Laureate Education (Producer). (2013c). Levy family Episodes 5 [V.docx

Laureate Education (Producer). (2013c). Levy family: Episodes
5 [Video file]. Baltimore, MD: Author.
Note: The approximate length of this media piece is 2 minutes.
Levy Family: Episode 5
Levy Family: Episode 5 Program Transcript
FEMALE SPEAKER: It was such an intense story. I just kept
seeing things the way he did, you know. The weird green of his
night-vision goggles, his sergeant screaming for Jake to kill
him. I just keep seeing it all in my head.
[MUSIC PLAYING]
MALE SPEAKER: Why, do you think?
FEMALE SPEAKER: Why what?
MALE SPEAKER: Why do you think you keep thinking about
this story, this particular case?
FEMALE SPEAKER: I don't know, maybe because it's so vivid.
You know, I went home last night, turned on the TV to try to
get my mind off it. And a commercial for the Marines came on,
and there was all over again-- the explosion, the screams, the
man dying. Such a nightmare to live with, and he's got a baby
on they way.
MALE SPEAKER: Could that be it, the baby?
FEMALE SPEAKER: Maybe. That's interesting you say that. I
mean, the other vets I work with are older, and they have grown
kids. But Jake is different.
I just keep picturing him with a newborn. And I guess it scares
me. I wonder if he'll be able to deal with it.
Levy Family: Episode 5 Additional Content Attribution
MUSIC:
Music by Clean Cuts

Original Art and Photography Provided By:
Brian Kline and Nico Danks
© 2016 Laureate Education, Inc. 1
Sources and Research Methods
October 4, 2017
This study proposal is founded on sources that I discovered via
library or internet survey. Among these sources is a review
called The Promise and Perils of Digital Currencies written by
Tyler Moore, among the most impressive scholars of the
twentieth centenary. In this review, Tyler gives an amazing and
educative analysis of why people of late are so into digital cash.
His analysis gives a deeper understanding of the craze
surrounding Bitcoin. He shows us the good side of digital cash
such as low transaction charges and the fact that they safeguard
against bitcoin. We also learn that the greatest threat behind
this is exchange rate threat. This apprehension is significant to
the proposed study. Another source that informed this study is

Cryptocurrencies and the Anonymous Nature of Transactions on
the Internet by Elizabeth Anne Casale. This article enlightens us
that bitcoin is a currency that is not supported by any
bureaucracy, utilizes cryptography for safety and is hard to
fake. It tells us how bitcoin has small state direction and raises
concern for its task as a mode of trade for offensive actions.
Regarding the theme of how bitcoin deals with offenders and
somehow hard for law enforcement due to less regulative, I
utilized an insightful review by Catherine Martin Christopher,
titled, Why Prosecuting Digital Currency Exchanges Won’t Stop
Online Money Laundering. In this review Catherine .captures
the U.S. anti-money laundering acts and defines Bitcoin as cash
laundering scheme and how it is hard for law enactment agents
to deal with issue. She concludes her review by giving
proposals on how to approach digital cash traders. Her analysis
guided this study by giving insight on confrontations that both
the law enactment officers and digital cash exchangers go
through.
Additionally, Evan Hewitt in Bringing Continuity to
Cryptocurrency enlightens us that since Bitcoin is currently
extending in acceptance, it is probable that states on all levels
to try and regulate the cryptocurrency so as to evade criminal
deals and also safeguard the user. Finally, Abdur Chowdhury
and Barry K. Mendelson in Virtual Currency and the Financial
System analytically clarify on Bitcoin by discussing its
responsibility and probable future utilization and the threats
connected to this kind of digital currency. The two writers sum
up their work by giving proposals to deal with policy creators’
concerns while giving room for additional inventiveness in the
Bitcoin network. This is a really detailed journal that provides a
deeper comprehentions of the issue on digital currency thus
informing this study significantly.
Here, writers portray digital currency and more specifically
bitcoins as a digital trade that is highly rising, though it is
associated with a lot of risks, it still has a role to play in a
country’s finance system. Looking forward, I intend to utilize

certain reviews such as, but not limited to; “Tethered money:
managing digital currency transactions,” (2015) written by
Gideon Samid, “Bitcoin basics: buying, selling, creating and
investing Bitcoins: the digital currency of the future,” (2014) by
Benjamin Tideas and “Digital gold: bitcoin and the inside story
of the misfits and millionaires trying to reinvent money,”
(2016) by Nathaniel Popper.
Significance of the problem
Names:
The problem addressed in the paper is the risks associated with
digital currency. The problems created by digital currency
include the increase in money laundering, loss of virtual money
since the details can be deleted, and high inflation. The

problems caused by the digital currently occur due to various
reasons such as lack of effective regulations and the
susceptibility of the digital currency to abuse by criminals. It
has been difficult to address the problems caused by digital
currency because criminal justice system does not effectively
target digital criminals. Instead, it focuses on implementing
more laws that target the law abiding individuals instead of
criminals (Christopher, 2014).
This problem is worthy research because of the increase in
the incidences of online money laundering. In addition, it has
negative affected the financial system of the country because of
the high inflation rate since the central bank has little control
over the digital currency (Moore, 2013). In addition, theft of
digital money has been reported many times. For instance, there
have been several high-profile theft on Bitcoin Company. The
exchange closure risk also worsens the issue. For instance,
about 18 currency exchanges were closed leaving depositors
stranded.
The problem is currently affecting a large population
because with technological advancements, a large number of
people is using the internet. The problem especially affects poor
people in rural area because they cannot access the services of
the traditional banks. In addition, poor people in rural areas are
also using the digital currency because of their low cost charges
(Chowdhury & Mendelson, 2013). The problem is worth
solving because failure to address it on time, more people will
be affected in future because of the high rate of usage of
technology.
References
Christopher, C. (2014). Whack a Mole : Why prosecuting digital
currency exchanges wont stop online money laundering. Lewis
& Clark Law Review. Vol 18: 1
Chowdhury, A. & Mendelson, B. (2013). Virtual Currency and
the financial system: The case of Bitcom. Department of
Economics.

Moore, T. (2013). The promise and perils of digital currencies.
International Journal of Critical Infrastructure Protection.
Vol 6: 147-149.
Proposing a Topic for Research
Purpose and Audience
In this first writing project, your purpose will be to persuade
your instructor to approve your research topic. Because this
topic will be the problematic issue that you will eventually
propose a solution to at the end of the semester, it’s important
to first prove that this topic is significant, complex, and truly
worth researching for several months. Furthermore, your
proposal should prove that you have a clear plan for how you
will conduct your research on this topic. Your purpose for the
proposal is not, however, to argue for a solution to your topic.
Save that for your final project of the semester.
Choosing a Topic for Your Proposal
You will be using the same topic for the entire semester, so try
to choose a problematic issue that personally affects you or
really interests you. This doesn't have to be a huge, worldwide
problem, but it should be something public that affects enough
people that you'll be able to research it thoroughly with a
variety of sources. This issue should also be something that
doesn’t have an easy answer. It could be something from your
major or field of study, an issue that’s currently in the news, a
personal problem that many people face, or something that
affects a discourse community to which you belong.
Once you have a topic in mind, you’ll come up with a research
question. There's a good chance that your research question will
evolve as you do your research, and that's not a problem.
Revising your research question shows flexibility, and it's also a

good sign that your understanding of your topic is growing and
evolving as you learn more.
Genre
In academia, research proposals are a common genre for
scholars who are trying to prove the significance of their
research, and secure funding to continue their research. Like all
writing, the length, content, components, and design of your
proposal will depend on your audience and purpose. In this
case, because your audience is your instructor, you will write a
relatively concise proposal requesting approval for your topic.
As your reader, I should be able to read your proposal and
easily get a clear understanding of your topic and why it’s
important and worthwhile.
Content and Organization
A proposal such as this often places emphasis on efficient,
concise writing and clear document design to allow quicker
reading for a busy audience. Your proposal must include clearly
labeled sections for each of the following components:
· Cover Page and Title: Here is the place to demonstrate
originality and creativity
· Abstract: In 50 to 100 words, try to summarize your project
· Significance of the Problem: Why is this problem a problem?
What causes this problem? Why hasn’t it been solved yet? What
kinds of disagreements does this problem cause? Why is this
problem important and worthy of research? Are a great number
of people affected by this problem? Who are they? Why is this
problem worth solving?

· Research Question and Thesis: What is the question (or
questions) that you’re trying to answer through your research?
What is your tentative response? What is the solution that you
will potentially propose?
· Sources and Research Methods: Which types of sources have
you used so far? Which types of sources do you plan to use?
Why will these sources be the most useful for learning more
about your topic? (Don’t just say, “I’m going to look at some
books and websites.” Build your credibility as a researcher by
being specific and naming authors, articles, publications, or
other sources.)
· Works cited page in MLA format or any other format you are
comfortable with. Keep it consistent.
Research Requirements
While there is no limit on the number of sources you can use in
your proposal, you should include at least three academic, peer-
reviewed sources. These sources should help you define the
problem and its causes, demonstrate the problem's significance,
analyze the community affected by the issue you’re researching,
and come up with a tentative solution. Your sources should be
cited within the proposal and in a separate works cited page.
Grading criteria
In grading your proposal, I’ll be asking the following questions:
• Does the proposal clearly and thoroughly explain the problem
and its causes?
• Does the proposal use credible research to support the
explanation of the problem and its causes?
• Does the proposal explain the significance of the problem?
• Does the proposal use credible research to effectively prove
the significance?

• Are all sources incorporated effectively through a combination
of quoting, summarizing, and paraphrasing?
• Does the proposal state a clear, specific research question or
questions?
• Does the proposal provide a clear, specific explanation of the
types of sources that you will be using to research your topic?
Does the proposal also explain why these types of sources will
be the most appropriate for this topic?
• Are all sections of the proposal unified, coherent, and easy to
identify through their headings?
• Is the writing clear and free of errors? Does it show evidence
of thorough proofreading?
• Are all sources cited correctly, both in the proposal and in an
MLA-formatted works cited page?
Criteria
“B/C” Range Goals
“A” Range Goals
Cover Page and Title
Weight 5%
Title shows evidence of originality and creativity. Cover page is
properly formatted.
Title is extremely creative, original, and thought-provoking – it
sounds like the title of a professional article.
Abstract
Weight 15%
Abstract effectively defines an area of interest, summarizes
research problem, and captures readers’ interest by providing
thought-provoking background information, contextualizing,
facts, examples, quotes, and/or statistics, while remaining
concise.

