This paper will discuss and evaluate the design features of Bitcoin in relation to the libertarian and metallist philosophies that have shaped the cryptocurrency. Bitcoin has failed to be perfectly decentralized or particularly anonymous. Furthermore, its hyperdeflationary design features have made Bitcoin a currency dependent on outside, more stable currencies (e.g., the U.S. dollar), which serve as units of account. Finally, despite the view of money taken by its creators, this supposedly stateless currency is far from apolitical in nature. Although its creators tend to espouse apolitical accounts of money, Bitcoin has been from the beginning a political project -- an evolving, distributed constitutional project, with many goals, visions, and factions. Furthermore, depending on the shape of these political goals, Bitcoin advocates may or may not have a vested interest in creating mechanisms to stabilize the currency and make it a viable unit of account. This paper was written for Christine Desan's seminar, "The Constitutional Law of Money," at Harvard Law School.
Virtual currencies are online payment systems that may function as real currencies but are not issued or backed by central governments. As demonstrated by recent events, virtual currencies present regulators with significant challenges. On May 23, 2013, the U.S. federal government brought an indictment against the operators of Liberty Reserve, a popular virtual currency, charging the operators with money laundering and operating an unlicensed money-transmitting business. The same month, the Government Accountability Office ("GAO") made public a report exploring the potential tax-compliance risks associated with virtual currencies and economies. Legislators have also taken particular interest in one type of virtual currency-Bitcoin. On August 13, 2013, the U.S. Senate Committee on Homeland Security announced plans to start an inquiry aimed at establishing a regulatory framework for Bitcoin. This short Essay describes the mechanisms by which "cryptocurrencies"-a subcategory of virtual currencies-could replace tax havens as the weapon-of-choice for tax-evaders. I argue that it is reasonable to expect this shift to occur in the foreseeable future due to the contemporary convergence of two unrelated, yet parallel, processes. The first process is the increasing popularity of cryptocurrencies, of which Bitcoin is the most widely recognized example. Unlike other virtual currencies that are associated with the existence of a virtual economy-usually in computer games-cryptocurrencies "function as a unique currency with [their] own free-floating exchange." Over the past three years, Bitcoin gradually gained the confidence of consumers, retailers, and service providers, and it is now effectively functioning as a currency in the real world. In fact, in August 2013, Bitcoin was officially recognized as a legal form of tender in Germany. Only two weeks earlier, a federal judge ruled that for purposes of U.S. securities regulation, Bitcoin is indeed "money."
Cryptocurrencies are digital alternatives to traditional governmentâissued paper monies. Given the current state of technology and skepticism regarding the future purchasing power of existing monies, why have cryptocurrencies failed to gain widespread acceptance? I offer an explanation based on network effects and switching costs. In order to articulate the problem that agents considering cryptocurrencies face, I employ a simple model developed by Dowd and Greenaway (1993) (Dowd, K., and D. Greenaway. âCurrency Competition, Network Externalities, and Switching Costs: Towards an Alternative View of Optimum Currency Areas.â The Economic Journal , 103(420), 1993, 1180â89). The model demonstrates that agents may fail to adopt an alternative currency when network effects and switching costs are present, even if all agents agree that the prevailing currency is inferior. The limited success of bitcoinâalmost certainly the most popular cryptocurrency to dateâserves to illustrate. After briefly surveying episodes of successful monetary transition, I conclude that cryptocurrencies like bitcoin are unlikely to generate widespread acceptance in the absence of either significant monetary instability or government support. ( JEL E40, E41, E42, E49)
We maintain that the crypto-currency bitcoin is a practical application of what is termed âmemoryâ in the monetary economics literature. After reviewing the theoretical literature on money and memory, we offer a brief overview of the bitcoin protocol and argue that, like memory, bitcoin functions as a public record-keeping device. Finally, we provide evidence that â in line with the standard theoretical account of memory â bitcoin use has soared as the expected cost of storing traditional monies increased.
