Issue:
Forum:
Position:
Name:
Reviewing Bitcoin as a legal
currency
The Group of Twenty
President of the Group of Twenty
Emma Scheffer
Introduction
Bitcoins were first introduced in 2009 by Satoshi Nakamoto in Japan. The bitcoin is a
cryptocurrency, so a digital currency, made, used and maintained electronically. There is no
concrete body in control of the bitcoin, which makes it difficult to track and monitor the
bitcoins worldwide. Bitcoins are produced by people and businesses increasingly use
computers all around the world to solve mathematical issues with their software. It is also the
first example of a growing category of money known as cryptocurrency.
There are several quite severe issues with the bitcoin which definitely need immediate
attention. First of all, altruistic systems are relatively easy to exploit, including the one of the
bitcoin. It is namely the case that there is little incentive to run a node anymore, because
very powerful machines have built certain algorithms specially for the bitcoin. These
algorithms have changed its decentralized and open nature and for now the confirmation
power of the bitcoins was concentrated under the care of those who can afford the
expensive hardware which is needed. Moreover, it is easy to use bitcoins as a measure to
harm other users using the bitcoin’s price.
Also, the bitcoins do not only have an effect on the international economy and its markets,
but on all nations. The bitcoin is not clearly maintained by a governing or any other body of
that sort, meaning that it is hardly controlled and monitored. For the nations it is extremely
difficult to keep track of the bitcoin and its effects. That is why specific, international
recognized rules and regulations should be established. Currently only 73 countries have
taken some form of regulatory action with regards to the bitcoin.
Multiple platforms, such as those of Apple and Google, are affiliated with the sceptics of the
nations and do not allow the use of bitcoins on their platforms. Lastly, seeing that the
amount of people who own Bitcoins are relatively low it is difficult to predict how the future of
the bitcoin will look like. Nonetheless, people seem to consider Bitcoin as some economical
hope in comparison to the banks make them more worried.
In the continuation of this research report you will learn about the history and the current
status of the bitcoin with relations to a detailed explanation of the issue that revolves around
the bitcoin and its future. Moreover, the solutions that have already been thought of and
those that could possibly serve as a solving pathway will be briefly discussed. If this
research report is not detailed enough with regards to certain aspects, additional links will be
given below in order for you to further investigate the bitcoins and its tale.
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Definition of Key Terms
Cryptocurrency
A cryptocurrency is a digital asset designed to work as a medium of exchange using
cryptography to secure the transactions and to control the creation of additional units of the
currency. 1Cryptocurrencies are a subset of alternative currencies, or specifically of digital
currencies.
Nodes
Bitcoin node refers to a "full" client. A "full" client is a client that owns the block chain and
that is sharing blocks and transaction across the network. In opposite a Lightweight
client cannot be considered as a node because he doesn't share the block chain with the
network. The Bitcoin network uses a client-to-client-network infrastructure so there is no
difference between a mining client and a non-mining client, they don't have any
privileges.2
Block chain
A block chain is a distributed database that maintains a continuously-growing list of
ordered records called blocks. Each block contains a timestamp and a link to a previous
block. Design are inherently resistant to modification of the data — once recorded, the data in a
block cannot be altered retroactively. Block chains are secure by design and an example of a
distributed computing system with high byzantine fault tolerance. Decentralised consensus can
therefore be achieved with a block chain.
Mining
Bitcoins are created as a reward in a competition in which users offer their computing power to
verify and record bitcoin transactions into the blockchain. This activity is referred to
as mining and successful miners are rewarded with transaction fees and newly created
bitcoins. 3
Bitcoin
The bitcoin is a cryptocurrency and a payment system invented by an unidentified
programmer under the name of Satoshi Nakamoto. The system is peer-to-peer and
transactions take place between users without an intermediary. 4The transactions are
verified by network nodes and recorded in a public distributed ledger called the block chain,
which uses bitcoin as its unit of account. Since the system works without a central repository or
single administrator, the bitcoin can be described as the first decentralized digital currency.
Bitcoin is the largest of its kind in terms of total market value. Besides being obtained by mining,
bitcoins can be exchanged for other currencies, products, and services.