The abstract does a masterful job of using dazzling language
and attention-grabbing examples to hook the reader into wanting
to read further about a clearly defined research problem.
Significance of the Problem
Weight 25%
The significance of the problem has been discussed and the
importance of research on that has been identified.
The writer goes beyond the simple identification of the problem
significance, and tries to go in-depth with different dimensions
of the issue with a critical perspective while acknowledging
competing narratives on the issue.
Question and Thesis
Weight 15%
The question and thesis do not reflect the author’s effort to
think outside the box, and his/her effort in learning about
various dimensions of the question at hand.
The question asked is sharp and demonstrates the author’s
genuine care for fixing the identified problem/ The thesis is
strong, clear, and indicative of the student’s willingness to take
risk and prior effort to understand the complexity of the issue at
hand.
Sources and Research Methods
Weight 10%
Description of research methods effectively demonstrates
logical plan for gathering sources, including at least one
primary source.
Section showcases exceptional research plan that goes into more
detail than that of the typical proposal.
Document Design
Weight 10%
Document employs effective use of design that is both visually
appealing and genre-appropriate. Single-spacing, clear
headings, bolding, font sizes, etc., make this proposal easy to
read for audiences with limited time for reviewing the proposal.

There is a well-organized works cited page at the end.
Project not only fulfills the basic requirements of visual design;
it looks downright eye-catching and professional.
Professionalism and Language
Weight 20%
Draft shows effective and appropriate use of syntax,
vocabulary, punctuation, and spelling in service of rhetorical
purpose.
Language, in addition to being nearly error-free, is
exceptionally dazzling. Sophisticated vocabulary, and / or
stellar command of sentence structure make the reading of this
project extremely engaging.
Total = /100
the Internet
By
Elizabeth Anne Casale
A PROJECT
submitted to
Oregon State University
University Honors College

in partial fulfillment of
the requirements for the
degree of
Honors Baccalaureate of Science in Business Administration
(Honors Scholar)
Presented June 1, 2015
Commencement June 2015
! 2!

! 3!
AN ABSTRACT OF THE THESIS OF
Elizabeth Casale for the degree of Honors Baccalaureate of
Science in Business
Administration presented on June 1, 2015. Title:
Cryptocurrencies and the Anonymous
Nature of Transactions on the Internet
Abstract Approved:
Victor Tremblay
Bitcoin is a digital cryptocurrency, meaning that it is a currency
that is not backed

by any government, uses cryptography for security and is
difficult to counterfeit.
Bitcoin’s popularity stems from the fact that it has little
regulation and affords some
degree of anonymity in transactions. Bitcoin currently has little
governmental regulation
but greater regulation is expected, as Bitcoin has come under
scrutiny from federal
regulators because of its role as a medium of exchange for illicit
activities and the high
degree of anonymity it gives users. Some proponents of Bitcoin
welcome regulation, but
others feel that it inherently goes against the liberatarian aim of
a cryptocurrency.
Key Words: Bitcoin, Cryptocurrency, Regulation, Libertarian,
Digital, Anonymity,
Economic theory
Corresponding e-mail address: [email protected]
! 4!

©Copyright by Elizabeth Anne Casale
June 1, 2015
All Rights Reserved
! 5!
the Internet
By
Elizabeth Anne Casale
A PROJECT
submitted to

Oregon State University
University Honors College
in partial fulfillment of
the requirements for the
degree of
(Honors Scholar)
Presented June 1, 2015
Commencement June 2015
! 6!

project of Elizabeth Anne
Casale presented on June 1, 2015.
APPROVED:
Victor Tremblay, Mentor, representing Economics
Elizabeth Schroeder, Committee Member, representing
Economics
Jon Chesbro, Committee Member, representing Economics
Toni Doolen, Dean, University Honors College
I understand that my project will become part of the permanent
collection of Oregon
State University, University Honors College. My signature
below authorizes release of
my project to any reader upon request.
Elizabeth Casale, Author

! 7!
Table of Contents
Introduction!...........................................................................
.....................................................!9!
Background!............................................................................
..................................................!10!
What is
Bitcoin?!.................................................................................
...............................................!10!
The Need for
Bitcoin!..................................................................................
......................................!11!
How Does Bitcoin
Work?!....................................................................................
............................!11!
Why Do People Use
Bitcoin?!.................................................................................
.........................!13!
Anonymity!.............................................................................
...........................................................................!13!
Ability to Use World
Wide!......................................................................................
...................................!14!
Easier and Safer to Use than
Cash!......................................................................................
......................!15!
Non-
Counterfeitable!......................................................................
................................................................!15!
Pre-Determined

Supply!...................................................................................
.............................................!15!
Low Transaction
Costs!.....................................................................................
............................................!16!
The Weaknesses of
Bitcoin!..................................................................................
...........................!17!
Volatility!...............................................................................
.............................................................................!17!
Figure 1 All Time Bitcoin Price
Index!.....................................................................................
...........................!18!
Lack of
Recognition!...........................................................................
...........................................................!18!
Not Totally
Anonymous!............................................................................
...................................................!19!
Use for Illicit
Activities!...............................................................................
.................................................!20!
Wait
Time!......................................................................................
....................................................................!20!
Weaknesses of
Exchanges!..............................................................................
.............................................!21!
Competitors!...........................................................................
.............................................................!21!
Not Legal
Tender!...................................................................................
.........................................................!22!

Traditional Measures of Currency and
Bitcoin!...............................................................!22!
Bitcoin As a Medium of
Exchange!...............................................................................
.................!22!
Store of
Value!.....................................................................................
...............................................!23!
Unit of
Account!.................................................................................
................................................!24!
The Regulation of
Bitcoin!..................................................................................
...................!25!
Arguments for the Regulation of
Bitcoin!..................................................................................
..!26!
Decrease
Volatility!...............................................................................
..........................................................!26!
Increased
Recognition!...........................................................................
........................................................!26!
Strengthen
Exchanges!..............................................................................
.....................................................!26!
Arguments Against
Regulation!.............................................................................
.........................!28!
Decrease
Freedom!.................................................................................
.........................................................!28!

Use in Illicit
Transactions!...........................................................................
.................................................!29!
10. Bitcoin’s Core
Users!.....................................................................................
...................!30!
11. Affect of Regulation on Core
Users!..............................................................................!30!
12. Recommendations For
Regulation!.............................................................................
..!31!
13. The United States’ Position on
Bitcoin!........................................................................!31!
! 8!
14.
Conclusions!...........................................................................
.............................................!32!
Appendix!.......................................................................... .....
....................................................!34!
Definition of Key
Terms:!...................................................................................
.............................!34!
Works
Cited!.....................................................................................
........................................!36!
!

!
!
!
!
!
!
!
!
!
!
!
!
!
!
!
!
!
!

!
!
!
! 9!
!
Cryptocurrencies and the Anonymous Nature of
Transactions on the Internet
!
Introduction
!
Bitcoin!is!a!digital!cryptocurrency!that!was!created!by!Satoshi
!Nakamoto!in!2009.!
There!is!much!debate!as!to!whether!Satoshi!Nakamoto!is!a!rea
l!person,!or!a!
pseudonym,!as!the!person!identifying!as!Satoshi!Nakamoto!has
!never!been!revealed!
offline.!Cryptocurrencies!have!been!growing!in!popularity!sinc
e!that!time,!due!to!the!
ability!to!use!them!as!a!medium!of!exchange!for!anonymous!tr
ansactions!on!the!

Internet!as!well!as!their!use!for!trade!internationally.!Bitcoin!i
s!very!volatile,!fueled!
by!speculative!activity!and!changes!in!consumer!confidence.!It
!is!unregulated!and!
unbacked!by!any!central!government.!The!growth!of!the!curren
cy!is!managed!by!a!
series!of!complex!algorithms!that!determine!the!rate!of!creatio
n!of!bitcoins.!!
Bitcoin!has!a!diverse!group!of!core!users!and!is!used!for!many
!different!types!of!
transactions.!In!order!to!understand!how!core!users!use!Bitcoi
n,!it!is!important!to!
discuss!why!Bitcoin!was!created,!how!Bitcoin!works,!and!how
!it!measures!against!
traditional!currencies.!It!is!also!necessary!to!discuss!the!social
!benefits!and!costs!of!
Bitcoin!as!a!currency!in!order!to!discuss!the!arguments!for!an
d!against!regulation.!!!
The!purpose!of!this!study!is!to!analyze!how!the!regulation!of!
Bitcoin!would!affect!
its!core!user!base.!The!research!question!is:!!would!an!increas
e!in!regulation!solidify!
Bitcoin!as!a!legitimate!currency!or!drive!away!its!core!users?!
This!is!important!

! 10!
because!Bitcoin!can!be!used!for!a!variety!of!different!purposes
!and!attracts!a!diverse!
user!base.!By!analyzing!the!outcomes!of!regulation,!one!can!di
scuss!the!effect!
regulation!would!have!on!its!core!user!base.!!!
Background
What is Bitcoin?
Bitcoin is a digital cryptocurrency that is not backed by any
central government or
regulatory agency. Since the creation of Bitcoin by Satoshi
Nakamoto, five other
developers from four different countries have access to the
source code and have taken up
the role of developing and maintaining the Bitcoin platform.
The source code is the
software as it was originally written, and is what tells the
program how to function. Each
of these developers has access to the Bitcoin source code, and
changes to the source code
must have a 51% majority of the network download the system
for a new version to take

effect. (Turpin 337) This means that any changes made to the
Bitcoin network must have
a majority vote in order to have that change be made. This is
meant to make it difficult to
make changes that would only benefit one party. However, the
overall code is also
available online for anyone to download and review.
A Bitcoin is a chain of digital signatures saved in a ledger.1
This chain of signatures
verifies the authenticity of the Bitcoin and records the history
of the transfer of
ownership. A user of Bitcoin has a wallet in which the bitcoins
are digitally stored. Each
wallet has a public key, and an address where another party can
send you bitcoins. It also
has a private key, which is what enables the wallet’s owner to
send bitcoins to someone
else (Turpin 338).
!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!
1!A!ledger!is!a!wallet!file!in!the!world!of!Bitcoin!
! 11!
The Need for Bitcoin