ďťżA bona fide currency functions as a medium of exchange, a store of value, and a unit of account, but bitcoin largely fails to satisfy these criteria. Bitcoin has achieved only scant consumer transaction volume, with an average well below one daily transaction for the few merchants who accept it. Its volatility is greatly higher than the volatilities of widely used currencies, imposing large short-term risk upon users. Bitcoinâs daily exchange rates exhibit virtually zero correlation with widely used currencies and with gold, making bitcoin useless for risk management and exceedingly difficult for its owners to hedge. Bitcoin prices of consumer goods require many decimal places with leading zeros, which is disconcerting to retail market participants. Bitcoin faces daily hacking and theft risks, lacks access to a banking system with deposit insurance, and it is not used to denominate consumer credit or loan contracts. Bitcoin appears to behave more like a speculative investment than a currency.
We propose an electronic payment protocol for typical customer-merchant relations which does not require a trusted (signed) payment descriptor to be sent from the merchant to the customer. Instead, the destination "account" number for the payment is solely created on the customer side. This eliminates the need for any encrypted or authenticated communication in the protocol and is secure even if the merchant's online infrastructure is compromised. Moreover, the payment transaction itself serves as a timestamped receipt for the customer. It proves what has been paid for and who received the funds, again without relying on any merchant signatures. In particular, funds and receipt are exchanged in a single atomic action. The asymmetric nature of the customer-merchant relation is crucial. The protocol is specifically designed with bitcoin in mind as the underlying payment system. Thereby, it has the useful benefit that all transactions are public. However, the only essential requirement on the payment system is that "accounts" are arbitrary user-created keypairs of a cryptosystem whose keypairs enjoy a homomorphic property. All ElGamal-type cryptosystems have this feature. For use with bitcoin we propose the design of a deterministic bitcoin wallet whose addresses can be indexed by clear text strings.
Governments have traditionally censored drug-related information, both in traditional media and, in recent years, in online media. We explore Internet content regulation from a drug-policy perspective by describing the likely impacts of censoring drug websites and the parallel growth in hidden Internet services. Australia proposes a compulsory Internet filtering regime that would block websites that âdepict, express or otherwise deal with matters of⌠drug misuse or addictionâ and/or âpromote, incite or instruct in matters of crimeâ. In this article, we present findings from a mixed-methods study of online drug discussion. Our research found that websites dealing with drugs, that would likely be blocked by the filter, in fact contributed positively to harm reduction. Such sites helped people access more comprehensive and relevant information than was available elsewhere. Blocking these websites would likely drive drug discussion underground at a time when corporate-controlled âwalled gardensâ (e.g. Facebook) and proprietary operating systems on mobile devices may also limit open drug discussion. At the same time, hidden Internet services, such as Silk Road, have emerged that are not affected by Internet filtering. The inability for any government to regulate Tor websites and the crypto-currency Bitcoin poses a unique challenge to drug prohibition policies.
We perform a comprehensive measurement analysis of Silk Road, an anonymous, international online marketplace that operates as a Tor hidden service and uses Bitcoin as its exchange currency. We gather and analyze data over eight months between the end of 2011 and 2012, including daily crawls of the marketplace for nearly six months in 2012. We obtain a detailed picture of the type of goods being sold on Silk Road, and of the revenues made both by sellers and Silk Road operators. Through examining over 24,400 separate items sold on the site, we show that Silk Road is overwhelmingly used as a market for controlled substances and narcotics, and that most items sold are available for less than three weeks. The majority of sellers disappears within roughly three months of their arrival, but a core of 112 sellers has been present throughout our measurement interval. We evaluate the total revenue made by all sellers, from public listings, to slightly over USD 1.2 million per month; this corresponds to about USD 92,000 per month in commissions for the Silk Road operators. We further show that the marketplace has been operating steadily, with daily sales and number of sellers overall increasing over our measurement interval. We discuss economic and policy implications of our analysis and results, including ethical considerations for future research in this area.
