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 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.
This thesis illustrates forensic research work on Bitcoin, an innovative Internet based global transaction system that attracts ascending popularity during the recent few years. As an open, public and scalable distributed payment system, Bitcoin brings forward significant economic and technological impact to our world. Meanwhile, a new notion of virtual currency, "Bitcoin" comes into existence such that Bitcoin currency can be "mined" from all over world complying with specific algorithms. Mined bit "coins" has practical monetary values that turn the Bitcoin system into a digital currency circulation system. Due to Bitcoin's decentralized semantics, Bitcoin transaction and currency are not subject to control and censorship from any single authority. Therefore, Bitcoin brings out various security concerns about its application as a long-term reliable system.\nThe research in the thesis focuses on forensic study on Bitcoin. It covers experimental study on the Bitcoin network as a peer-to-peer system and a graph-based forensic approach against Bitcoin's transaction data. Major contributions include network data evaluation and transaction history analysis. In case of forensic investigation is needed against criminal incidents such as fraud, false transactions and money theft, which are commonly seen in commonly used digital payment systems, the research provides a guidance of efficient information collection and framework of evidence data processing and extraction
The present study addresses one of the most problematic phenomena: Bitcoin price. We explore the Granger causality for two relationships (Bitcoin price and transactions; Bitcoin price and investors’ attractiveness) from a frequency domain perspective using Breitung and Candelon’s (2006) approach. Intuitively, this research gauges empirically the causal links between these variables unconditionally on the one hand and conditionally to the Chinese stock market and the processing power of Bitcoin network on the other hand. The observed outcomes reveal some differences with respect to the frequencies involved, highlighting the complexity of assessing what Bitcoin looks like and the difficulty to gain clearer insights into this nascent crypto-currency. Beyond the nuances of short-, medium- and long-run frequencies, this paper confirms the extremely speculative nature of Bitcoin without neglecting its usefulness in economic reasons (trade transactions). The consideration of the Chinese market index and the hash rate has led to solid and unambiguous findings connecting further Bitcoin to speculation.
When processing transactions in a block, a miner increases his reward but also decreases his probability to earn any reward because the time needed for his block to reach consensus depends on its size. We show that this leads to a game situation between miners. We analytically solve this game for two miners. Then, we show that miners do not play a Nash equilibrium in the current Bitcoin mining environment, instead, they should not process any transaction. Finally, we show that the situation where no transaction is ever processed would stop being a Nash equilibrium if the transaction fee was multiplied or, equivalently, the fixed reward divided by a factor of about 12.
This article explores the state of virtual currencies and their regulation in and by the United States and the States. It offers thoughts on which models of regulation might suit virtual currencies best. It also surveys recent enforcement actions brought by the Departments of Treasury, Justice and Homeland Security against providers of virtual currencies or comparable electronic stored value. It concludes that issuers and users of virtual currencies are not being realistic if they think that the United States will not regulate virtual currencies for some purposes.
Robleh Ali, John Barrdear, Roger Clews, James Southgate
Modern electronic payment systems rely on trusted, central third parties to process payments securely. Recent developments have seen the creation of digital currencies like Bitcoin, which combine new currencies with decentralised payment systems. Although the monetary aspects of digital currencies have attracted considerable attention, the distributed ledger underlying their payment systems is a significant innovation. As with money held as bank deposits, most financial assets today exist as purely digital records. This opens up the possibility for distributed ledgers to transform the financial system more generally.
A private initiative that has created a virtual currency and a payment system based on cryptography and decentralized management, Bitcoin is considered not only an interesting, but also a disruptive technical innovation by many observers. A number of regulatory and supervisory bodies have issued assessments of the phenomenon, contributing to an emerging international discussion. Does Bitcoin’s claim to provide useful monetary and payment services hold up when checked against principles of monetary theory and the economics of payment systems? We find that while Bitcoin does not rival the established money and payment systems in their traditional domains, a complementary function is conceivable in niches. Using the Bitcoin network poses several risks to customers, however. Since this network and financial services related to bitcoins are not regulated, costumers must take appropriate technical measures to protect their bitcoin holdings. In case of error and fraud, payments are difficult to reverse. Furthermore, the significant exchange rate fluctuations could pose a grave risk to bitcoin owners’ wealth and discourage widespread use for monetary purposes. In a nutshell, at present, bitcoins can be regarded as speculative assets, and the Bitcoin network might inspire further innovation in payment systems and other applications.
