Bitcoins: A New Form of Virtual Currency?

Jeffrey D. Neuburger Partner November 14, 2013

Bitcoins: A New Form of Currency?

Source: Lui, Simulcrum.cc

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November 14, 2013

Bitcoin on the front pages

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How Well Do You Know Bitcoin?

Jeffrey D. Neuburger

November 14, 2013

How Well Do You Know Bitcoin?

1. Bitcoin is a relatively new currency in the form of gold coins with the dollar sign like B logo. True or False?

Jeffrey D. Neuburger

November 14, 2013

How Well Do You Know Bitcoin?

1. Bitcoin is a relatively new currency in the form of gold coins with the dollar sign like B logo. True or False?

Unlike U.S. dollars and other currencies, bitcoin exists only as a virtual currency and does not have a physical coin or bill associated with its circulation. It is not government issued. Its value is not pegged to any established currency.

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How Well Do You Know Bitcoin?

2. There is no such thing as an ATM for bitcoins. True or False?

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How Well Do You Know Bitcoin?

2. There is no such thing as an ATM for bitcoins. True or False?

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First Bitcoin ATM

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How Well Do You Know Bitcoin?

3. You can store bitcoins on your Metrocard? True or False?

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How Well Do You Know Bitcoin?

3. You can store bitcoins on your Metrocard? True or False?

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How Well Do You Know Bitcoin?

3. You can store bitcoins on your Metrocard? True or False?

But, a Metrocard will still get you from Washington Heights to Coney Island for $2.50.
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How Well Do You Know Bitcoin?

4. Who invented the Bitcoin protocol and currency?

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 Developed in 2009, Bitcoin today is the most widely-used digital currency. Exists only as a long string of numbers and letters in a users computer file, using public and private key encryption and a network of computers to conduct and verify transactions. Bitcoins act as a real world currency and also a speculative investment option. As of Nov. 1, 2013, over 11.8 million bitcoins were in circulation.

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Rise of Bitcoin
Jan. 2009: Bitcoin software starts running; first transaction July 2010: Mt. Gox established; until very recently, the largest Bitcoin exchange. Others include Bitstamp, VTC-E, BTCChina, Bitcoin.de Feb. 2011: 1 BTC=$1 Spring 2013: Bitcoin market cap surpasses $1 billion; now, $2.5 billion Nov. 13, 2013: 1 BTC = $392
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Bitcoin Mining
Bitcoins are created and entered into circulation through a process, called mining that members of the bitcoin network perform. Miners download software used to solve extremely complex mathematical problems, which verify the validity of past bitcoin transactions and prove that the transactions did not represent double spending of a bitcoin. When a miners computer solves an equation, the bitcoin network creates 25 new bitcoins (an amount that will decrease over time) and awards them to the miner. By design, there will be a maximum of 21 million bitcoins in circulation, with the last to be mined in 2140. The rate of mining is controlled by the complexity of the mathematical problems.

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Bitcoin Mining

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Bitcoin Transactions
Bitcoins are sent from a bitcoin wallet to the Bitcoin Address of the other person via computer, smartphone or other device.
- Recipients need private keys to access their bitcoins. - Bitcoin transactions are encrypted, completely anonymous and do not use any intermediaries. - After a transaction has been conducted, the Bitcoin network verifies transactions and ensures that the same bitcoin has not been spent twice.

Anonymous, public transactions!

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How Is Bitcoin Used?

Source: Survey of 1,000 Bitcoin users by Lui, Simulcrum.cc

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The Silk Road

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Living on Bitcoin is a great way to lose weight. As it is not widely accepted, you are prevented from spontaneous snacking. And because most transportation providers do not currently accept it, you must walk or bike a lot. I lost 5 pounds in a week. Its hard to convince someone who has never heard of Bitcoin before to accept it as payment. You can simply choose to walk away from the person who wont accept Bitcoin payment, but that is hard to do when the person is your landlord. . The buying power of my little 5 Bitcoin bank has I fluctuated wildly since I created it, from a BTC valuation high of $140 USD to a low of $90 USD. I bought 28 minicupcakes at the low point for .5896 BTC. They were $56 at the time (which is already crazy). Reevaluating at BTCs high point, I spent $86 on cupcakes. My expense report is going to be a nightmare.

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Bitcoin Issues: Risks & Downsides

Regulatory Environment and Lack of Comprehensive Governmental Backing Infrastructure Issues: Data Security, Service Outages Data Network Problems Volatility and Liquidity Practical Issues Reputational Issues

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The Regulatory Environment

31 CFR 1010.100(ff): A Money Services Business must register with FinCen.

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FinCEN Guidance
In March 2013, FinCEN issued a Guidance (FIN-2013G001) clarifying that anti-money laundering regulations concerning recordkeeping and recording apply to digital currency exchanges
- An administrator or exchanger that (1) accepts and transmits a convertible virtual currency or (2) buys or sells convertible virtual currency for any reason is a money transmitter under FinCENs regulations, unless a limitation to or exemption from the definition applies to the person. - The definition of a money transmitter does not differentiate between real currencies and convertible virtual currencies.

In 2007, the Govt indicted and later shut down E-Gold, an unlicensed money transmitter that allegedly shielded illegal activity behind a virtual currency tied to gold
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Government Regulation Enforcement Actions

May 2013: Government indicts Liberty Reserve, a money transmitter that allegedly facilitated illegal transactions with their LR digital currency.