Bitcoin is a peer-to-peer electronic cash system, first proposed
by Satoshi Nakamoto
in his manifesto Bitcoin: A Peer-to-Peer Electronic Cash System
published on October
31, 2008. In his proposal, Nakamoto argues that an important
benefit of Bitcoin is that it
allows payments to be made without having to use a financial
institution as an
intermediary. The need for a peer-to-peer version of electronic
cash is necessary, in his
opinion, because of the “…inherent weaknesses of a trust based
model.” (Nakamoto, 1)
By creating a cryptographic proof, rather than relying on trust,
Nakamoto believes that
this system is more reliable. According to Nakamoto’s Bitcoin:
A Peer-to-Peer
Electronic Cash System, the system is advantageous because it
makes transactions
impractical to reverse, which protects sellers and buyers from
fraud, and is monitored by
a timestamp and chronological order of transactions to further
prevent fraud. The
timestamp records the time at which the transaction was made
and the block chain

records the transactions in the order they happen.
How Does Bitcoin Work?
Bitcoin is an electronic currency that can be used as payment
for a good or
service. The previous transaction, and the public key,2 of the
owner are then added to the
end of the “coin”, allowing the payee to verify a coin’s chain of
ownership (Nakamoto).
There are various steps taken to prevent the double spending of
a coin. The first
step is a timestamp server. A timestamp server takes a hash of a
block of items and then
publishes this in a public record. The timestamp verifies that
the data existed at a certain
!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!
2!A!public!key!is!used!to!send!and!receive!transactions!made!
using!Bitcoin.!
! 12!
point in time. Each timestamp includes the previous timestamps,
which forms a chain to
reinforce the history of the hash (Nakamoto).
The next step is a proof-of-work. The proof of work verifies
that the transaction

took place (Turpin 339). Every time a transaction is made, CPU
power is exerted to
complete the transaction. From here, the block value cannot be
undone without redoing
the work. Later blocks are chained to the previous blocks,
creating a chain of work that
acts as a public ledger of transactions.
To prevent fraud, or incorrect blocks being added to the block
chain, the proof-of-
work system is governed by one-CPU-one-vote (Nakamoto).
This means that the
majority decision is represented by the longest chain of blocks,
and that it has the greatest
amount of work invested in it and is also the block chain that
grows at the fastest rate.
This prevents fraud because it means that one would have to
posses enough computing
power to operate faster than the rest of the Bitcoin network and
would also have to be
able replicate past work, which is very difficult or impossible to
do. As the number of
Bitcoin miners (mining is discussed below) and hardware speeds
increase, the proof-of-

work difficulty is determined by an average targeting for
number of blocks per hour, and
if they are generating too fast, the difficulty increases.
(Nakamoto)
As an incentive to use the proof-of-work system, the first
transaction in the block
starts a new coin that is owned by the creator of the block. This
distributes coins into
circulation, since there is no central authority, and creates the
incentive to use CPU power
and electricity to create the block chain and add more coins into
circulation. There are a
predetermined number of bicoins, and after these are all
released into circulation, the
! 13!
incentive to exert CPU power to complete transactions will be
transaction fees
(Nakamoto). This process is known as “mining”, with those
taking part in the process
known as “miners.” The proof-or-work system is meant to
make it difficult for a
dishonest miner to try and process transactions in a fraudulent
way so as to double-spend

coins (Nakamoto).
Why Do People Use Bitcoin?
Bitcoin is used to complete transactions on the Internet.
Bitcoin has many aspects
that drive users to use it to complete their transactions. Bitcoin
is differentiated from
existing methods of payment on the Internet because it is
unregulated and operates
outside the traditional banking system. The motivations to use
Bitcoin are that it has the
ability to complete transactions anonymously, it can be used
world wide, it is easier to
carry than cash, it is non-counterfeitable, it has a fixed supply,
and has relatively low
transaction costs. Understanding the motivations for using
Bitcoin is an important aspect
of understanding Bitcoin’s core users. Below is a discussion of
some of the benefits that
lead people to choose to use Bitcoin.
Anonymity
One advantage of Bitcoin is its use for anonymous transactions.
When making a
transaction with Bitcoin, users do not have to give identifying
information other than

their key chain identifier. Their Bitcoin identities are also
pseudo-anonymous, meaning
that the transactions are mostly anonymous, but that it could be
possible to identify the
spender. (Meiklejohn) While the online identities are not
specifically tied to a certain
person, all transactions are completely transparent, because they
are posted to the block
ledger.
! 14!
When making a purchase with Bitcoin, a person is only
identified by their specific
key address, not by their name or other identifying information
such as in traditional
transactions made using mediums such as credit cards. This
makes Bitcoin popular with
those seeking to make purchases on the deep web. The deep web
is popular among those
seeking to purchase illicit substances on the Internet.3 Bitcoin
is the primary medium of
exchange for those making these transactions, because users do
not have to worry about

the transaction being tracked back to their name.
This anonymity is also favorable for people in crisis countries.
(Woo) It would be
advantageous to use Bitcoin for those who worry about having
their property unfairly
confiscated, or fear high taxes and regulations. The lack of
governmental control of
Bitcoin protects against that fear as people would not have to
worry about having their
bitcoins unduly taken.
The anonymity is also favorable for those who are potentially
looking to avoid
taxes or other regulations. By operating outside the traditional
banking system, it also
leads to the possibility of avoiding records being made of
someone’s purchase history.
This is advantageous for those who don’t want their purchase
history recorded.
Ability to Use World Wide
Another strength of Bitcoin is its ability to be used worldwide.
While each
country has individual regulations regarding Bitcoin, it can
technically be used from

anywhere worldwide. Bitcoin also reduces or eliminates the
need for currency exchange
when traveling abroad, because users can make their payments
in Bitcoin, without
worrying about acquiring the local currency.
!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!
3!See!Appendix!for!definition!of!Deep!Web!!
! 15!
Easier and Safer to Use than Cash
Bitcoin is also much easier and safer to carry than cash. It is
primarily available in
a virtual format, so it is not cumbersome for users to carry
around. As Bitcoins are a
digital currency, they are also relatively difficult for thieves to
steal. In a traditional
sense, someone would be unable to stop you on the street and
attempt to steal your coins.
The coins are stored in an encrypted format on an owner’s
computer, thus making them
relatively difficult to take. Since they are stored on one’s
computer, they are also easier to
keep track of than cash. It is also possible to store Bitcoins
online, in a mobile wallet, in

a paper wallet, or in a USB wallet as backups. Bitcoin
transactions are also completely
transparent, so the transaction history of a bitcoin can be
completely viewed since its
inception, so there are no questions about its ownership.
Non-Counterfeitable
Bitcoin is also a promising alternative to traditional currencies
because it is almost
impossible to counterfeit. (Woo) Because Bitcoins are created
through the mining process
governed by a predetermined series of algorithms, and have
very specific identifying
features, they are very difficult to counterfeit. The timestamp
server, proof-of-work, and
block chain all prevent the double spending of Bitcoin, and thus
make sure that the
transactions that are being made are authentic. Counterfeit
money led to a direct domestic
cost of $61 million in the United States in 2007. (Quercioli)
Thus, Bitcoin has lower costs
to its users than users of traditional currencies, such as the
dollar because of its relative
inability to be counterfeited.

Pre-Determined Supply
There is also a finite number of bitcoins that will ever be
circulated. Bitcoins are
created at a preset rate that is proportionate to the number of the
blocks being added to
! 16!
the block chain. As miners use their CPU power to process the
transactions being made
with Bitcoin, they are rewarded with bitcoins as well as a small
fee charged from the
transaction. (Arias) The rate at which the supply of coins is
increased is also correlated
with the difficulty of the algorithmic proof-of-work problems.
These respond to the
increase in the number of miners and the computing power of
the network. As such, the
growth rate is cut in half every four years and will stop
approximately around the year
2140 when the supply of Bitcoins is capped at 21 million.
(Arias) Among some users of
Bitcoin there is uncertainty regarding the effect of the finite
supply. Proponents of
Bitcoin counter these concerns by presenting the idea that each

bitcoin can be split into
100 million satoshis, so it would not be difficult to continue
using Bitcoin. (Buterin) This
finite supply of bitcoin can reduce the fear of inflation and of
governmental interference
in the creation of money.
Low Transaction Costs
Bitcoin is advantageous for users because it has relatively low
transaction costs as
compared to using cash. The peer-to-peer nature of Bitcoin
means that a central
clearinghouse is not needed for transactions. Miners, who as
previously discussed, have
an incentive to play by the rules when posting transactions to
the ledger, process the
transactions. They have an incentive to play a role in processing
the transactions because
they receive bitcoin as a reward for helping to process the
transaction.
Bitcoin also has low transaction costs because it provides an
alternate payment
method to those who do not have or wish to use credit or debit
cards or other electronic
forms of payment. (Woo) The use of bitcoins to complete

transactions also appeals to
those who do not wish to place trust in a central banking
system. Because a
! 17!
predetermined algorithm for the creation of bitcoin governs
Bitcoin, the supply is not
affected by monetary policy or human decisions.
The Weaknesses of Bitcoin
While Bitcoin has many positive attributes that attract users, it
also has some
weaknesses. These include its volatility, wait time, and lack of
strong exchanges. These
weaknesses inhibit many people from using Bitcoin, and inhibit
Bitcoin’s use as a global
currency. Some of these weaknesses are what lead different
agencies to issue guidelines
on, and attempt to regulate Bitcoin.
Volatility
One of Bitcoin’s inherent weaknesses is its volatility. This
stems from Bitcoin’s
decentralized nature, and lack of a central regulatory agency.
Bitcoin is often affected by

speculation. The dollar conversion price has been very volatile
over its history, often
affected by governmental policy decisions regarding Bitcoin
and by the crashes of major
Bitcoin exchanges.
Its volatility is three to four times higher than a typical stock,
and its exchange
rate with the dollar is about ten times more volatile than that of
the Dollar with the Euro
and Yen. (Yermack) Please see Figure 1 below for the all time
price index for Bitcoin.
While other currencies, such as the Argentine Real and Mexican
Peso, have had large
fluctuations in value over time, they typically tend to stabilize
after a period of time.
Thus, as a store of value, Bitcoin is not a very stable choice for
those looking to safely
store their money.
! 18!
Figure 1 All Time Bitcoin Price Index
Data Available From:

http://www.coindesk.com/price/#2010-07-17,2015-04-
04,close,bpi,USD
Prices in USD$
Close data from 7/18/10 to 5/18/15
Standard Deviation= $240.34
Lack of Recognition
Bitcoin is also limited in that it is not yet widely accepted for
transactions. While
the overall adoption rate of Bitcoin has grown, it is not readily
accepted as tender by most
vendors. The average consumer would have to make vast
changes to their lifestyle in
order to try and use Bitcoin for all of their transactions. A
typical consumer would be
unable to go to their local grocer and pay for their groceries
using Bitcoin.
0!
200!
400!
600!
800!