1
Cryptocurrency, https://en.wikipedia.org/wiki/Cryptocurrency
2
What Are Bitcoin Nodes and Why Do We Need Them, http://www.coindesk.com/bitcoin-nodes-
need/
3
4
Bitcoin, https://en.wikipedia.org/wiki/Bitcoin
Bitcoin, https://en.wikipedia.org/wiki/Bitcoin
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Double spending
Double-spending is the result of successfully spending some money more than once. Bitcoin
protects against double spending by verifying each transaction added to the block chain to
ensure that the inputs for the transaction had not previously already been spent.5
Clawback
General Overview
In 2008 a paper appeared on the internet under the name Satoshi Nakamoto, titled ‘Bitcoin:
A Peer-to-Peer Electronic Cash System’. The paper discussed several methods that used a
peer-to-peer network to build “a system for electronic transactions without relying on trust”.
Only in January of 2009 the Bitcoin network was reality by releasing the first open source
bitcoin client and the issuance of the first bitcoins. Satoshi Nakamoto was the very first
person to mine a block of bitcoins, which is known today as the genesis block. The value of
the first bitcoin transactions were negotiated by individuals on the bitcointalk fora where one
transaction was quite remarkable, it was namely a one with a value of 10,000 BTC that
served the purpose of indirectly buying two pizzas by Papa John’s.
Several faults and vulnerabilities were discovered and extremely exploited up to almost 200
billion bitcoins. These were faults such as that transactions were not properly verified before
they were included in the blockchain, which means that others users were able to bypass
bitcoin’s economic restrictions and create indefinite numbers of bitcoins, not affecting
Bitcoin’s value at that time. Besides these infrequent mistake, using Bitcoins has been safe.
Nonetheless, there are numerous cases and complaints about missing amounts of Bitcoins
from large corporations. Currently, there is a large range of legal cases in, amongst other
nations, the United States in which companies and individuals have been sued for practices that
had been paid for with Bitcoins, in order to recover money that has been disbursed. However,
judges most often decide not to deny ruling on the ownership of the issue, but decide whether
the Bitcoins have to be repaid in either Bitcoins or an equivalent in a legal currency. This is a
challenging decision seeing that the Bitcoin does not have a comparable value to for instance the
US Dollar or the British Sterling Pound. Such cases are referred to as 'clawback'.
Moreover, governments are worried about the use and abuse of Bitcoins for many reasons.
First of all, the use of Bitcoins can be completely anonymous. This means that people can
easily use Bitcoins for instance for money laundering and the buying and selling of weaponry
and drugs. Individual countries and governing bodies have been either accepting or denying
Bitcoins. Currently, there are no international regulations forming a regulatory framework
and guide for the use of Bitcoins, meaning that up until now users of the Bitcoin have been
very free with regards to their behaviour and the Bitcoin. Most nations have expressed some
sort of judgement on the Bitcoin, however, none has made it a law-based practise to use the
Bitcoin. This means that Bitcoin on itself is legal, depending on what exactly is done with
them and in which country it is done.
Countries such as Japan have already been extensively discussing the possibilities to make
cryptocurrencies such as Bitcoin and Dogecoin a legal and internationally recognized
currency. Such parties suggest that legalizing the bitcoin as a currency would result in more
accessible ways to regulate monitor the taxes. Above all, according to the Guardian, it is
stated that legalizing the Bitcoin would result in an increasing amount of investments to
develop cryptocurrency infrastructure in for instance countries such as Japan.
5
Double-spending, https://en.bitcoin.it/wiki/Double-spending
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Many consider Bitcoins a commodity since it fits the new definition which considers anything
that can be exchanged for goods and services or legal tender as a currency.
People are increasingly using virtual money, like Bitcoin, that is not backed by any
government. Many central banks have cautioned against it, but most authorities take a
hands-off approach.
It is difficult to ascertain whether Bitcoins are a commodity or a currency for it cannot be
exactly determined yet what role Bitcoins play in the legal world. Nonetheless, Bitcoins are
already used in exchange for goods and services in some parts of the world. However, as
for now, the majority of the Member States has not (yet) agreed or are not taken action to
legalize Bitcoin as a legal currency.