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Mt. Gox (May 30, 2013): It is our responsibility to provide a trusted and legal exchange, and that includes making sure that we are operating within strict anti-moneylaundering rules and preventing other malicious activity.

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State Regulation New York Dept of Financial Services Subpoenas 22 Bitcoin Entities

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International Regulation Mixed Results

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Data Security - Watch Your Wallet!!!

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Data Security
Offline solutions to deter hacking Startup bitcoin service provider Circle stated that it would provide security for its customers bitcoins by opening offline reserves essentially, hard drives not connected to the internet in a facility protected by armed guards. Swiss entrepreneur Richard Porubcan has retrofitted old Swiss nuclear shelters into secure bunkers for secure bitcoin mining or digital currency storage
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Fraud
SEC v. Shavers, No. 13-416 (E.D. Tex. Aug. 6, 2013)
- Based on allegations of bitcoin-based ponzi scheme, the court has jurisdiction under 33 Act because investments bought with bitcoins satisfy the definition of an investment contract and are securities

The SEC reiterated that any investment in securities in the United States remains subject to the jurisdiction of the SEC regardless of whether the investment is made in U.S. dollars or a virtual currency.

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Volatility -Ups and Downs

Bitcoins exchange is affected by a varierty of external market forces. In April 2013, within a span of seven days, bitcoin lost almost 70% of its value after a service outage at Mt.Gox. In 2013, bitcoin value went from about $20 to its recent highs near $400 In one day in 2013, it went from $266 to $105 to $194

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Liquidity
As of November 2013, there are over 11.8 million bitcoins in circulation, with market cap of over $3.8B (depending on the exchange rate), and there only ever will be 21 million bitcoins created. Limited amount of bitcoins not enough to handle any sizeable share of world economic activity without causing liquidity issues. If bitcoin were adopted on a large scale, can a merchant be confident that its large sell orders converting bitcoin back to USD will be executed at a predictable price? Without affecting the market?
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Growing Legitimacy Investment

Areas for future investment:
- Online exchanges - e-Wallet and other user services - Business services related to transactions and compliance

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Growing Legitimacy Investment

The Winklevoss Bitcoin Trust Cameron and Tyler Winklevoss reportedly hold approximately $11 million in bitcoins The Winklevoss twins filed a proposal with the SEC to create a bitcoin investment fund (akin to an exchange-traded fund) allowing investors to purchase shares in a trust that hold bitcoins, with the price indexed to the blended price across various exchanges. Ashton Kutchers A-Grade Investments joined others in a subsequent round of seed funding for bitcoin service provider Bitpay. Union Square Ventures raised $5M for Coinbase
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Benefits to Business Why Should A Company Accept Bitcoin?

Attracts a tech-forward clientele; creates a buzz Natural connection to certain industries Option for investment if the company holds the bitcoins instead of immediately exchanging them for USD Encourages spontaneous transactions Flexibility for Consumers: PC, mobile, website; mobile to mobile; Merchants can add a bitcoin shopping cart plug-in

Lower transactional costs

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Benefits to Business Why Should A Company Accept Bitcoin?

Bitcoin service providers charge lower transaction fees than payment cards. Typical charges are less than 2% vs. 2-3% for traditional credit cards, and Paypal 2.2-2.9% with + 30-cent txn fee). Coinbase: no merchant fees on first $1M in sales, then 1% on conversion of BTC to USD.

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Issues for Businesses What Do I Have to Do to Accept Bitcoins?

Companies like BitPay or BIPS offer business processing software and services, with the option of transferring bitcoins immediately into dollars after the transaction. Must vet carefully all service providers and exchanges that handle online or point of sale transactions. Either method transfers bitcoins into a merchants e-wallet, which can be later transferred into hard currency and deposited into a bank account.

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Jeffrey D. Neuburger

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Issues for Businesses What Do I Have to Do to Accept Bitcoins?

For brick and mortar sales, customers can pay via mobile phone by scanning a QR code on a tablet or by entering vendors bitcoin wallet address into their bitcoin payment software.

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So, Should I Accept Bitcoins? Which Side of the Line Are You On?

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The Future
Will more volatility or hacking incidents destroy confidence in the bitcoin currency, or will it could continue to gain in stability and legitimacy? Will bitcoin become a standard payment option, remain a niche product, or bust completely under the weight of speculators? Will Bitcoins open up new business opportunities, e.g., BitMonet, micropayments to publishers for article access. Will Bitcoin be embraced by other payment processors?

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The Digital Currency Rush Is Here 36 Crypto-Currencies and Counting

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Bitcoin Creator Who is Satoshi Nakamoto?

Pseduonym for a coder or hacker, or a group of computer scientists wellversed in cryptography. Developed software that started the Bitcoin system (original research paper posted in 2008 and Bitcoin network appeared in 2009) A bit of a parlor game has developed around Who is Satoshi? Some think its an eminent computer scientist, while other conspiracy-minded people speculate it was created by tech companies or even the U.S. Govt?
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Bitcoin Creator Who is Satoshi Nakamoto??

Nakamoto wrote many web posts, and a technical paper and corresponded with other software developers on the bitcoin open source code until 2011, when he disappeared.

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Jeffrey D. Neuburger

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Who is Satoshi Nakamoto??

Even a New Yorker reporter in 2011 couldnt discern his/her/their? identity

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So, Who is Satoshi Nakamoto???

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Thank You!

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