1000!
1200!
1400!
P
ri
ce
!(
$)
!
All!Time!Bitcoin!Price!Index!
! 19!
Companies such as Overstock.com, Expedia, Dell, and
Microsoft say that they
accept Bitcoin as payment for goods and services. (Davidson)
However, in practice these
companies do not technically accept Bitcoin. They typically
partner with an intermediary
to make Bitcoin transactions happen. When a customer pays in
Bitcoin, the company they
are purchasing the good or service from uses an intermediary to
convert the Bitcoin in
cash. (Davidson) Thus, these companies indirectly accept
Bitcoin in practice.

This process can be tedious for companies to organize. As long
as companies
want to convert the transaction payments from bitcoins into
dollars, they will be reliant
on third party currency converter sites. This can also present a
security issue for
companies, as any bank or government does not guarantee the
Bitcoin exchanges. This
also increases the cost of doing business using Bitcoin. It
requires companies to expend
the energy working to convert Bitcoin into another currency.
Not Totally Anonymous
While many choose to use Bitcoin because of its relative
anonymity, it does not
create a wholly anonymous transaction. A user’s public key
serves as their identifier.
When a transaction takes place the receiver (new owner) of the
Bitcoin adds their public
key (public identifier) to the list of previous transactions.
(Nakamoto) Thus, the Bitcoin
block chain creates a transparent ledger allowing the new owner
to identify the ownership
history of the bitcoin they now possess.

It is becoming increasingly more difficult for people to keep
their offline identity
separate from their online identity. However there are steps
users can take to keep their
offline identity from being tied to their Bitcoin usage. When
accessing the deep web
! 20!
using TOR4, a user is linked through multiple channels so that
the risk of traffic analysis
is reduced. However, when browsing the “clear” web, a user’s
IP address can fairly easily
be identified, thus a transaction could be linked back to an
individual.
Use for Illicit Activities
Some of Bitcoin’s early adopters were drawn to it because of
its ability to be used
to purchase illicit goods on the Internet. Most of these
transactions take place on the deep
web that is only accessible using the Onion Router. 5 Bitcoin is
the chosen medium of
exchange because it is not directly correlated with someone’s
offline name, and it is not
governed by any specific government agency. Bitcoin is known

to many as the means to
make these illicit transactions happen and this negative
publicity directly affects the
credibility of the currency. Many people thus are wary of using
Bitcoin because of its
negative press due to its association with illegal activities.
Wait Time
Another shortcoming of Bitcoin as a currency is that there is a
lag associated with
its use for transactions. To prevent double spending, the
payment must be verified. It
takes about 50 minutes for enough additional blocks to be added
to the block chain to
prevent double spending from happening. (Woo) For two
parties that know each other,
this is less of an issue because they trust each other and do not
have to wait to verify the
payment receipt. The person receiving the payment can quickly
see if the network has
accepted the transaction, but they cannot verify the payment.
(Nakamoto) For anonymous
transactions, there is the need to wait for the transaction to
verify, thus slowing down the
time it takes to complete a transaction. As there is no central

clearinghouse for
!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!
4!See!Appendix!for!definition!of!TOR!
5!See!Appendix!for!definitions!of!deep!web!!
! 21!
transactions, Bitcoin is likely to remain less than perfectly
liquid, thus hindering it’s
ability for large-scale adoption. (Woo)
Weaknesses of Exchanges
Bitcoin also suffers from the weak security of its major
exchanges. As Bitcoin is
not backed by a central bank, users of Bitcoin must trust using
third party exchanges.
Firstly, a user must accept the large fluctuations in exchange
rates that take place on these
currency exchanges. Secondly, the existing Bitcoin exchanges
have been subject to a
number of thefts that have resulted in large losses of currency.
In February of 2014, Mt. Gox, then one of the prominent
Bitcoin exchanges, was
hacked. In the hack, $470 million worth of bitcoins were stolen.
At the time, this

represented about 7% of the total bitcoins in circulation. (Sidel)
The hack of Mt. Gox
showcases the inherent risk in using Bitcoin exchanges. As no
government or regulatory
agency backs Bitcoin, those who had their bitcoins stolen do not
have many options for
legal recourse.
Competitors
Another threat to Bitcoin is its competitors.. Because Bitcoin is
an open source
project, it is relatively feasible to create similar projects, and
thus has inspired many
copycats. (Lee) Some of these other digital currencies include
Dogecoin, Litecoin, and
Dash (formerly known as Darkcoin). Cryptocurrenices other
than Bitcoin are often
known as “altcoins.” (Lee) This influx of competitors could
dilute Bitcoin’s value, as
users could choose to switch to other digital cryptocurrencies.
While Bitcoin remains the largest and most valuable digital
currently, this could
change depending on the regulatory horizon for Bitcoin. As
Bitcoin is the first and largest
digital cryptocurrency, it receives the most press, both positive

and negative, leading to
! 22!
more scrutiny than the other currencies. However, it is possible
that if Bitcoin were to
become more regulated than the other currencies, that users
could choose to switch. It is
also possible that a currency could be created that has more
favorable characteristics than
Bitcoin, or that a flaw in Bitcoin could be discovered leading
users to stop using Bitcoin.
Not Legal Tender
The greatest hindrance to Bitcoin’s ability to become an
international currency is that
it is not legal tender. Businesses are not required to accept
Bitcoins as payment because it
is not a recognized currency. This means that Bitcoin is really
only worth the value
perceived by its users. (Woo) Bitcoin is also fiat money because
it does because it is not
immediately convertible into coins or precious metals, like gold
or silver. (Mishkin, 56)
Thus, the value of Bitcoin could fluctuate widely over time as
reflected by what its users

think its worth at a particular time. This affects Bitcoin’s ability
to serve as a store of
value, thus undermining its ability to serve as global currency.
Traditional Measures of Currency and Bitcoin
In order to evaluate Bitcoin’s feasibility as a currency and the
effect regulation
would have, it is important to evaluate Bitcoin against some of
the traditional metrics of
currency. In economic terms, the measures of currency are
medium of exchange, store of
value, and unit of account.
Bitcoin As a Medium of Exchange
One of the traditional functions of currency is as a medium of
exchange. This
medium of exchange function is typically associated with the
acceptance of a currency as
payment for goods and services. The U.S. dollar serves this
purpose because it is widely
accepted in the payment for goods and services. The role of
medium of exchange also
! 23!
serves to promote economic efficiency and reduce the cost that

goes into conducting a
transaction.
Bitcoin can be used as medium of exchange because it is
accepted for
transactions. However, Bitcoin’s acceptance as a medium of
exchange is primarily
limited to transactions on the Internet. Many vendors that
accept Bitcoin as a method of
payment immediately convert it to another currency.
In some regards, Bitcoin reduces the costs going into a
transaction because it is a
peer-to-peer network. Transactions made using Bitcoin also do
not have to go through a
financial intermediary in order to be completed. However, there
is a lag time associated
with using Bitcoin because of the peer-to-peer nature, and this
does not necessarily
promote economic efficiency.
Overall, Bitcoin moderately acts as a medium of exchange
because it is accepted as
payment for goods and services. However, it does not
necessarily promote economic
efficiency because many vendors immediately convert Bitcoin

into a hard currency. Also,
various countries have differing levels or regulation regarding
what Bitcoin can be used
for, thus Bitcoin’s acceptability as a medium of exchange varies
from country to country.
However, Bitcoin can decrease transaction costs because it is
decentralized. Thus, Bitcoin
moderately meets the traditional measure of currency, medium
of exchange.
Store of Value
Another traditional metric of a currency is its use as a store of
value. Store of value
refers to the level of a medium of exchange’s ability to act as a
store of wealth. (Fisher,
11) The function of a store of value is to save purchasing power
from the time income is
acquired until the time that income is spent. (Mishkin, 55) Store
of value also relates to
! 24!
the liquidity of an asset. People often choose how they want to
store their assets based on
the liquidity they are looking for. As a medium of exchange,
money is the most liquid

asset because it does not have to be converted into anything else
in order to be used. The
measure of a store of value also depends on its ability to hold
its wealth dependent on the
price level.
Bitcoin does moderately have the ability to act as a store of
value. Bitcoin can be
saved to a person’s wallet and does not have to immediately be
used for another
transaction when received. However, Bitcoin can be extremely
volatile in terms of worth,
and in this regard is a weak store of value. In the period
between December 31, 2012 and
December 31, 2013, Bitcoin began around $13 US dollars,
fluctuated to over $1,000 US
dollars, and eventually fell to around $700 at the close of the
year. These large
fluctuations do not create consumer confidence in Bitcoin’s
ability to store and hold
value over a long period of time.
Bitcoin’s use as a store of value can compromise its viability as
a medium of
exchange because of the high volatility of the currency, largely

due to speculative
activities. (Woo) Users of Bitcoin have to be willing to tolerate
significant fluctuations in
the value of their investment. There is also speculation that
those primarily seeking to use
the currency for black market activities, as Bitcoin may help the
user to avoid certain
federal regulations, could use Bitcoin as a store of value, but it
is still risky given
Bitcoin’s volatility.
Unit of Account
Unit of account is used to measure the value of money in an
economy. (Fisher 11)
Unit of account also reflects the worth of the unit as a medium
of exchange. Bitcoin does
! 25!
have the ability to serve as a unit of account. It reflects the
value of an item, and can be
used to purchase items. However, part of the definition unit of
account includes the
ability for two parties to both be able to understand how much
the currency is worth.

