also prone to hacking, \nbitcoin resembles and behaves more like a pyramidal investment vehicle than a global currency alternative. Nevertheless, technology that made it be may still spawn an evolution in the way we posses things, transfer ownership and pay for goods and services in the near IT-ridden future.
This note explores the origins and workings of Bitcoin, its popularity and regulation in Germany, how criminal enterprises have used Bitcoin, and governments’ ability to regulate it. To date, there have been no cases challenging the power of individuals to make transactions using Bitcoin. However, policymakers and consumers around the world are calling for enhanced government regulations. This leads to the question of whether national governments can regulate a currency that is not their own, and if so, what exactly those regulations should look like. This note will show that national governments around the world have no legal basis to prohibit Bitcoin users from entering the marketplace. National governments should refrain from passing legislation or regulations that would have a chilling effect on the use of Bitcoin. This note suggests that if a dispute arises, contract law provides a suitable solution for all consumers, and taxation provides sufficient regulation for governments. Section II of this note provides an overview of Bitcoin, its technological foundations, and its use in the marketplace. Section III analyzes Germany’s loose regulatory approach to regulating Bitcoin. Section IV examines how Bitcoin has been, or could be, utilized for illicit purposes by criminal enterprises around the world. Section V analyzes the arguments against increased regulation and proposes solutions that will not have a chilling effect on the adoption of Bitcoin.
The aim of this thesis is to provide a holistic analysis and an economic understanding of Bitcoin, answering two key questions: (i) Why do bitcoins have value? (ii) Why and how will governments seek to regulate the use of bitcoin? To answer these questions, the thesis begins with a discussion of money itself, developing a framework of different types of monies in terms of their uses and properties that will form the basis of the analysis. Based on the technical properties of Bitcoin the framework developed above is then applied to identify bitcoin as a digital commodity money. Following this identification, potential uses of bitcoin supporting its value will be discussed, drawing particular attention to Bitcoin s resilience to regulation. In addition, real world examples of other commodity monies will be used to support the claim that bitcoin may circulate without use value and state backing. Governments tend to seek economic control through controlling money, and it will be argued that there are good reasons to expect governments to be hostile towards widespread use of bitcoin. This is to be expected, as use of bitcoin undermines governments capacity to control money.
I argue that the bitcoins market is an example of a complex system without a stable equilibrium. The users of bitcoins fall into two broad categories: 1) Capital gain seekers: who have no functional use for the currency apart from an expectation of capital gains; 2) Functional users: who use the currency to save on transaction costs as it provides a less costly medium of exchange over traditional fiat currencies. I assume thateach category consists of mean-variance optimizers, and specify simple evolutionary dynamics for each category. I identify two simple routes to chaos in the bitcoins market. If only capital gain seekers are present, then one route to chaos is via the logistic map. If both categories of users matter then a possible route to chaos is via the delay logistic-Hénon map. A policy recommendation follows: in order to pre-empt chaos in the bitcoins market, currency exchanges should be allowed to convert bitcoins into dollars and vice versa if and only if there is an associated transaction involving buying and selling of goods or services or if the bitcoins are freshly mined.Such a regulation pre-empts chaos by reducing the impact of capital gain seekers on the virtual currency’s value.
The present paper seeks to effectively address the following question: What Bitcoin looks like? To do so, we regress Bitcoin price on different variables (potential Bitcoin fundamentals recorded in the literature) by applying an ARDL Bounds Testing approach for daily data covering the period from December 2010 to June 2014. Our findings highlight the speculative behavior of Bitcoin. This virtual currency may be also used for economic reasons. However, there is any sign of being a safe haven. By considering the Chinese trading bankruptcy, the contribution of speculation (proxied by investors’ attractiveness to Bitcoin) remains dominant, indicating the robustness of our results.
Florian Glaser, Martin Haferkorn, Moritz Weber, Kai Zimmermann
Digital currencies are gaining more and more attention against the backdrop of recent events triggered by the ongoing economic crisis. While digital currencies face increasing popularity, the currencies' prices are free floating and subject to high volatility as a result of lacking fundamental valuation methods. On the basis of an overview over the most prominent currency -- Bitcoin -- and an economic literature review we propose an econometric model that incorporates the basic components of the current price discovery process of a digital currency's exchange rate. On the basis of our empirical validation we further show that, in the case of Bitcoin, price volatility is significantly influenced by the media coverage and positive sentiment.
OBJECTIVES OF THE STUDY:\n\nThis thesis has three objectives. First, the past development of monetary systems is studied to see how Bitcoin is positioned as the forerunner of a new category. Second, the attitudes and expecta-tions of Finnish stakeholders are studied to recognize the general perception and future outlook for Bitcoin. Third, bitcoins are examined as an investment instrument by studying price drivers and the degree of predictability of future returns.\n\nDATA AND METHODOLOGY:\n\nThe qualitative methods are based on a literature review and an interview study conducted with Finnish stakeholders from different financial institutions and Bitcoin start-ups. The quantitative methods consist of market sizing calculations, a regression analysis, and Granger tests. The regres-sions utilize novel variables network hashrate, network transactions, and bitcoin supply as explan-atory variables for bitcoin price. Also bitcoin price and Google Trends SVI are used as explanatory variables. The market sizing calculations are based on M2 monetary aggregates for USD, EUR, and JPY.\n\nFINDINGS OF THE STUDY:\n\nThe thesis develops a categorization for decentralized cpytocurrencies that takes into account the main developments of the past monetary systems. The interview study reveals optimism for the technology behind Bitcoin and other decentralized systems, while all interviewees accept the un-certainty of Bitcoin survival. The stakeholders perceive the main challenges of Bitcoin to be tech-nological weaknesses, trust, and reputational issues. In terms of market sizing, it is clear that Bitcoin is not currently a serious threat to fiat currencies. Price driver analysis revealed a momen-tum effect in price returns, as well as an inflationary effect caused by the increasing supply. Also the network hashrate was found to forecast future bitcoin returns. The results from the Granger tests challenge the causality assumed in the regressions.