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World powers react to the Bitcoin boom

Currency's value crashed after China forbade its banks from Bitcoin transactions.

Last updated: 07 Dec 2013 13:22
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The Old Fitzroy Pub is the first pub in Australia to accept Bitcoins as payment [Getty Images]

World powers have scrambled in recent weeks to react to the rise of Bitcoin, a decentralised digital currency created in 2009.

Publicity from US Senate hearings and a black-market website that used the currency saw the value of Bitcoin skyrocket from $13 in January to $1,242 on November 29 - higher than the price of gold at the time. The currency is stored in a digital "wallet" and is "mined" by computers solving mathematical puzzles.

But on Saturday the value of the crypto-currency plummeted to $830 on BTC China, the world's largest Bitcoin exchange by trading volume, after China banned its banks from providing related services and products on Thursday. Data on the Bitcoin Charts website shows that about one-third of the world's Bitcoin transactions are made on the BTC China exchange, which is open only to Chinese users.

The Chinese market has become so big that China Telecom subsidiary Jiangsu Telecom and a Shanghai developer began accepting the currency, and one man has reportedly become China's first Bitcoin multi-millionaire.

'Clear potential for growth'

Meanwhile, on Thursday the French central bank warned against using Bitcoin, because of its volatility and lack of regulationHowever, Bank of America Merrill Lynch said in its first research report on the currency that it had the potential to become a major means of payment for ecommerce and a serious competitor to traditional payment methods"Bitcoin has clear potential for growth," the bank said.

Bitcoin value drops after US crackdown

The value of Bitcoin jumped from $478 to $744 in November after a US Senate committee opened a hearing into virtual currencies including Bitcoin, titled "Beyond Silk Road: Potential Risks, Threats and Promises of Virtual Currencies".

"Silk Road" is the name of the now-closed website that the US Federal Bureau of Investigation believes was used for services including drug trafficking, money laundering, computer hacking and even murders-for-hire, using Bitcoin as payments. Ross Ulbricht, an American, has been accused of being "Dread Pirate Roberts", the pseudonym of the person, or people, who ran the online market.

American software businessman Mike Caldwell said many people had heard about Bitcoin in the context of the Silk Road. "I see the shutdown of Silk Road as being a pretty good thing," Caldwell told Al Jazeera. "When someone gets on and demonstrates that this currency works as it's intended to, and that it's sound enough to be used for the same thing cash is used for, it gets out the message that, you may not understand the technology, but it works."

Similarly, Spain-based Bitcoin trader Felix Moreno said the virtual currency had benefited from the attention the criminal case had attracted. "All publicity is good publicity," Moreno told Al Jazeera. "When they found out that Roberts made $18m, it made business people interested."

British tycoon Sir Richard Branson announced in November that his Virgin Galactic space flight venture would accept Bitcoin as a valid form of payment. The payment centre network ZipZap said plans to offer a cash-for-Bitcoin service at 28,000 locations in Britain in January and roll out the service in the rest of the EU, Middle East, Africa and Asia. And the Channel Island of Alderney has announced plans to become the first jurisdiction to produce physical Bitcoins, in partnership with the UK's Royal Mint. The British crown dependency wants to become an international centre for Bitcoin transactions and establish services such as exchanges that meet anti-money laundering rules.

Crime concerns

Mythili Raman, the head of the US Justice Department's Criminal Division, told the US Senate committee that the currency has been used by criminals. "We have seen increasing use of such currencies by drug dealers, traffickers of child pornography, and perpetrators of large-scale fraud schemes," Raman said.

Authorities have also expressed concern at the emergence of other websites that purport to raise money to commission crimes such as murder, including a site called "Assassination Market". While some analysts believed the website was a hoax, or even a trap set by authorities, Assassination Market attracted substantial bids from anonymous users who contributed Bitcoins towards plans to kill political figures such as US Federal Reserve Chairman Ben Bernanke, who had the equivalent of a $75,000 bounty in Bitcoins on his head.

Welshman throws away fortune in Bitcoins

Bernanke wrote in a letter to the US Senate's Homeland Security and Governmental Affairs Committee that Bitcoin can also be used for money laundering, concerns echoed by China. Nevertheless, he said "there are also other areas where they may hold long-term promise".

Jinyoung Lee Englund, the director of Public Affairs for the Bitcoin Foundation - a member-driven non-profit organisation for the Bitcoin community - said the Senate Committee had been cautiously optimistic about the virtual currency. "They recognise that new technology is not scary or unmanageable, and they certainly do not wish to stamp out innovation in the US," she said. "At the same time, bad actors will use any medium, whether it be cash, cell phones, social media, the internet or Bitcoin, to achieve their means. So a better understanding of the technology is required in order to understand how to best mitigate the risks within existing regulatory guidelines."

Stealing Bitcoins

Caldwell has encountered regulatory issues of his own after the US Financial Crimes Enforcement Network contacted him and told him he might be a "money transmitter". He is seeking legal advice after suspending production of his popular Casascius coins, which are physical representations of Bitcoins.

While authorities consider how to regulate the currency and investigate its possible use in funding crime, Bitcoin has itself become a target. The digital currency website Coindesk has reported that hackers recently stole 1,295 bitcoins, valued at more than $1m, after wiping data from the Denmark-based Bitcoin Internet Payment System (BIPS).

Nevertheless, Caldwell said that while he was sure there would be technical problems, the concept behind the currency would prevail. "I think what's happening this year is that the world is getting sold on the idea of a decentralised currency," Caldwell said.

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Al Jazeera
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