Bitcoin does not really meet this because its value is solely
reflected by the value
consumers place on it.
Overall, Bitcoin moderately meets the measure of unit of
account. However, users
do still have to covert to another currency in many cases to
complete the majority of their
transactions.
The Regulation of Bitcoin
Money is typically regulated by a centralized federal agency.
The U.S. Dollar is
regulated by the Federal Reserve, which controls the supply of
money and the rate of
inflation. The United States Federal Reserve also creates
confidence in the banking
system for the general public because of its regulatory
constraint, and serves as a lender
of last resort for banks. Confidence in the banking system is
also created through the
Federal Deposit Insurance Corporation (FDIC). The FDIC
insures depositors in a
commercial bank or mutual savings fund up to $250,000.
(Mishkin, 47) If a financial
institution were to fail, the FDIC will pay off depositors up to

the value of $250,000.
Bitcoin is unregulated, as it was created outside of the
traditional confines of the
banking system. This lack of regulation can lead to lack of
confidence in Bitcoin as a
viable currency. An increase in regulation could increase the
confidence in Bitcoin,
decrease volatility, and strengthen the major Bitcoin exchanges.
! 26!
Arguments for the Regulation of Bitcoin
Decrease Volatility
A positive outcome of the regulation of Bitcoin is that it would
decrease the
volatility of the currency. If Bitcoin were backed by a central
bank or government, it
would help to reduce the amount of fluctuation of Bitcoin’s
value relative to real
currencies. By reducing the volatility of the currency, Bitcoin
would better serve as a
store of value. As a stable store of value, Bitcoin could come to
be more widely accepted
as a legitimate currency. Serving as a stable store of value

would also allow users of
Bitcoin to have faith in the currency, and not worry that the
value of their investment
could disappear overnight.
Increased Recognition
Increased regulation of Bitcoin would be a positive thing for
users because it
would increase the recognition of the currency. This would lead
to more businesses
accepting Bitcoin as means of payment for goods and services.
Businesses would also
feel more comfortable accepting Bitcoin as payment, knowing
that it has central backing
from a major regulatory agency. Regulations regarding how to
handle Bitcoin also help
individuals and businesses know that they are acting properly in
the eyes of the
government. However, this could potentially harm black market
users because it would
make it more difficult to complete their transactions.
Strengthen Exchanges
Increased regulation would also strengthen the security of
Bitcoin exchanges.

Many users of Bitcoin get their Bitcoins from using currency
exchangers as opposed to
! 27!
mining the currency themselves. Over the history of Bitcoin, the
exchanges have been
plagued with a series of hacks that have stolen sums that
number in the millions.
Increased regulation would strengthen these exchanges because
it would allow users of
the exchanges to know that their coins are backed by a central
regulatory agency.
Increased regulation would also take the step of decreasing the
likelihood of a
bank run. A bank panic or bank run occurs when people fear
that multiple banks will fail
simultaneously, so they withdraw their investments leading to
the point where banks fail.
This situation occurs in the absence of, or with, limited deposit
insurance and is caused
by asymmetric information. (Mishkin, 188) When Mt. Gox, one
of the prominent Bitcoin
exchanges, halted withdrawals on February 8, 2014, a digital

bank run occurred. Users
went to withdraw their money, and were unable to do so. Later
it was revealed that Mt.
Gox had suffered from an elaborate heist with over $470 million
worth of Bitcoin taken.
Mt. Gox users were without legal recourse to try and get their
money back. Regulated
Bitcoin exchanges would reduce the likelihood of a bank run,
and would increase
confidence in using a Bitcoin exchange.
There has already been some movement in regulation and
recognition regarding
Bitcoin exchanges. In January of 2015, Coinbase launched
Lunar, a Bitcoin exchange.
Lunar is the first licensed U.S. based exchange. Coinbase is also
unique in that it claims
to have insurance, thus providing some sort of comfort to
potential users of the exchange.
(Bensinger) The announcement of an exchange with insurance
clearly had a positive
effect on the currency as the day of the announcement the price
of Bitcoin spiked 16%
relative to the U.S. dollar. (Clinch) Coinbase is licensed for use
in 24 states, and only

users in those states that are licensed can access Lunar. This
Bitcoin currency exchange is
! 28!
a strong step towards increasing the acceptance of the currency,
and creating the
perception that it is a legitimate currency.
Arguments Against Regulation
While the regulation of Bitcoin could help to cement it as a
legitimate currency,
some feel that it goes against the inherently libertarian aim of
Bitcoin. Bitcoin was
founded on the grounds of being a peer-to-peer medium of
exchange, governed by the
collaborative mining system. If Bitcoin were to be regulated,
avid users feel that it would
decrease the freedom of its use, a core reason bitcoin was
created. Regulation by the
United States would also require the government to associate
with something that has
been widely associated with illicit transactions.
Decrease Freedom
If Bitcoin were to be completely regulated by a government or

agency, it would
decrease the freedom Bitcoin allows its users. Many of
Bitcoin’s original adopters chose
the currency because it was separate from a specific government
or regulatory agency,
and was seen as being free from human intervention. As the
number of Bitcoins in
circulation depends on a pre-determined algorithm, the amount
cannot be altered to adjust
for depreciation or inflation.
Bitcoin came into being in 2009 during a time of recession.
Some early adopters
may have seen Bitcoin as a way to operate outside of the central
banking system that
could be manipulated by policy makers. While the supply of
Bitcoin would not be
affected by Bitcoin regulation, there would be interference by a
central bank or
government agency.
Satoshi Nakamoto created Bitcoin to serve as a purely peer-to-
peer electronic
cash system. (Nakamoto) Bitcoin was meant to cut financial
institutions out of the

! 29!
transaction process because of the inherent trust the financial
system requires. When
online transactions using traditional mediums of exchange, such
as cash, are mediated by
a financial institution, non-reversible transactions are not
possible, and trust of the
financial system is required. (Nakamoto) By introducing
financial institutions or
governments into the Bitcoin transaction processes, an element
of trust in a financial
institution is again required for the transaction. Regulation thus
goes against the original
reason for the creation of Bitcoin.
Use in Illicit Transactions
U.S. regulation of Bitcoin would also involve the United States
to directly deal
with a currency that has been widely associated with illicit
transactions. Bitcoin played a
large role in facilitating the transactions that took place on the
Silk Road.6 The top three
largest categories of items sold on the Silk Road were “Weed”
(marijuana), “Drugs”

(encompasses narcotics or prescriptions the seller did not
categorize), and
“Prescriptions.” Of the top twenty categories on the website, the
four most popular
categories were related to drugs, and sixteen of the top twenty
were drug-related.
(Christin 8) The website generated more than $213 million in
illicit revenues during its
existence. (Luther) By regulating Bitcoin, the U.S. government
would be acknowledging
or would need to at least legally deal with a currency that is
used to facilitate illegal
transactions.
Regulation by the United States would also be seen as
detrimental by those
hoping to use Bitcoin to purchase illicit substances. Regulation
would make it harder to
complete these transactions on the clear web, however these
transactions could still
potentially be possible on the deep web.
!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!
6!See!Appendix!for!definition!of!the!Silk!Road!!

! 30!
10. Bitcoin’s Core Users
It is difficult to find concrete data on whom exactly Bitcoin’s
core users are. One
user base is Libertarians, who appreciate Bitcoin because it is
unregulated by any central
bank or organization. Another core group of users are computer
programmers, who
appreciate Bitcoin because it is completely digital, and managed
by a series of complex
algorithms. And finally, another core user group are those who
use Bitcoin primarily for
illegal activities on the Internet. (Wilson) Overall, it is difficult
to track Bitcoin’s users
because many of them use Bitcoin on the Deep Web.
11. Affect of Regulation on Core Users
The issue of regulation of Bitcoin seems to divide users. Those
who regard Bitcoin as
the future of currency, and use it for primarily legal
transactions, will benefit the most
from Bitcoin regulation. Regulation could change how Bitcoin
is taxed, which would be
beneficial for those that hold large amounts of the currency, and
currently have it taxed as

property. Regulation would decrease the volatility of the
currency, making it a safer
investment and less risky to hold. It would also potentially
increase the security of
Bitcoin exchanges, which would make more people feel
comfortable changing hard
currency into virtual currency.
Those that use Bitcoin primarily for illicit activities will
probably deride regulation,
as it would decrease its usefulness as a medium of exchange for
those activities.
However, it would still be possible to use Bitcoin for illicit
transactions, as regulated
currencies are routinely used for illicit transactions every day.
! 31!
12. Recommendations For Regulation
The ideal route for regulation of Bitcoin seems to be the
regulation of Bitcoin
exchanges. As Bitcoin is based off of a computer algorithm, it
would be impossible to
regulate the creation and distribution of Bitcoin. It would also
be impossible to regulate

or tax every transaction that takes place because transactions
are made possible through
the peer-to-peer system. The regulation of exchanges is ideal
because it increases
consumer confidence in using the exchange, and helps decrease
the volatility of Bitcoin.
Decreased volatility then stabilizes Bitcoin as a medium of
exchange. A regulated
Bitcoin exchange would also decrease the instance of theft, thus
making it a safer
medium of exchange for users.
13. The United States’ Position on Bitcoin
It is legal to use Bitcoin in the United States, however it is not
regulated by the United
States government. A number of reports have been released by
the United States
Department of the Treasury regarding the treatment of Bitcoin
for tax and other purposes.
On March 18, 2013, the Department of the Treasury Financial
Crimes Enforcement
Network (FinCEN) released a notice providing guidance on
digital currencies. (FIN-
2013-G001) The notice relates how to apply the Banking
Secrecy Act to virtual

currencies. Regarding virtual currencies, FinCEN states:
In contrast [to real currency] ‘virtual’ currency is a medium of
exchange
that operates like a currency in some environments, but does not
have all
the attributes of real currency. In particular, virtual currency
does not have
legal tender status in any jurisdiction. This type of real currency
either has
an equivalent value in real currency, or acts as a substitute for
real
currency. (FIN-2013-G001)
Thus, the Department of the Treasury recognizes that virtual
currencies can serve as a
medium of exchange, but are not legal tender and thus do not
have to be accepted for
! 32!
payment for goods and services. The report also defines user,
exchanger, and
administrator for tax purposes. (FIN-2013-G001) Using the
virtual currency to purchase
real or virtual goods does not make one a money service
business, but being an
administrator or exchange of a virtual currency does make one a
money transmitter. For

purposes of a de-centralized virtual currency, a person who
“creates” (mines) the
currency is not a money transmitter, but those who create units
of the virtual currency and
then sell those units to another person in exchange for real
currency are money
transmitters. (FIN-2013-G001)
On March 25, 2014, the IRS released a report regarding the
treatment of virtual
currencies for tax purposes. The report states that virtual
currencies must be treated as
taxable property. The report acknowledges that people use
virtual currency to pay for
goods and services, and that it could also be used for investment
purposes. This helped to
further clarify the United States’ view of virtual currencies and
acknowledges that
Bitcoin is considered to be a convertible virtual currency.
(Notice 2014-21) The most
important aspect of this report is that it acknowledges that
miners of virtual currencies
must report the virtual currency as gross income. United States
taxpayers also have to

acknowledge capital gains or losses when exchanging virtual
currency for other property.
(Notice 2014-21)
14. Conclusions
Overall, the issue of regulation divides users because regulation
inherently goes
against the original aim of the currency. Bitcoin was created as
a peer-to-peer network,
managed by those individuals that take part in the mining and
block chain creation
process. While complete regulation would be beneficial for
some of Bitcoin’s core users,
! 33!
it is unlikely to happen. While it is possible to regulate certain
aspects, it is unlikely that
full regulation would be possible as Bitcoin is not controlled by
any central government
or regulatory agency. Bitcoin seems likely to continue to grow
in popularity, but is
unlikely to become a predominant global currency due to its
lack of regulation and
association with illicit activities on the Internet.