During 2013, the U.S. Treasury Department evoked the first use of the 2001 Patriot Act to exclude virtual currency provider Liberty Reserve from the U.S. financial system. This article will discuss: the regulation of virtual currencies; cybercrimes and payment systems; darknets, Tor and the “deep web”; Bitcoin; Liberty Reserve; Silk Road and Mt. Gox. Virtual currencies have quickly become a reality, gaining significant traction in a very short period of time, and are evolving rapidly. Virtual currencies present particularly difficult law enforcement challenges because of their: ability to transcend national borders in the fraction of a second; unique jurisdictional issues; and anonymity due to encryption. Due primarily to their anonymous characteristic, virtual currencies have been linked to numerous types of crimes, including facilitating marketplaces for: assassins; attacks on businesses; child exploitation (including pornography); corporate espionage; counterfeit currencies; drugs; fake IDs and passports; high yield investment schemes (Ponzi schemes and other financial frauds); sexual exploitation; stolen credit cards and credit card numbers; and weapons. Innovation in the pace of development of new currencies and technologies continue to create ongoing challenges for responsible users of technology and regulators alike. While technological advances create great opportunities to improve the health, living conditions, and general wellbeing of mankind; new technologies also create great challenges for nation states.
Bitcoins are scarce digital commodities that enable parties to transmit messages over a network that serves as a universal public ledger. Bitcoins fall within the definition of “commodity” under the Commodity Exchange Act (CEA) such that derivatives contracts that reference bitcoins are subject to regulation by the Commodity Futures Trading Commission. Like other derivatives, Bitcoin derivatives would likely not be subject to the full scope of regulation under the CEA to the extent such derivatives involve physical delivery (as opposed to cash settlement) or are nonfungible and not independently traded. In addition, Bitcoin swaps are currently too illiquid to be subject to mandatory clearing. A growing number of firms are offering Bitcoin derivatives, most of which are for retail traders. In addition to traditional derivatives that reference bitcoins, the Bitcoin (block chain) protocol can potentially enable automated derivatives contracts that securely trade, clear, and settle without the use of trusted intermediaries. The CFTC should consider an exemption for block chain derivatives that meet its policy objectives as a result of the rules that the underlying code applies to the transactions.
This paper discusses the potential and limitations of Bitcoin as a digital currency. Bitcoin as a digital asset has been extensively discussed from the viewpoints of engineering and security design. But there are few economic analyses of Bitcoin as a currency. Bitcoin was designed as a payments vehicle and as a store of value (or speculation). It has no use bar as money or currency. Despite recent enthusiasm for Bitcoin, it seems very unlikely that currencies provided by central banks are at risk of being replaced, primarily because of the market price instability of Bitcoin (i.e. the exchange rate against the major currencies). We diagnose the instability of market price of Bitcoin as being a symptom of the lack of flexibility in the Bitcoin supply schedule ‐ a predetermined algorithm in which the proof of work is the major driving force. This paper explores the problem of instability from the viewpoint of economics and suggests a new monetary policy rule (i.e. monetary policy without a central bank) for stabilizing the values of Bitcoin and other cryptocurrencies.
The Bitcoin Market Potential Index conceptualizes and ranks the potential utility of bitcoin across 178 countries to show where the cryptocurrency has the greatest relative potential for adoption. The index utilizes a data set with 40 variables from the following areas: technology penetration, international remittances, inflation, informal economy, financial repression, financial crises (historical), and bitcoin penetration. Standardized and re-scaled country level data both indicate that Argentina and Sub-Saharan Africa are the country and region, respectively, where bitcoin has the greatest potential for adoption. It is argued that regulation could have an important effect on bitcoin adoption but that it should be excluded as an index variable for now due to insufficient data and uncertainty over its short-term directional impact and longer-term consequences.
Bitcoins are digital gold. They are a purely electronic commodity traded for speculative purposes as well as in exchange for goods and services. Just like physical gold, the relative price of bitcoins denominated in different currencies implies a nominal exchange rate. This is a departure from previous literature which treats bitcoin prices themselves as nominal exchange rates. I argue that treating prices as exchange rates is inappropriate as one would not consider the price of physical gold to be an exchange rate. Therefore, this paper characterizes the behavior of nominal exchange rates implied by relative bitcoin prices. I show that the implied nominal exchange rate is highly cointegrated with the nominal exchange rate determined in conventional foreign currency exchange markets. I also show that the direction of causality flows from the conventional markets to the bitcoin market and not vice-versa which can explain much of the volatility in bitcoin prices.