Another difficult factor is to determine the precise value of a Bitcoin, for it tends to fluctuate
extremely. As long as Bitcoins do not have a concrete value, it is difficult to use them in
practice for e.g. making investments. Also, this makes it hard for governments to keep track
on the amount of Bitcoins going on around the word and what their influence is / will / could
be. It is challenging to predict the consequences of legalizing the Bitcoin as an
internationally recognized currency. The possible value is extremely dependent on the fact
whether or not it is legally seen as a commodity or as a currency. According to John
Rampton from the Huffington Post is it possible that the value differs in repayment up to one
million euros/dollars if the Bitcoin is accepted as a currency.
Major Parties Involved
United States of America
The United States have been very interested in the Bitcoins for many years now. The US
one of the most lenient countries towards the Bitcoin as a currency. The Bank of America
released a report on the 6th of December in 2013 that, according to them, the Bitcoin was
becoming a major means of payment for e-commerce” and “a serious competitor to
traditional money transfer providers.” Furthermore, the article seemed to review the Bitcoin
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already as an ordinary, everyday used currency. The American enthusiasm has since then
held up.
National governments
It is difficult to put a new legal currency upon a nation. Therefore, in the end, the national
governments decide whether or not the Bitcoin is accepted as a legal currency. That is, as
long as the international community has not taken any serious or concrete action that says
otherwise. Up until so far this is exactly what most of the nations have done. Independently
they have researched the Bitcoin as a possible legal currency and drawn their (temporary)
conclusion. This resulted in certain national regulations, only approaching the state of affairs
within their own nation.
National banks
Even though national banks are dependent on the regulatory framework of their government,
some of them have more freedom than others. In such cases, banks have the right to decide
whether or not to accept Bitcoins as a legal currency.
Timeline of Key Events
2007
August 18th 2008
October 31st 2008
January 3rd 2009
January 9th 2009
January 12th 2009
October 5th 2009
February 6th 2010
May 22nd 2010
Satoshi Nakamoto began working on the Bitcoin concept in
2007. A paper was posted online titled Bitcoin: A Peer-to-Peer
Electronic Cash System.
Bitcoin.org is registered. The domain was registered at a site
that allows users to anonymously register domain names and
currently accepts Bitcoins.
Nakamoto publishes a design paper through a cryptography
mailing list that describes the Bitcoin currency an solves the
problem of double spending so as to prevent the currency from
being copied.
The Genesis Block, the first block, block 0, is established at
18:15:05 GMT.
Version 0.1 f Bitcoin is released. It lacks a command line
interface and is so complete that it furthers speculation that it
was developed by more than one person.
The first transaction of Bitcoin currency, in block 170, takes
place between Nakamoto and Hal Finney, a developer and
cryptographic activist.
New Liberty Standard publishes a Bitcoins exchange rate that
establishes the value of a Bitcoin at US$1 = 1,309.03 BTC.
The Bitcoin Market is established by dwdollar as a Bitcoin
currency exchange.
The first real transaction was made using Bitcoin. Programmer
Laszlo Hanyecz offers to pay 10,000 BTC for a pizza.
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August 15th 2010
December 6th 2012
May 2nd 2013
A vulnerability in the Bitcoin system that causes Bitcoins to be
improperly verified is discovered and exploited, resulting in the
generation of 184 billion Bitcoins.
The first Bitcoin exchange to be licensed as a European bank
is Bitcoin Central, operating within the European regulatory
framework.
The first ATM machine for Bitcoins was placed in San Diego,
California.
Previous attempts to resolve the issue
Due to the fact that a digital currency is not limited by national boundaries, it requires an
international solution and, thus, has drawn the attention of international regulators. The
traditional payment systems are maintained by central banks that process the transactions
of depository bank and other authorized or chartered financial institutes, based on statutorybased monetary systems. However, with virtual currencies there are no laws and regulations
defining the duties and obligations of parties or provide for finality of settlement, resolution of
disputes, or supervision of services provided.
In the past eight years the Bitcoin has been an unpredictable currency and the majority of
the nations have left the Bitcoin quite neglected. Since there have not yet been made
concrete rules and regulations with regards to the use of the Bitcoin which are internationally
recognized it have up until now only been individual countries that have defined the Bitcoin.
Accordingly, these nations have either taken up the Bitcoin in a form in their national system
or have banned or restricted it. Thus the regulations of Bitcoin differ per country and no
actual attempt to review the Bitcoin as a legal currency has been made internationally.
