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)
The blockchain paradigm when coupled with cryptographically-secured transactions has demonstrated its
utility through a number of projects, not least Bitcoin. Each such project can be seen as a simple application on a decentralised, but singleton, compute resource. We can call this paradigm a transactional singleton machine with shared-state.
Ethereum implements this paradigm in a generalised manner. Furthermore it provides a plurality of such resources, each with a distinct state and operating code but able to interact through a message-passing framework with others. We discuss its design, implementation issues, the opportunities it provides and the future hurdles we envisage.
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.
Marcin Andrychowicz, Stefan Dziembowski, Daniel Malinowski, Ćukasz Mazurek
AbstractâBitcoin is a decentralized digital currency, intro-duced in 2008, that has recently gained noticeable popularity. Its main features are: (a) it lacks a central authority that controls the transactions, (b) the list of transactions is publicly available, and (c) its syntax allows more advanced transactions than simply transferring the money. The goal of this paper is to show how these properties of Bitcoin can be used in the area of secure multiparty computation protocols (MPCs). Firstly, we show that the Bitcoin system provides an attractive way to construct a version of âtimed commitmentsâ, where the committer has to reveal his secret within a certain time frame, or to pay a fine. This, in turn, can be used to obtain fairness in some multiparty protocols. Secondly, we introduce a concept of multiparty protocols that work âdirectly on Bitcoinâ. Recall that the standard definition of the MPCs guarantees only that the protocol âemulates the trusted third partyâ. Hence ensuring that the inputs are correct, and the outcome is respected is beyond the scope of the definition. Our observation is that the Bitcoin system can be used to go beyond the standard âemulation-basedâ definition, by constructing protocols that link their inputs and the outputs with the real Bitcoin transactions. As an instantiation of this idea we construct protocols for secure multiparty lotteries using the Bitcoin currency, without relying on a trusted authority (one of these protocols uses the Bitcoin-based timed commitments mentioned above). Our protocols guarantee fairness for the honest parties no matter how the loser behaves. For example: if one party interrupts the protocol then her money is transferred to the honest participants. Our protocols are practical (to demonstrate it we performed their transactions in the actual Bitcoin system), and can be used in real life as a replacement for the online gambling sites. We think that this paradigm can have also other applications. We discuss some of them. Keywordsâbitcoin; multiparty; lottery; I.
ï»żA 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.
Arthur Gervais, Ghassan Karame, Vedran Äapkun, SrÄjan Äapkun
Bitcoin has achieved large-scale acceptance and popularity by promising its users a fully \ndecentralized and low-cost virtual currency system. However, recent incidents and observations \nare revealing the true limits of decentralization in the Bitcoin system. In this article, we \nshow that the vital operations and decisions that Bitcoin is currently undertaking are not \ndecentralized. More specifically, we show that a limited set of entities currently control the \nservices, decision making, mining, and the incident resolution processes in Bitcoin. We also \nshow that third-party entities can unilaterally decide to âdevalueâ any specific set of Bitcoin \naddresses pertaining to any entity participating in the system. Finally, we explore possible \navenues to enhance the decentralization in the Bitcoin system.
The Bitcoin digital currency depends for its correctness and stability on a combination of cryptography, distributed algorithms, and incentivedriven behavior. We examine Bitcoin as a consensus game and determine that it relies on separate consensus about the rules and about game state. An important aspect of Bitcoinâs design is the mining mechanism, in which participants expend resources on solving computational puzzles in order to collect rewards. This mechanism purportedly protects Bitcoin against certain technical problems such as inconsistencies in the systemâs distributed log data structure. We consider the economics of Bitcoin mining, and whether the Bitcoin protocol can survive attacks, assuming that participants behave according to their incentives. We show that there is a Nash equilibrium in which all players behave consistently with Bitcoinâs reference implementation, along with infinitely many equilibria in which they behave otherwise. We also show how a motivated adversary might be able to disrupt the Bitcoin system and âcrash â the currency. Finally, we argue that Bitcoin will require the emergence of governance structures, contrary to the commonly held view in the Bitcoin community that the currency is ungovernable. 1
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.
