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Does Bitcoin promote illicit e-commerce?

Kenneth Corbin | Aug. 22, 2013
The much buzzed-about digital currency has aroused concern for its use in illicit activity, but George Mason University researchers urge a cautious regulatory approach.

The homeland security committee is in the midst of an ongoing inquiry into the uses and implications of virtual currency.

"The expansive nature of this emerging technology demands a holistic and whole-government approach in order to understand and provide a sensible regulatory framework for their existence. As with all emerging technologies, the federal government must make sure that potential threats and risks are dealt with swiftly; however, we must also ensure that rash or uninformed actions don't stifle a potentially valuable technology," Carper and Coburn wrote.

Bitcoin: Less anonymous than cash
Given the use of the public-key technology, the George Mason researchers take issue with the description of Bitcoin as an anonymous payment service. Because each transaction is tied to a public key, and therefore is marked in the overall record of Bitcoin activity, known as the block chain, they contend that the transactions are properly described as pseudonymous, rather than anonymous, like a basic cash transaction.

"Tying a real-world identity to a pseudonymous Bitcoin address is not as difficult as some might imagine," Brito and Castillo write, pointing out that users' IP addresses and other identifying information are often recorded in the process of making a Bitcoin transaction or exchanging bitcoins for dollars.

The researchers also note the severe fluctuations in value that Bitcoin has seen, with a single unit rising from its initial value of pennies to a peak of more than $260 in April 2013. Citing an estimate from the end of May, the researchers peg the total market capitalization of the Bitcoin economy at more than $1 billion.

That volatility could pose a risk to newcomer investors, the researchers acknowledge, though they suggest that Bitcoin's enduring merit might be to serve as a medium of exchange, rather than a vehicle for storing wealth, thus insulating users from the fluctuations in value.

"Customers who purchase Bitcoins to make a one-time purchase don't care about what the exchange rate will look like tomorrow," the authors write. "They simply care that Bitcoin can lower transaction costs in the present. Bitcoin's usefulness as a medium of exchange might explain why the currency has grown more popular among merchants in spite of its price volatility."

 

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