Digital Currency

Kody Myers

DefinitionCurrency that does not exist in any physical form, but can be used similarly to physical currency while retaining the three main properties of money: a store of value, a medium of exchange, and a unit of account.

Subsets of Digital Currency

Virtual CurrencyIntended for purchase of virtual goods.

Gold (World of Warcraft) Microsoft Points Amazon Coin Linden Dollars (Second Life)

CryptocurrencyIntended for purchase of real goods.

Bitcoin Litecoin Peercoin Namecoin

Subsets of Virtual Currencies

Closed One-way Convertible

No legal exchange provided for real currency.

Black markets exist to provide exchanges.

Can be purchased with time, real currency, or some other criteria.

Cannot be converted to real currency.

Open exchange for conversion to and from real currency.

Gold (World of Warcraft)

Frequent Flyer Points

Amazon Coin

Linden Dollars (Second Life)

Cryptocurrencies

• Named such because they use cryptography to secure transactions and control the creation of new units.

• Uses peer-to-peer networks to decentralize control.

• All transactions are publicly announced so that they can be verified by the network’s participants.

• Similar to a stock exchange, though the transactions are visible, the identities of the parties are not disclosed.

• Transactions take seconds, but verification can take up to 10 minutes.

Bitcoin Mining

Currency “Mining”

• Mining is the process of spending computing power to process transactions, secure the network, and keep everyone in the system synchronized together.

• Mining software listens for transactions broadcast through the peer-to-peer network and performs appropriate tasks to process and confirm these transactions.

• For new transactions to be confirmed, they need to be included in a block along with a mathematical proof of work. 

• Proofs are very hard to generate because there is no way to create them other than by trying billions of calculations per second.

• As more people start to mine, the difficulty of finding valid blocks is automatically increased by the network to ensure that the average time to find a block remains equal to 10 minutes.

Mt. Gox

• Originally existed as the “Magic: The Gathering Online eXchange” for trading collectible cards as stock.

• Rechristened as a Bitcoin exchange in July 2010.

• Handled 70% of all Bitcoin transactions by 2013.

• Suspended operations in February 2014 and filed for bankruptcy protection.

• During the liquidation process, 850,000 BTC, valued at $450 million, was reported missing or likely stolen.

beenz.com

• Founded in 1998 by Charles Cohen.

• Raised about $80 million in venture capital.

• Companies purchased beenz, then issued them to customers for completing certain actions.

• Customers could redeem earned beenz with on-line merchants.

• Sold off in 2001 after the dot-com bubble burst.

Flooz.com

• Founded in 1998 by Robert Levitan.

• Spent at least $35 million in venture capital.

• Utilized by a Russian crime syndicate to launder money from stolen credit cards.

• Closed in 2001.

Legal and Regulatory Concerns

• Consumer protections

• Collection of economic statistics

• Exchange rate policy

• Payment systems

• Tax evasion

• Money laundering

Public Acceptance

• Long term stability

• Security

• Anonymity

• Nothing to “tuck under the mattress”

Google Image search: bitcoin

References

• http://www.bitcoin.com/

• http://www.sec.gov/oiea/investor-alerts-bulletins/investoralertsia_bitcoin.html

• http://worldhistoryproject.org/1998/floozcom-is-founded

• http://www.nytimes.com/2001/08/27/business/e-commerce-report-seller-of-online-currency-may-have-been-victim-of-fraud.html

• http://qz.com/180876/the-failure-of-mt-gox-could-be-a-mortal-wound-for-bitcoin/

• http://www.washingtonpost.com/blogs/the-switch/wp/2014/02/25/no-the-failure-of-mt-gox-wont-kill-bitcoin/

• http://us.battle.net/wow/en/shop/anti-gold/

• https://bitcoin.org/en/how-it-works

• http://www.forbes.com/sites/investopedia/2013/08/01/how-bitcoin-works/