!
!
!
! 34!
Appendix
Definition of Key Terms:
Bitcoin-Refers to the concept of Bitcoin as a whole, or used
when discussing the network.
Example: The scope of Bitcoin is global.
bitcoin (lowercase)- Refers to bitcoin as a unit of measurement,
similar to the concept of
$1 bill. Example: I spent one bitcoin yesterday.
Blocks- Record that contains and confirms transactions
Block Chain- Public record of Bitcoin transactions in

chronological order
Clear Web or Visible Web- Everything you can find on the in
Internet using conventional
search engines that use web crawlers
Coin- Chain of digital signatures
Cryptocurrency- Digital currency that uses cryptography for
security, digital to
counterfeit and not regulated by a central authority
Cryptography- Area of mathematics that allows people to create
proofs that provide high
levels of security. In Bitcoin, it is used to prevent the theft of
someone else’s coins, and
also can be used to encrypt a user’s wallet.
Deep Web or Invisible Web -Term for some of the more
disreputable corners of the
Internet, typically only accessible through an encryption method
such as TOR
Hash Rate-The measuring unit of the processing power of the
network
Mining- The process of using computer hardware to do
mathematical calculations to
confirm transactions
Peer-to-peer (P2P)- Systems that work like an organized
collective group by allowing
individuals to directly interact with each other
Satoshi-Unit of measurement, 100 million satoshis=1 bitcoin

Silk Road- Website accessible only through The Onion Router.
Allowed users to
purchase illegal goods such as drugs, fake documents, and
stolen credit card numbers.
Was begun in February of 2011 and was closed by the Federal
Bureau of Investigation in
October of 2013. The site has re-emerged in many forms such as
Silk Road 2.0 and Silk
Road 3.0.
The Onion Router (TOR)-Originally developed with the United
States Navy in mind.
Works by routing transactions through various paths so that no
single route can link back
! 35!
to the destination. Creates a private pathway, and allows users
to browse the Internet
anonymously.
Wallet- Similar to a wallet in the physical world, allows you to
see your balance of
bitcoins, as well as send them to others

! 36!
Works Cited
Arias, M., & Shin, Y. (2013, October 1). There Are Two Sides
to Every Coin-Even to the
Bitcoin, a Virtual Currency. The Regional Economist
Bensinger, G. (2015, January 25). First U.S. Bitcoin Exchange
Set to Open. Retrieved
April 12, 2015, from http://www.wsj.com/articles/first-u-s-
bitcoin-exchange-set-to-open-
1422221641
Bitcoin Price Index. (n.d.). Retrieved April 4, 2015, from
30,close,bpi,USD
Bitcoin Price Index. (n.d.). Retrieved April 4, 2015, from
30,close,bpi,USD
Buterin, V. (2013, October 28). Satoshi's Genius: Unexpected
Ways in which Bitcoin

Dodged Some Cryptographic Bullets. Retrieved May 1, 2015,
from
https://bitcoinmagazine.com/7781/satoshis-genius-unexpected-
ways-in-which-bitcoin-
dodged-some-cryptographic-bullet/
Christin, N. (2013, May). Traveling the Silk Road: A
measurement analysis of a large
anonymous online marketplace. In Proceedings of the 22nd
international conference on
World Wide Web (pp. 213-224). International World Wide Web
Conferences Steering
Committee.
Christopher, C. M. (2014). Why on Earth Do People Use
Bitcoin?. Business &
Bankruptcy LJ, Forthcoming.
Clinch, M. (2015, January 26). Bitcoin Gets First Regulated US
Exchange. Retrieved
April 12, 2015, from http://www.cnbc.com/id/102367943
Cryptocurrency Definition. (2013, July 29). Retrieved May 15,
2015, from
http://www.investopedia.com/terms/c/cryptocurrency.asp
Davidson, J. (2015, January 9). No, Big Companies Aren't
Really Accepting Bitcoin.
Retrieved April 12, 2015, from
http://time.com/money/3658361/dell-microsoft-expedia-
bitcoin/.

Fin-2013-G001. (2013, February 18). Retrived October 17,
2014, from
http://www.fincen.gov/statutes_reg/guidance/html/Fin-2013-
G001.html
! 37!
First U.S. Bitcoin Exchange Set to Open. (n.d.). Retrieved May
13, 2015, from
http://www.wsj.com/articles/first-u-s-bitcoin-exchange-set-to-
open-1422221641
Fisher, D. (1980). Money, Banking, and Monetary Policy.
Homewood, Ill.: R.D. Irwin.
Greenburg, A. (2013, October 12) End of the Silk Road.
Retrived May 1, 2015, from
http://www.forbes.com/sites/andygreenberg/2013/10/02/end-of-
the-silk-road-fbi-busts-
the-webs-biggest-anonymous-drug-black-market/
How to Store Your Bitcoins. (2014, December 22). Retrieved
June 1, 2015, from
http://www.coindesk.com/information/how-to-store-your-
bitcoins/
Invisible Web (n.d.) Retrived February 13, 2015, from
http://www.lib.berkeley.edu/TeachingLib/Guides/Internet/Invisi
bleWeb.html
Kotenko, J. (2014, August 14). A Beginner’s Guide to Tor.
Retrived February 13, 2015,

from http://www.digitaltrends.com/computing/a-beginngers-
guide-to-tor-how-to-
navigate-through-the-underground-internet/
Lee, T. (2015, May 14). What's up with Bitcoin competitors
such as Litecoin and
Dogecoin? Retrieved May 20, 2015, from
http://www.vox.com/cards/bitcoin/whats-up-
with-bitcoin-competitors-such-as-litecoin-and-dogecoin
Luther, W. (2015, February 23). Dark Dollar Dealings. Retrived
April 12, 2015, from
http://www.usnews.com/opinion/economic-
intelligence/2015/02/23/us-has-no-business-
regulating-bitcoin-because-of-illegal-dealings
Meiklejohn, S., Pomarole, M., Jordan, G., Levchenko, K.,
McCoy, D., Voelker, G. M., &
Savage, S. (2013, October). A fistful of bitcoins: characterizing
payments among men
with no names. In Proceedings of the 2013 conference on
Internet measurement
conference (pp. 127-140). ACM.
Mishkin, F. (2013). The Economics of Money, Banking, and
Financial Markets (10th
ed.). New Jersey: Pearson.
Nakamoto, S. (2008, October 31). Bitcoin: A Peer-to-Peer
Electronic Cash System
Satoshi Nakamoto. Retrieved December 23, 2014, from
http://nakamotoinstitute.org/bitcoin/

Notice 2014-21. (2014, April 14). Retrieved April 12, 2015,
from
http://www.irs.gov/pub/irs-drop-n-14-21.pdf
! 38!
Quercioli, E., & Smith, L. (2009, January 10). The Economics
of Counterfeiting.
Retrieved May 1, 2015, from
https://research.stlouisfed.org/conferences/moconf/2009/Querci
oli.pdf
Sidel, R., Warnock, E., & Mochizuki, T. (2014, February 28).
Almost Half a Billion
Worth of Bitcoins Vanish. Retrieved May 1, 2015, from
http://www.wsj.com/articles/SB10001424052702303801304579
410010379087576
Some Bitcoin words you might hear. (n.d.). Retrieved May 18,
2015, from
https://bitcoin.org/en/vocabulary
Tor: Overview. (n.d.) Retrieved February 13, 2015, from
https://www.torproject.org/about/overview
Wetjen, M. (2014, November 3). Bringing Commodities
Regulation to Bitcoin. Retrieved
December 2, 2014, from http:wsj.com/articles/mark-wetjen-
bringing-commodities-
regulation-to-bitcoin-1415060058
Wilson, Matthew Graham and Yelowitz, Aaron, Characteristics

of Bitcoin Users: An
Analysis of Google Search Data (November 3, 2014)
Woo, D., Gordon, I., & Iaralov, V. (2013). Bitcoin: a first
assessment. FX and Rates.
Yermack, D. (2014, February 18). Bitcoin Lacks the Properties
of a Real Currency.
Retrieved May 20, 2015, from
http://www.technologyreview.com/view/524666/bitcoin-
lacks-the-properties-of-a-real-currency/
www.elsevier.com/locate/ijcip
Available online at www.sciencedirect.com
Discussion
The promise and perils of digital currencies
Tyler Moore
Computer Science and Engineering Department, Lyle School of
Engineering, Southern Methodist University,
P.O. Box 750122, Dallas, Texas 75275-0122, USA

Interest in digital currencies, especially Bitcoin, has exploded
over the past year. The cryptocurrency Bitcoin was created in
2009 by an anonymous entity operating under the pseudo-
nym Satoshi Nakamoto. Using cryptographic primitives to
create a digital currency is not particularly new – David
Chaum proposed electronic cash nearly thirty years ago.
What is different about Bitcoin is its success in gaining
adoption. More than $1 billion of Bitcoin currency is in
circulation, while Bitcoin startups are attracting tremendous
interest from venture capitalists.
But not all the attention attracted by digital currencies is
positive. In 2011, two U.S. Senators asked that Bitcoin be shut
down after they learned that it was used to pay for hard drugs
in an underground marketplace called The Silk Road.
Recently, the Costa-Rica-based digital currency, Liberty
Reserve, was closed down because it allegedly laundered
more than $6 billion on behalf of cyber criminals who had
turned to the currency as a favored means of exchange.
Bitcoin itself is frequently targeted by hackers, who exploit
operational security failures to steal from the “wallets” of
consumers and firms.
1. Why is there so much interest in digital
currencies?
One big reason is that digital currencies offer the prospect of
substantially reduced transaction fees for online purchases.
Nearly all online payments are made via payment-card net-
works. These payment platforms are so dominant that they
can charge high fees despite low operating costs. Responding
to consumer outrage, the United States recently passed
legislation limiting debit card interchange fees. The European
Union has proposed similar limits. The backers of new digital
currencies believe they can offer lower transaction fees

through technological innovation rather than regulation. Of
course, it remains to be seen if they can overtake the
entrenched payment networks of Visa and MasterCard.
The second reason is that digital currencies provide
greater anonymity than credit cards. In Bitcoin, for example,
accounts are pseudonymous and the protocol is designed to
encourage the use of new account numbers for each transac-
tion. These features are touted by Bitcoin supporters as a
guarantee of anonymity, which has drawn privacy-conscious
consumers – and criminals – to the currency. But they are
mistaken. Associating identities with Bitcoin addresses is
possible, particularly when interacting with online currency
exchanges.
The third reason is the decentralized design of Bitcoin and
other digital currencies that protects against inflation. Tradi-
tional currencies rely on a central bank to regulate the money
supply, introducing new money into circulation as needed.
The quantitative easing policies adopted by the U.S. Federal
Reserve have attracted criticism about potentially causing
inflation. Bitcoin, in contrast, uses cryptography to guarantee
a relatively fixed money supply, which is allowed to grow at
regular intervals. Periodically, the amount of money intro-
duced is halved, until no more Bitcoin currency is brought
into circulation. Hence, instead of central bank decisions
driven by human prognostications, Bitcoin relies on an
algorithm to limit the growth of the money supply. This
approach is very appealing to inflation “hawks” who have
literally bought into Bitcoin.
2. So what are the risks?
The principal risk is that digital currencies are highly suscep-
tible to abuse by criminals.

