More than $1 billion dollars worth of a digital currency known as “bitcoins” now circulate on the web – an amount that exceeds the value of the entire currency stock of small countries like Liberia (which uses “Liberian dollars”), Bhutan (which uses the “Ngultrum”), and 18 other countries.
So what is a “bitcoin,” and why would anyone use it?
Unlike traditional currency, bitcoins are not issued by a government or even a private company. Instead, the currency is run by computer code that distributes new bitcoins at a set rate to people who devote web servers to keep the code running. The bitcoins are then bought and sold for regular U.S. dollars online.
Bitcoin is in high demand right now — each bitcoin currently sells for more than $90 U.S. dollars — which bitcoin insiders say is because of world events that have shaken confidence in government-issued currencies.
“Because of what’s going on in Cyprus and Europe, people are trying to pull their money out of banks there,” Tony Gallippi, the CEO “BitPay.com,” which enables businesses to easily accept bitcoins as payment, told FoxNews.com.
In Cyprus, the government is considering taking a percentage of all citizens’ bank accounts to solve its fiscal woes. That has led Cypriots — and other Europeans worried about the same thing happening to them — to take their money out of banks.
“So they buy gold, they put it under the mattress, or they buy bitcoin,” Gallippi said.
Bitcoin demand has also increased, Gallippi says, because last week U.S. regulators issued the first official guidelines for private digital currencies. Prior to the regulations, the legal status of the currencies was in doubt.
“Now people can see that it’s not illegal, that it’s not banned,” Gallippi said.
Bitcoin is controversial because the currency can be exchanged anonymously online — it is in a sense the digital equivalent of using hard cash — and so some have criticized it for facilitating online drug markets. On the site known as “the Silk Road,” for instance, users pay bitcoins for illegal drugs and other forbidden items.
In a 2011 letter to the Attorney General, Senators Charles Schumer (D-NY) and Joe Manchin (D-W.Va.) argued for strict enforcement.
“After purchasing bitcoins through an exchange, a user can create an account on Silk Road and start purchasing illegal drugs from individuals around the world and have them delivered to their homes within days,” the Senators wrote. “We urge you to take immediate action and shut down the Silk Road network.”
But the Silk Road is still running, and a recent study estimates that $23 million dollars of illicit items are sold for bitcoins on the site every year.
The regulatory guidelines issued last week by the government agency known as the Financial Crimes Enforcement Network (FinCEN), however, will not stop that.
The regulations say that digital currencies like bitcoin are to be treated essentially as foreign currencies. Companies that exchange digital bitcoins for real money will have to comply with the same regulations as traditional currency exchangers — namely, they must verify the identity of anyone exchanging money for bitcoins and report large transactions to the government.
Using bitcoins to purchase goods, however, is specifically exempted.
“A user who obtains convertible virtual currency and uses it to purchase real or virtual goods or services is not… under FinCEN’s regulations,” the guidance reads.
Some bitcoin defenders say the use of bitcoins to buy illegal items shouldn’t obscure the legal uses.
“With any technology… Criminals are going to use it for something, and regular people are going to use it for something,” Gallippi said. “You can’t ban cell phones just because criminals are using them to do drug deals. You can’t ban e-mail just because people are using them to do phishing scams in Nigeria. You have to start just prosecuting people who are committing crimes — you can’t just completely wipe out the new technology.”
Gallippi says one reason to use bitcoins for legal transactions is a lower risk of identity theft.
“If you are buying something online and you have the choice of paying with a credit card or bitcoins – think about what you have to do to use a credit card. You have to fill out this whole long form, name, address, account number, sometimes more… coincidentally, that’s all the info a thief would need to steal to pretend to be you.”
Between that, bitcoin’s anonymity, and worries about conventional currency, bitcoin demand is as high as ever, according to Alan Safahi, who runs “Zip Zap” – a company that facilitates cash deposits at stores like CVS and Wal-Mart for transfer to a site that can convert the money to bitcoins.
“We’re processing millions of dollars a month. We’ve seen tremendous surge in activity,” he said.