In this paper we discuss Bitcoin, the leader among the existing cryptocurrencies, to analyse its trends, success factors, current challenges and probable solutions to make it even better. In the introduction section, we discuss the history and working mechanism of Bitcoin. In the background section, we develop the ideas that evolved in the process of making a stable cryptocurrency. We also analyze the survey matrices of the present day cryptocurrencies. This survey clearly shows that Bitcoin is the clear winner among its kind. Section 3 is about the success factors of Bitcoin and the proceeding sections are a discussion about current challenges which pose as hurdles in making Bitcoin a better currency in the digital world. We finally discuss the balance between anonymity and reduced trust in the cryptocurrency world, before concluding the survey.
We present a thorough empirical analysis of market impact on the Bitcoin/USD exchange market using a complete dataset that allows us to reconstruct more than one million metaorders. We empirically confirm the "square-root law'' for market impact, which holds on four decades in spite of the quasi-absence of statistical arbitrage and market marking strategies. We show that the square-root impact holds during the whole trajectory of a metaorder and not only for the final execution price. We also attempt to decompose the order flow into an "informed'' and "uninformed'' component, the latter leading to an almost complete long-term decay of impact. This study sheds light on the hypotheses and predictions of several market impact models recently proposed in the literature and promotes heterogeneous agent models as promising candidates to explain price impact on the Bitcoin market -- and, we believe, on other markets as well.
Bitcoin is a virtual currency created by programmers, which is produced at a predetermined and knowable rate to simulate a limited resource. Its value is derived from the trust of its users and is protected by its limited nature and the cryptography by which the currency is secured and authenticated. Bitcoin has been, and continues to be, used by some for the purchase of illegal substances and in furtherance of crimes. Because Bitcoin is not issued by a central bank or government, its use entails risks, both legal and otherwise, that have not previously been explored. Nonetheless, Bitcoin possesses significant economic upside over traditional currencies and methods of transaction online. As a result, governments should further study Bitcoin and regulate businesses that exchange in Bitcoin, but without attempting to stop or slow the growth of the currency itself and without attacking otherwise law-abiding citizens who transact in Bitcoins.
It is a widely spread belief that crypto-currencies implementing a proof of stake transaction validation system are less vulnerable to a 51% attack than crypto-currencies implementing a proof of work transaction validation system. In this article, we show that it is not the case and that, in fact, if the attacker's motivation is large enough (and this is common knowledge), he will succeed in his attack at no cost.
This paper overviews the entire landscape of Bitcoin-like cryptocurrencies. Bitcoin has not emerged out of cryptocurrency competition, but rather became a dominant currency as the first broad market based cryptocurrency. But there are more than a hundred of cryptocurrencies in the market, and some are catching up to Bitcoin. This is a healthy sign of currency competition á la Hayek. Through this competition new technological and security innovations may emerge. In this paper, we point out potential problems with Bitcoin and propose some ideas for an alternative cryptocurrency.
Bitcoin has enabled competition between digital cryptocurrencies and traditional legal tender fiat currencies. Despite rapidly increasing acceptance, so far the affirmation of cryptocurrency as better money has been thwarted by dramatic deflationary price instability. Successful at disposing of any central monetary authority, bitcoin has elected to have a fixed deterministic inelastic monetary policy, establishing itself more as digital gold than as a currency. Price stability could be achieved by dynamically rebasing the outstanding amount of money: the number of cryptocurrency units in every digital wallet is adjusted instead of each single unit changing its value. The apparent awkwardness of this unfamiliar paradigm is discussed at length, proving that its only real novelty is about fairness and effectiveness. Furthermore, suggestions are provided about how to ease the effect of contractionary monetary policy. The proposed monetary base adjustment has neutral impact on the overall wallet wealth, as it does not introduce any arbitrary distortion into the intrinsic value dynamics of the wallet. The adjustment is based on a commodity price index determined with a resilient consensus process that does not rely on central third party authorities. It is posited in this paper that a digital cryptocurrency adopting elastic monetary standard is Hayek Money, so named from the Nobel Prize-winning economist: a good money standard providing stable prices for a new economic era.