Possible Solutions
The first real solution and necessity is to establish internationally recognized regulations in
order to ensure:
The safety of the users of Bitcoins and their ‘money’
The entire Bitcoin system is dependent on the way it is arranged by its makers. Loopholes
have been found in the past and can never be ruled out completely. From the moment that
Bitcoins are to be used as a legal currency its users ought to have the guarantee that their
money cannot be taken from them in any possible way; they need a certain assurance in
order to be able to use the Bitcoin confidently.
The possibility of money laundering is nihil
Technically speaking the Bitcoin is, as it is now, extremely difficult to monitor, both its
amounts as its value. Similarly, it is difficult to ascertain how the Bitcoins are used, for what
kind of market. Moreover, it also very challenging to see with what kind of money the
Bitcoins are bought. It is, namely, possible that Bitcoins are bought with illegal money that
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has been stored on a (online) bank account. By using such money to purchase Bitcoins,
which would then be considered a legal currency, the money would then be added to the
‘legal money stream’ whereas its origins do not belong there.
Bitcoins cannot be used for the purchasing of drugs or weaponry
As said it is almost impossible to exactly check what is done with the Bitcoins. Certain
websites have been shot from the net due to their black interests such as weaponry and
other illegal businesses. It is of utmost importance that Bitcoins cannot be used as an easy
gateway to illegal practices. It is, therefore, certainly a point that needs attention; the
possibilities of the application of Bitcoin.
A system to monitor the value of the Bitcoin
Currencies are measured every second of the day, all over the world. For every
(international) market it is very important that the value is determined precisely. The Bitcoin
should be no exception. The owners of Bitcoins should be able to be aware of the value of
their (invested) money. Also, seeing as the Bitcoin would officially be accepted as a legal
currency the money would definitely participate in the legal money stream.
These are the things you will have to think of while preparing for the conference in April.
These are just examples that have been mentioned in the Research Report. There are many
different aspects that need to be addressed. Bitcoin is a difficult topic to understand, which is
why some background research is definitely needed. For questions please address to me or
the Internet.
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Appendix/Appendices
-
https://fas.org/sgp/crs/misc/R43339.pdf
https://en.wikipedia.org/wiki/Legality_of_bitcoin_by_country#
https://www.loc.gov/law/help/bitcoin-survey/
http://historyofbitcoin.org/
https://cryptocity.wordpress.com/2014/12/21/can-national-governments-enforce-abitcoin-ban/
http://www.coindesk.com/information/is-bitcoin-legal/
http://www.investopedia.com/articles/forex/042015/why-governments-are-afraidbitcoin.asp
Bibliography
Bitcoin Wiki, April 11, 2016, Double-spending, https://en.bitcoin.it/wiki/Double-spending
Cawrey, D, CoinDesk, May 26, 2014, The Five Biggest Threats Facing Bitcoins,
http://www.coindesk.com/five-biggest-threats-facing-bitcoin/
Cawrey, D, CoinDesk, May 9, 2014, What Are Bitcoin Nodes and Why Do We Need Them,
http://www.coindesk.com/bitcoin-nodes-need/
CNN, Where is Bitcoin legal?, http://money.cnn.com/interactive/technology/where-isbitcoin-legal/
CoinDesk, March 20, 2015, What is bitcoin?, http://www.coindesk.com/information/what-isbitcoin/
Nakamoto, Satoshi (1 Nov 2008). "Bitcoin: A Peer-to-Peer Electronic Cash System" (PDF).
Retrieved 20 December 2012.
Rampton, John, Why is bitcoin not regulated?, March 15 2016,
http://www.huffingtonpost.com/john-rampton/why-bitcoin-is-notregula_b_9458864.html
Smart, Richard, The Guardian, Japan considers making bitcoin a legal currency,
https://www.theguardian.com/technology/2016/feb/25/japan-to-make-bitcoin-legalcurrency
Wikipedia, January 6, 2017, Bitcoin, https://en.wikipedia.org/wiki/Bitcoin
Wikipedia, January 7, 2017, Blockchain (database),
https://en.wikipedia.org/wiki/Blockchain_(database)
Wikipedia, January 4, 2017, Cryptocurrency, https://en.wikipedia.org/wiki/Cryptocurrency
Wikipedia, January7, 2017, History of Bitcoin,
https://en.wikipedia.org/wiki/History_of_bitcoin#cite_note-whitepaper-9
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