Bitcoins and the Law, Part II
“Bitcoin Advantages and Disadvantages”
By: Raphael Qiu
There are a number of key advantages to Bitcoin that are intrinsic to its decentralized and versatile nature. Although Bitcoins are not attached to fiat currencies, they can be purchased through Bitcoin currency exchanges using fiat currencies. In addition, Bitcoins can be generated by “mining” in which users provide CPU power to log bitcoin transactions (since there is no central bank) and in return they have a random chance of getting bitcoins as a reward.
Bitcoins acquired by a user are placed into their Bitcoin wallet which is a software file that holds bitcoin addresses. Along with the addresses, the wallet stores the private security key for that address as well as the transaction history of that Bitcoin address. Shutting down the Bitcoin network would require disabling every user that is mining on the network. In addition, the ability of users to convert their bitcoins into physical currencies, transfer the bitcoins through multiple Bitcoin addresses, and to exchange the bitcoins for goods or services makes anti-money laundering efforts much more difficult.
Although there are a number of virtual currencies out there, Bitcoin is currently the most popular one in terms of total market share. In addition to its anonymous nature, Bitcoin is appealing because it is easily transferable as no third-party institution is required to verify the transaction. There are also no transaction costs like with credit card transactions because all that is required for transactions is an Internet connection and a computer. Furthermore, Bitcoins can be exchanged throughout the world instantaneously at any time which makes it particularly convenient for international transactions such as remittances.
However, there are a number of disadvantages with Bitcoin that explain why it is not widely accepted. Bitcoin software is still undergoing development so most Bitcoin companies are new and offer no insurance. This has contributed to price volatility in that even small trades can impact the price. Since Bitcoin is decentralized, a bitcoin’s value is set by supply and demand of Bitcoin users.
Another primary disadvantage is Bitcoin’s perceived association with criminal activities such as online drug trafficking, money laundering, and terrorist financing. In 2012, the FBI issued an intelligence assessment on Bitcoin where it stated with medium confidence that: “…in the near term, cyber criminals will treat Bitcoin as another payment option alongside more traditional and established virtual currencies which they have little reason to abandon.” However, with regard to theft of Bitcoins, the FBI was highly confident that criminals intending to steal bitcoins can target and exploit third-party bitcoin services and an individual’s Bitcoin wallet. Furthermore, the FBI believes that there is significant future criminal potential in Bitcoin: “Bitcoin will likely continue to attract cyber criminals who view it as a means to move or steal funds as well as a means of making donations to illicit groups. If Bitcoin stabilizes and grows in popularity, it will become an increasingly useful tool for various illegal activities beyond the cyber realm. Since Bitcoin does not have a centralized authority, law enforcement faces difficulties detecting suspicious activity, identifying users, and obtaining transaction records – problems that might attract malicious actors to Bitcoin. This is because Bitcoin accounts have no personally identifiable information and no central server that can be monitored. Bitcoin may also attract money launderers and other criminals who avoid traditional financial systems by using the Internet to conduct global monetary transfers.” Furthermore, Bitcoin accounts and transaction records may be held by different entities in different countries which makes regulation even more difficult.
FBI Intelligence Assessment. “Bitcoin Virtual Currency”. April 4, 2014. HTTP://WWW.WIRED.COM/IMAGES_BLOGS/THREATLEVEL/2012/05/BITCOIN-FBI.PDF.
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