Abstract : 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.
Bitcoin is an electronic currency designed to use a public protocol that implements it in a totally decentralized manner, so as not to need the control of any central issuing organization that manages it. Though still in development, it has been proven to be a modern payment system referred to have been used in some procedures commonly associated to money laundering or trafficking of illegal substances of various kinds. Thus, in this article, we analyse those features which transform such a cryptocurrency in a useful tool to perform any kind of transactions far from the control of any kind of regulatory agency, as well as we pinpoint some of the fields in which their usage can derive in new illicit behaviours. Keywords-bitcoin; cryptoanarchism; cryptocurrency; fraud; speculation; virtual money.
Bitcoin is a decentralized payment system that relies on Proof-of-Work (PoW) to verify payments. Nowadays, Bitcoin is increasingly used in a number of fast payment scenarios, where the time between the exchange of currency and goods is short (in the order of few seconds). While the Bitcoin payment verification scheme is designed to prevent double-spending, our results show that the system requires tens of minutes to verify a transaction and is therefore inappropriate for fast payments. An example of this use of Bitcoin was recently reported in the media: Bitcoins were used as a form of \emph{fast} payment in a local fast-food restaurant. Until now, the security of fast Bitcoin payments has not been studied. In this paper, we analyze the security of using Bitcoin for fast payments. We show that, unless appropriate detection techniques are integrated in the current Bitcoin implementation, double-spending attacks on fast payments succeed with overwhelming probability and can be mounted at low cost. We further show that the measures recommended by Bitcoin developers for the use of Bitcoin in fast payments are not always effective in detecting double-spending; we show that if those recommendations are integrated in future Bitcoin implementations, double-spending attacks on Bitcoin will still be possible. Finally, we propose and implement a modification to the existing Bitcoin implementation that ensures the detection of double-spending attacks against fast payments.
This paper presents an analysis of the money laundering risks of two virtual currencies, the Linden dollar, the in-world currency of the interactive online environment Second Life, and Bitcoin, an experimental virtual currency that allows for the transfer of value through peer-to-peer software. The paper will demonstrate that although these virtual currencies have money laundering utility, they are currently unsuitable for laundering on a large scale. The paper also considers whether either of these virtual currencies fall under the scope of the Money Laundering Regulations 2007 and draws on similarities with online gambling to suggest a method of incorporating the Linden dollar and Bitcoin within the anti-money laundering framework.
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.
Malware and botnets are one of the most serious threats to today's Internet security. In this paper, we characterise the so-called "Miner Botnet". It received major media attention after massive distributed denial of service attacks against a wide range of German and Russian websites, mainly during August and September 2011. We use our insights on this botnet to outline current botnet-related money-making concepts and to show that multiple activities of this botnet are actually centred on the virtual anonymised currency Bitcoin, thus justifying the name. Furthermore, we provide a binary-level analysis of the malware's design and components to illustrate the modularity of the previously mentioned concepts. We give an overview of the structure of the command-and-control protocol as well as of the botnet's architecture. Both centralised as well as distributed infrastructure aspects realised through peer-to-peer are present to run the botnet, the latter for increasing its resiliency. Finally, we provide the results of our ongoing tracking efforts that started in September 2011, focusing on the development of the botnet's size and geographic distribution. In addition we point out the challenge that is generally connected with size measurements of botnets due to the reachability of individual nodes and the persistence of IP addresses over time.
There's nothing like a dollar bill for paying a stripper. Anonymous, yet highly personal-wherever you use it, that dollar will fit the occasion. Purveyors of Internet smut, after years of hiding charges on credit cards, or just giving it away for free, recently found their own version of the dollar-a new digital currency called Bitcoin.
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.