Internet and digital technologies have been discussed recently by Addiction contributors in relation to the delivery of efficient computer-delivered brief interventions [1,2], online methodologies for recruiting and surveying illicit drug users [3] and the internet's role in facilitating the spread of information and sale of emerging drugs such as mephedrone [4] and synthetic cannabinoids [5]. Here, I introduce readers to a novel use of the internet in the drugs field. The anonymous online drug market-place Silk Road was first revealed in June 2011 [6]. Silk Road is accessible only to people who are using Tor anonymizing software [7]. Tor uses encryption to make it impossible for anyone to trace IP addresses (the electronic code assigned to each computer on the internet). The front page of Silk Road looks a great deal like the front page of eBay. Goods and services for sale are categorized and all manner of drugs are available under the following categories: ecstasy, cannabis, dissociatives, psychedelics, opioids, stimulants, benzodiazepines and other. Sellers receive ratings from buyers and comments about the quality of their products, how fast they ship and the level of professionalism and discretion of the transaction. Trust in sellers is built on reputation. Silk Road traders use the anonymous currency Bitcoin [8]. This decentralized international currency operates through peer-to-peer technologies. At the time of writing (October 2011), Silk Road is still online and continuing to expand. Facilitated by a combination of the internet and encryption technologies, buying and selling illegal products is now possible and may increase dramatically in the future. What may stop an exponential increase in the use of anonymous online drug market-places is the hurdle of delivery. At the end of the transaction, the physical product still needs to be sent to the buyer. Sending products between countries allows law enforcement the opportunity to intercept packages and potentially attempt to arrest the would-be importer. Sending products within the same country may make arrest less likely. There are also numerous barriers to entry for people who might want to use Silk Road. Installing and using Tor, buying and using Bitcoins in a secure way and taking the risk of fraud or arrest upon delivery may deter the majority of would-be users. Nevertheless, for the minority who master these concerns and are willing to take the risk, Silk Road has revolutionized how the internet can be used to source drugs. After all, buying drugs in the real world also involves considerable risk. For some, the online equivalent may prove more convenient and secure than arranging a standard deal. There are many unanswered questions about Silk Road. The extent to which law enforcement can stop and disband a site such as this is yet to be seen. The extent to which drug users will use this new technology is also unknown. Needless to say, if anonymous online drug markets do end up expanding into mainstream drug markets, they will pose a real challenge to existing drug laws and policies. We should definitely watch this space. None.
What is the legal status of a âbitcoin,â a decentralized peer-to-peer digital currency? Is the use of bitcoins even legal? Should it be? The bitcoin cybercurrency thus poses a puzzle. Unlike centralized and publicly-created metallic or paper currencies, bitcoin is a privately-created, decentralized medium of exchange and thus is not backed by any national or transnational government or by any public or private bank. As such, the legal status of the bitcoin cybercurrency is murky and unclear at best. Despite this legal uncertainty, the demand for bitcoins on the Internet continues to grow. The authors will present a legal, normative, and game-theoretic analysis of the bitcoin cybercurrency. To provide a theoretical background to our legal and normative analysis, the first part of the paper will present an analytical model of the behavior of bitcoin users. In summary, the use of bitcoins can be modeled as a Prisonerâs Dilemma. That is, because of the limited supply of bitcoins and the rising demand of this cybercurrency, the temptation to defect by hoarding this currency -- rather than using bitcoins for the exchange of goods and services -- threatens the stability of the bitcoin cybercurrency as a whole. In the second part of the paper, the authors consider the legal status of bitcoins, discuss the policy and normative arguments for and against the legalization of bitcoins, and propose several possible legal frameworks for protecting the bitcoin cybercurrency and solving the bitcoin puzzle.
This paper analyses 26 time series that measure daily data for different attributes of the Bitcoin network and studies how the virtual currency behaves compared to a basket of currencies containing the Brazil Real (BRL), the Chinese Yuan (CNY), the Euro (EUR), and the Japan Yen (JPY) against the US Dollar (USD). \nBasic statistics about the time series have been taken and stationarity has been studied in order to build sterilized fact data and meaningful cointegrations have been found among them. By applying a Vector Autoregressive (VAR) model, a regression has been built among the currencies and the Granger causality test has been applied in order to determine whether one time series (of a given currency) is useful in forecasting another and to observe causal relationships among the currencies studied.