1874-5482/$ - see front matter & 2013 Published by Elsevier
B.V.
http://dx.doi.org/10.1016/j.ijcip.2013.08.002
E-mail address: [email protected]
i n t e r n a t i o n a l j o u r n a l o f c r i t i c a l i n f r a s t r u
c t u r e p r o t e c t i o n 6 ( 2 0 1 3 ) 1 4 7 – 1 4 9
Merchants who sell dodgy goods or services using the
traditional payment system must avoid excessive chargeback
rates or they will be forced to pay higher transaction fees or
perhaps even be dropped altogether by their payment pro-
cessors. Criminals peddling fake antivirus software are
known to pay close attention to their chargeback rates, even
refunding bilked customers later in the month to stay under
the radar of payment processors. Unlicensed online pharma-
cies are also ever fearful of being targeted by law enforcement
who shut down their access to payment processors.
Given these obstacles, many criminals have moved to
digital currencies to process payments. Before its closure by
the FBI in October 2013, The Silk Road underground market-
place sold schedule drugs and narcotics without prescription,
relying on Bitcoin for all transactions. Thousands of online
Ponzi schemes called high-yield investment programs
(HYIPs) rely on obscure digital currencies such as Perfect
Money and, until it was shut down, Liberty Reserve.
Criminals also have begun to (ab)use digital currencies as
a platform for exchange. Like all of us, criminals desire
reliable bank accounts. But they want to register these
accounts without providing identifying information so that
their victims cannot seek recompense. Some less reputable

digital currencies gladly meet this requirement. Criminals in
underground forums frequently paid each other for goods
and services using the now-defunct Liberty Reserve. When it
was operational, Liberty Reserve was the “coin of the realm”
for many criminal entities. Notably, there has been almost no
evidence of criminals using Bitcoin for this purpose on a
large scale.
Still, digital currencies such as Bitcoin pose many risks to
consumers. Consumers looking to use digital currencies for
legitimate transactions can be bitten badly.
The biggest risk facing Bitcoin users is exchange-rate risk.
The Bitcoin-dollar exchange rate has fluctuated wildly. Dur-
ing its first few years of operation, exchange rates fluctuated
between $5 and $15. However, beginning in January 2013, the
currency rose inexorably, reaching a peak of over $250 in
early April before falling sharply. The currency has stabilized
somewhat in recent months, hovering around $100. While
Bitcoin's rise has benefited early adopters, consumers are
fearful of holding or spending the currency because its value
can change so rapidly.
Another risk for consumers is that, unlike traditional
online payments, many digital currencies (including Bitcoin
and Liberty Reserve) are designed to have irreversible trans-
actions. This is attractive to merchants because it can reduce
chargeback rates. But for consumers, the potential for harm is
substantial because fraudulent transactions cannot be
undone. Millions of consumers flocked to credit cards starting
in the 1970s because strong government regulation required
credit card companies to reimburse disputed transactions.
Absent such protection, digital currencies could see very low
adoption rates except in the minority of cases where other
benefits outweigh the risk.

Another related problem is that hackers who gain
unauthorized access to Bitcoin wallets can steal money,
leaving victims without any recourse. Several high-profile
Bitcoin thefts have targeted currency exchanges and other
entities that hold large amounts of the currency. This is
significant because many consumers, fearful of taking pos-
session of their Bitcoin assets, choose to leave their newly-
acquired currency in the control of the very exchanges from
which they purchased the currency.
This points to another Bitcoin-specific hazard: exchange-
closure risk. Since 2010, at least 40 currency exchanges that
convert Bitcoin to and from hard currencies for a small fee
have opened. Unfortunately, eighteen of these exchanges
have subsequently closed, leaving their Bitcoin depositors
in the lurch. Regression analysis has shown that increased
trading volume is associated with longer operating lifetimes
for exchanges. But trading volume is also positively corre-
lated with suffering security breaches – profitable exchanges
make valuable targets. Unfortunately, in the “Wild West” of
Bitcoin's ecosystem, consumers have no protection against
these and other risks.
3. Are there regulatory remedies that can
protect consumers?
Given the widespread criminality facilitated by digital cur-
rencies and perpetrated against consumers, one might expect
that little could be done by regulators and law enforcement to
mitigate the threats. But the prospects for oversight and
control are actually quite decent.
While Bitcoin was designed to be completely decentra-
lized, the reality is that a relatively small number of currency
exchanges facilitate most transactions. These exchanges are

essential to the functional operation of the Bitcoin ecosystem
because they are responsible for all transfers into and out of
Bitcoin from hard currencies. Most of these exchanges oper-
ate in countries with substantial financial oversight – the
largest exchange, Mt. Gox, is based in Japan.
Governments have begun to flex their muscle. The U.S.
Department of Homeland Security recently temporarily cut
off Mt. Gox's account with its U.S.-based payment processor
Dwolla for non-compliance with currency-exchange regula-
tions. The U.S. Treasury Department's Financial Crimes
Enforcement Network (FinCEN) recently issued guidance to
digital currencies on compliance with the Bank Secrecy Act.
Bitcoin exchanges have strong incentives to cooperate
with regulators in efforts such as these. One reason is purely
existential – a closure such as that of Liberty Reserve is a
future that no exchange desires to emulate. It is also quite
possible that exchanges will compete by providing better
protection of customer accounts. Mt. Gox has suffered multi-
ple security breaches, but in every case, it repaid consumers
and absorbed the loss. However, it is not clear that such
behavior would persist in the aftermath of a massive breach.
Another reason Bitcoin and other digital currency
exchanges will likely work with regulators and law enforce-
ment is that taking a stand against crime may well drive
criminals to use more lax currencies. The pessimistic corol-
lary is that, even if Bitcoin and other digital currencies do not
become criminal havens, less responsible currencies will
happily provide sanctuary, just like eGold, WebMoney and
Liberty Reserve did in the past. While regulators can exert
influence on the more responsible currencies, they will
c t u r e p r o t e c t i o n 6 ( 2 0 1 3 ) 1 4 7 – 1 4 9148

doubtless play a never-ending game of “whack-a-mole” with
the dodgier currency operators.
The bottom line is that digital currencies are a disruptive
technology. They can lower online payment fees and even
offer cryptographic guarantees about the money supply. But
the risks they introduce – from abuse by criminals to wide-
spread customer fraud – are substantial.
Technologists, policymakers and consumers must work
together to overcome the many risks and tame what is most
definitely another “Wild West.”
Tyler Moore is an Assistant Professor of
Computer Science and Engineering at
Southern Methodist University, Dallas,
Texas. His research interests include the
economics of information security, the
study of electronic crime, and the devel-
opment of policy for strengthening secur-
ity. He is a Director and Vice President of
the International Financial Cryptography
Association (IFCA) and Vice Chair of the
IFIP 11.10 Working Group on Critical Infrastructure Protection.
c t u r e p r o t e c t i o n 6 ( 2 0 1 3 ) 1 4 7 – 1 4 9 149

Department of Economics
Working Paper
College of Business Administration
Virtual Currency and the Financial System: The Case
of Bitcoin
By
Abdur Chowdhury
and
Barry K. Mendelson
Working Paper 2013-09

VIRTUAL CURRENCY AND THE FINANCIAL SYSTEM: THE
CASE OF BITCOIN
Abdur Chowdhury
Department of Economics
Marquette University
and
Barry K. Mendelson
Senior Investment Analyst
Capital Market Consultants, Inc.
Milwaukee, WI 53202
I. Introduction
Technological development and the increased use of the internet
have led to the
proliferation of virtual communities. Some of these

communities have created and
circulated their own currency for exchanging goods and
services. Bitcoin is currently the
most popular among these virtual or digital currencies and has
been in news recently
because of the wild fluctuations in its ‘value’ and also
significant venture capital investment
in entities associated with it.1 Bitcoin is relevant in several
areas of the financial system and
is therefore of interest to central banks, consumers and
investors.
Digital currencies are part of a broader group of virtual
currencies that include credit card
points, air miles, loyalty points and coupons (Chart 1). With the
advent of the Internet,
mobile devices and detailed consumer information, companies
are increasingly using
digital currencies as a marketing tool. As a result, there has
been a sharp increase in the use
of digital currencies, particularly for app-based coins and
tokens, mobile coupons, and
personal data exchanged for digital content. As these trends
evolve, digital currencies have
the potential to become more popular and compete with

traditional currencies.
This paper aims to provide some clarity in particular on Bitcoin,
its role and potential
future use in the financial system and the risks associated with
this form of digital
currency.. It will begin by providing a short introduction to the
Bitcoin network as well as
describe the benefits of allowing the Bitcoin network to develop
and innovate. It will
highlight concerns for consumers, policymakers and financial
regulators. Next it will
analyze the role that Bitcoin could play in the financial system.
The paper will conclude by
providing recommendations to address policymakers’ concerns
while allowing for further
innovation within the Bitcoin network. An initial comprehensive
overview of this kind is
absent from the existing literature. This paper intends to fill
that gap in the literature.
1 Bitcoin is not the only virtual currency on the Web. There are
others, such as Ripple, a new currency from a
startup called OpenCoin.com

II. Bitcoin Network
Bitcoin is the world’s first completely decentralized peer-to-
peer digital currency. A
software developer pseudo-named Satoshi Nakamoto published
the Bitcoin Protocol
(Nakamoto, 2008) which outlined the theory of a decentralized
currency. This was
followed in January 2009 by the release of the open-source
Bitcoin software, and the
mining of the first Bitcoins. It rocketed to prominence in 2013,
when the value of a Bitcoin
soared more than 10-fold in a two-month period, from $22 in
February to a record $266 in
April (Chart 2).2 The price of a Bitcoin again rose to a record
$710 on November 17, 2013,
before falling to $600 shortly thereafter. The nearly tripling of
the price since early
November was fueled by rising expectations that the virtual
currency will continue to gain
traction as an alternative to traditional methods of payment.3
At its peak, based on more
than 11.8 million Bitcoins issued, the digital currency boasted a
market value of over $2

billion (Chart 3).4
Since its creation, Bitcoin has evolved from a mathematical
proof of concept to a rapidly
expanding economic network. It is now being used in business
transactions around the
world. Businesses big and small have shown interest in
integrating the Bitcoin platform
into their operations and providing new services within the
Bitcoin economy. The
momentum behind Bitcoin is coming from around the world, as
amateur investors, venture
capitalists and technology enthusiasts pump money into
businesses that are trying to
figure out how to use Bitcoin to buy and sell goods and (Chart
4).5 A growing number of
2 Bitcoins come in whole or in fractional form. Each Bitcoin is
subdivided into 100 million smaller units called
satoshis, defined by eight decimal places.
3 The prices are as of the writing of this draft on the Tokyo-
based Mt. Gox exchange and on the Slovenia-based
Bitstamp Exchange.
4 The Bitcoin economy exceeded $8 billion at one point in
November, and investors and the U.S. Treasury are
beginning to give the virtual currency legitimacy.

5 Sarah Needleman and Spencer Ante, “Bitcoin Startups begin
to Attract Real Cash,” Wall Street Journal, May 8,
2013.
merchants accept Bitcoin, because the transaction costs
associated with the currency are
generally lower than those for using credit or debit cards.
Instead of being made on a printing press or by a central
authority, Bitcoins are generated
by solving complicated algorithmic searches by powerful
computers, a process known as
mining.6 Most Bitcoin users do not mine, but purchase or trade
for their Bitcoin. Mining
doesn't affect the average Bitcoin user much, but is still a very
important part of the Bitcoin
ecosystem.
All newly mined Bitcoin, along with every transaction, are
publicly recorded. This record is
known as the blockchain. While the blockchain records
transaction details, it does not
record any personal identifying information about the senders or
recipients. The
blockchain is a critical feature to maintain the transparency of
the Bitcoin system, and

make counterfeiting or double spending impossible.
While Bitcoins are created through mining that pursuit is
getting increasingly complicated
and expensive, as companies and technology fans race to build
the powerful computers
required for Bitcoin production. There's a limit to the number of
Bitcoins that can be
mined. After the year 2140, no more Bitcoins will be created,
and the total amount ever
available is fixed at 21 million, more than half of which have
already been mined (Chart 5).
The Bitcoin scheme is technically designed in such a way that
its supply will increase at a
particular pace.
III. Theoretical Roots of Bitcoin
The theoretical roots of Bitcoin can be found in the Austrian
school of economics and its
6 Mining is the calculation of a hash of a block header, which
includes, among other things, a reference to the
previous block, a hash of a set of transactions and a nonce (a
32-bit/4-byte field whose value is set so that the
hash of the block will contain a run of zeros). If the hash value
is found to be less than the current target

(which is inversely proportional to the difficulty), a new block
is formed and the miner gets 50 newly
generated Bitcoins. If the hash is not less than the current
target, a new nonce is tried, and a new hash is
calculated. This is done millions of times per second by each
miner.
criticism of the current fiat money system and interventions
undertaken by governments
and other agencies, which, in their view, result in exacerbated
business cycles and massive
inflation (ECB, 2012).
Friedrich A. Hayek of the Austrian School argued that
governments should not have a
monopoly over the issuance of money. He instead suggested that
private banks should be
allowed to issue non-interest-bearing certificates based on their
own registered
trademarks. These certificates (i.e. currencies) should be open
to competition and would be
traded at variable exchange rates. Any currencies able to
guarantee a stable purchasing
power would eliminate other less stable currencies from the
market leading to a healthy

and efficient monetary system. Following this line of reasoning,
Bitcoin supporters believe
that, inspired by the former gold standard, Bitcoin could end the
money-creating monopoly
of central banks. Although the theoretical roots of the scheme
can be found in the Austrian
School of economics, Bitcoin has also raised serious concerns
among some of today’s
Austrian economists.7
IV. Why People Might Want to Use Bitcoins?
According to the supporters of Bitcoin, it holds much promise
as a way to lower transaction
costs for small businesses and global remittances, help alleviate
global poverty by
improving access to capital, protect individuals against capital
controls and censorship,
ensure financial privacy for oppressed groups, and spur
innovation (Brito and Castillo,
2013).
Firstly, Bitcoin is attractive to cost-conscious small businesses
looking for ways to lower
the transaction costs of doing business. Since Bitcoin facilitates

direct transactions without
a third party, it removes costly charges that accompany say, for
example, credit card
7 Their criticism covers two general aspects: a) Bitcoins have
no intrinsic value like gold; they are mere bits
stored in a computer; and b) the system fails to satisfy the
“Misean Regression Theorem”, which explains that
money becomes accepted not because of a government decree or
social convention, but because it has its
roots in a commodity expressing a certain purchasing power.
See Matonis (2011).
transactions. And because transactions are cheaper, Bitcoin
makes micropayments and
other innovations possible.
Secondly, as an inexpensive funds-transfer system, Bitcoin also
holds promise for the
future of low-cost remittances. In 2012, immigrants to
developed countries sent at least
$401 billion in remittances back to relatives living in
developing countries (World Bank,
2013)8. The amount of remittances is projected to increase
substantially in the near future.
Most of these remittances are sent using traditional brick-and-

mortar wire services such as
Western Union and MoneyGram, which charge steep fees
(9.0%) for the service and can
take several business days to transfer the funds. In contrast,
transaction fees on the Bitcoin
network tend to be less than 1% of the transaction.9 This
entrepreneurial opportunity to
improve global money transfers has attracted investments from
big-name venture
capitalists. Bitcoin allows for instantaneous, inexpensive
remittances, and the reduction in
the cost of global remittances for consumers could be
considerable.
Thirdly, Bitcoin also has the potential to improve the quality of
life for the world’s poorest
by improving access to basic financial services.10 According to
one estimate, 64 percent of
people living in developing countries lack access to these
services, perhaps because it is too
costly for traditional financial institutions to serve poor, rural
areas.11 Because of the
impediments to developing traditional branch banking in poor
areas, people in developing

countries have turned to mobile banking services for their
financial needs.12 Mobile
banking services in developing countries can be further
augmented by the adoption of
8 World Bank Payment Systems Development Group,
Remittance Prices Worldwide: An Analysis of Trends in
the Average Total Cost of Migrant Remittance Services
(Washington, DC: World Bank, 2013),
9 In the first quarter of 2013, the global average fee for sending
remittances was 9.05 percent (World bank,
2013). See, also, Andrew Paul, “Is Bitcoin the Next Generation
of Online Payments?,” Yahoo!Small Business
Advisor, May 24, 2013,
10 Muhammad Yunus, Banker to the Poor: Micro-lending and
the Battle againstWorld Poverty (New York:
Public Affairs, 2003).
11 Oya Pinar Ardic, Maximilien Heimann, and Nataliya
Mylenko, “Access to Financial Services and the Financial
Inclusion Agenda around the World” (Policy Research Working
Paper, World Bank Financial and Private
Sector Development Consultative Group to Assist the Poor,
2011).
12 The closed-system mobile payment service M-Pesa has been
particularly successful in countries such as Kenya,
Tanzania, and Afghanistan. See, for example, Jeff Fong, “How
Bitcoin Could Help the World’s Poorest People,”
PolicyMic,May 2013,
Bitcoin. As an open-system payment service, Bitcoin can
provide people in developing

countries with inexpensive access to financial services on a
global scale.
Fourthly, Bitcoin might also provide relief to people living in
countries with strict capital
controls. The total number of Bitcoins that can be mined is
capped and cannot be
manipulated. There is no central authority that can reverse
transactions or prevent the
exchange of Bitcoins between countries. Bitcoin therefore
provides an escape route for
people who desire an alternative to their country’s devalued
currencies or frozen capital
markets. For example, people in Argentina have adopted
Bitcoin in response to the
country’s dual burdens of a 25% inflation rate and strict capital
controls.13
Additionally, one of the most promising applications of Bitcoin
is as a platform for financial
innovation. The Bitcoin protocol contains the digital blueprints
for a number of useful
financial and legal services that programmers can easily
develop. Since Bitcoins are, at their
core, simply packets of data, they can be used to transfer, not

only currencies, but also
stocks, bets, and sensitive information.14 Some of the features
that are built into the Bitcoin
protocol include micropayments, dispute mediations, assurance
contracts, smart property,
etc.
V. Challenges Facing Bitcoin Users
Despite the benefits that it presents, Bitcoin has downside risks
potential users should
consider.15 Firstly, Bitcoin has weathered at least six
significant price adjustments since
2011.16 These adjustments resemble traditional speculative
bubbles: overoptimistic media
coverage of Bitcoin prompts waves of novice investors to pump
up Bitcoin prices.17 The
exuberance reaches a tipping point, and the value eventually
plummets (Brito and Castillo,
2013).
13 Jon Matonis, “Bitcoin’s Promise in Argentina,” Forbes, April
27, 2013,
14 Jerry Brito, “The Top 3 Things I Learned at the Bitcoin
Conference,” Reason, May 20, 2013.

Laureate Education (Producer). (2013c). Levy family Episodes 5 [V.docx

Laureate Education (Producer). (2013c). Levy family Episodes 5 [V.docx

Recommended

Recommended

More Related Content

Similar to Laureate Education (Producer). (2013c). Levy family Episodes 5 [V.docx

Similar to Laureate Education (Producer). (2013c). Levy family Episodes 5 [V.docx (20)

More from smile790243

More from smile790243 (20)

Recently uploaded

Recently uploaded (20)

Laureate Education (Producer). (2013c). Levy family Episodes 5 [V.docx