In 2009, a curious new virtual currency called Bitcoin made its first appearance on the Internet. While it remains a ânicheâ currency relative to other major denominations like the U.S. dollar, Bitcoin has experienced significant growth since its inception. The total number of Bitcoins in circulation is about 12.5 million, with a recent market price of about $500 each. Today, Bitcoinâs total market capitalization is about $6 billion, and in the past it has been as high as $13 billion. The average number of Bitcoin transactions per day has averaged over 60,000 since January 2014, reflecting between $20 million and $100 million worth of transactions per day. The numbers show that in the five years since its first appearance, Bitcoin has grown tremendously in popular knowledge and usage. Although it is clear that Bitcoin can be used to purchase goods and services, and can be given an explicit dollar value, questions remain about the economic and legal status of Bitcoin and other virtual currencies that have emerged in its wake. Members of the Bitcoin developer and user community believe âBitcoin is an innovative payment network and new kind of money.â Others, like the U.S. Internal Revenue Service, take the position that Bitcoin is a type of commodity or property. Whether Bitcoin is a new form of virtual money or simply an electronic commodity requires an investigation into what constitutes money, and an assessment of whether Bitcoin comfortably fits into the parameters of what we consider to be money. This paper finds that, at this stage in its development, Bitcoin is not money and more closely resembles a commodity or property. This paper begins by giving a brief overview of Bitcoin and how it operates. It then describes two major theories of money â the conventional and constitutional theories â that differ in their accounts of how money emerges within a society or political grouping. The paper assesses how well Bitcoin fits under each theory by assessing Bitcoinâs economic properties and implementation. It then turns to the impact of the Bitcoin on the two theories of money, finding it likely does not support the conventional creation story of money and instead lends credence to the constitutional theory.
In 1601, Elizabeth I and her government devalued the Irish coin from nine ounces fine to three ounces fine of silver in order to finance the high cost of the Nine Years War in Ireland. 1 This unilateral move by the English government, combined with the failure to remove the old sterling from circulation, caused catastrophic problems throughout Ireland. 2 In addition to rapid inflation in common foodstuffs, the people in Ireland would only accept the new coin at its reduced intrinsic value rather than face value. 3 Further, merchants refused to accept the devalued coin in commercial transactions leading to a shortage of vital goods from England. 4
Simon Barber, Xavier Boyen, Elaine Shi, Ersin Uzun
Abstract. Bitcoin is a distributed digital currency which has attracted a substan-tial number of users. We perform an in-depth investigation to understand what made Bitcoin so successful, while decades of research on cryptographic e-cash has not lead to a large-scale deployment. We ask also how Bitcoin could become a good candidate for a long-lived stable currency. In doing so, we identify several issues and attacks of Bitcoin, and propose suitable techniques to address them. 1
In this paper we describe the various scoring systems used to calculate rewards of participants in Bitcoin pooled mining, explain the problems each were designed to solve and analyze their respective advantages and disadvantages.
Bitcoin is a digital, decentralized, partially anonymous currency, not backed by any government or other legal entity, and not redeemable for gold or other commodity. It relies on peer-to-peer networking and cryptography to maintain its integrity. Compared to most currencies or online payment services, such as PayPal, bitcoins are highly liquid, have low transaction costs, and can be used to make micropayments. This new currency could also hold the key to allowing organizations such as Wikileaks, hated by governments, to receive donations and conduct business anonymously. Although the Bitcoin economy is flourishing, Bitcoin users are anxious about Bitcoin's legal status. This Article examines a few relevant legal issues, such as the recent conviction of the Liberty Dollar creator, the Stamp Payments Act, and the Federal Securities Acts.
Moshe Babaioff, Shahar Dobzinski, Sigal Oren, Aviv Zohar
Many large decentralized systems rely on information propagation to ensure their proper function. We examine a common scenario in which only participants that are aware of the information can compete for some reward, and thus informed participants have an incentive not to propagate information to others. One recent example in which such tension arises is the 2009 DARPA Network Challenge (finding red balloons). We focus on another prominent example: Bitcoin, a decentralized electronic currency system. Bitcoin represents a radical new approach to monetary systems. It has been getting a large amount of public attention over the last year, both in policy discussions and in the popular press. Its cryptographic fundamentals have largely held up even as its usage has become increasingly widespread. We find, however, that it exhibits a fundamental problem of a different nature, based on how its incentives are structured. We propose a modification to the protocol that can eliminate this problem. Bitcoin relies on a peer-to-peer network to track transactions that are performed with the currency. For this purpose, every transaction a node learns about should be transmitted to its neighbors in the network. The current implemented protocol provides an incentive to nodes to not broadcast transactions they are aware of. Our solution is to augment the protocol with a scheme that rewards information propagation. Since clones are easy to create in the Bitcoin system, an important feature of our scheme is Sybil-proofness. We show that our proposed scheme succeeds in setting the correct incentives, that it is Sybil-proof, and that it requires only a small payment overhead, all this is achieved with iterated elimination of dominated strategies. We complement this result by showing that there are no reward schemes in which information propagation and no self-cloning is a dominant strategy.
Anonymity in Bitcoin, a peer-to-peer electronic currency system, is a complicated issue. Within the system, users are identified by public-keys only. An attacker wishing to de-anonymize its users will attempt to construct the one-to-many mapping between users and public-keys and associate information external to the system with the users. Bitcoin tries to prevent this attack by storing the mapping of a user to his or her public-keys on that user's node only and by allowing each user to generate as many public-keys as required. In this chapter we consider the topological structure of two networks derived from Bitcoin's public transaction history. We show that the two networks have a non-trivial topological structure, provide complementary views of the Bitcoin system and have implications for anonymity. We combine these structures with external information and techniques such as context discovery and flow analysis to investigate an alleged theft of Bitcoins, which, at the time of the theft, had a market value of approximately half a million U.S. dollars.
Peters (2011a) defined an optimal leverage which maximizes the time-average growth rate of an investment held at constant leverage. It was hypothesized that this optimal leverage is attracted to 1, such that, e.g., leveraging an investment in the market portfolio cannot yield long-term outperformance. This places a strong constraint on the stochastic properties of prices of traded assets, which we call "leverage efficiency." Market conditions that deviate from leverage efficiency are unstable and may create leverage-driven bubbles. Here we expand on the hypothesis and its implications. These include a theory of noise that explains how systemic stability rules out smooth price changes at any pricing frequency; a resolution of the so-called equity premium puzzle; a protocol for central bank interest rate setting to avoid leverage-driven price instabilities; and a method for detecting fraudulent investment schemes by exploiting differences between the stochastic properties of their prices and those of legitimately-traded assets. To submit the hypothesis to a rigorous test we choose price data from different assets: the S&P500 index, Bitcoin, Berkshire Hathaway Inc., and Bernard L. Madoff Investment Securities LLC. Analysis of these data supports the hypothesis.
Formalist positions towards money are considered from a perspective of formal methods in computing. The Formaleuro (FEUR) as a dimension for monetary quantities is proposed as well as the Formalbitcoin (FBTC) which represents an item ready for circulation in a model of informational money. An attempt is made to understand the concept of money from scratch. In order to provide a definition of money the need is felt to make use of a tailored theory of definition. To that end a theory of imaginative definitions is presented and its implications for definitions of money are sketched. It is argued that a theory of money may be dependent on the role of its holder. A survey of some roles is given, with the so-called subordinate administrative role (SAR) in a central position. The concepts of virtual memory and virtual machine are taken as the point of departure for a definition of the notion of virtual money. It is argued that from the perspective of a component (division) of a large organization (ORG) its local financial system (LFS) provides a virtual money vm(LFS, ORG) which may well fail to meet the most common general and acknowledged moneyness criteria. Inverse moneyness preference is coined as phrase to assert the tendency of top-management of ORG to make its virtual money deviate from these criteria.