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The virtual world now is cashing in, to the tune of up to $500,000 daily, on online transactions, even though there remains a “legal gray area” about Bitcoin.

But the growing popularity of the anonymous, decentralized, digital currency is prompting concern among users and law enforcement agencies that it may be misused.

Since its inception in 2009, the online payment system (the term “Bitcoin” refers both to the system and to the virtual units of currency users transfer through that system) now accounts for between $100,000-$500,000 worth of online transactions per day, despite the fact that Bitcoin exists in what Timothy B. Lee calls “a legal gray area.”

Lee, writing for Ars Technica, reports that New York Sen. Charles Schumer has denounced Bitcoin as a means of money laundering on the Web. The Secret Service is now well aware of the “untraceable online currency popular in the criminal underworld,” too, but Lee cites a legal paper by Temple University’s Nikolei Kaplanov in pointing out that current law simply does not adequately govern this new form of digital money.

Kaplanov explains that, as of this writing, there are no cases that challenge the ability of parties in the U.S. to make transactions in bitcoins. In other words, the currency is legal only because no one has yet enacted policy asserting that it isn’t. But the Secret Service and policymakers like Schumer now have the Bitcoin system in their sights, which means legal action may be inevitable.

“This has led to the question of whether the federal government has the ability under current federal law to prohibit the use of bitcoins between willing parties,” writes Kaplanov, who believes that as the laws stand now, the federal government “has no basis to stop bitcoin users who engage in traditional consumer purchases and transfers.”

Created by programmer Satoshi Nakamoto, Bitcoin makes it possible to send money quickly to any point in the world with Internet access, and at no additional cost. It is accepted by websites such as Wikileaks, the Internet Archive, and the Free Software Foundation. In the case of Wikileaks specifically, Bitcoin was one of the few options left to the controversial site after it became persona non grata with the commercial banking industry.

“Since 7th December 2010 an arbitrary and unlawful financial blockade has been imposed by Bank of America, VISA, MasterCard, PayPal and Western Union,” reads the site. “The attack has destroyed 95% of our revenue.”

Bitcoin’s decentralized network puts it outside of such coordinated control.

“It’s a sophisticated math algorithm,” insists James Angleton of Aegis FinServ Corp. “[Satoshi] was dissatisfied with the way FOREX works and [the way] government uses it. His ideological theory was to introduce a monetary supply and system that is off grid, yet maintains integrity via stock and mining for its currency rather than [from printing], like the U.S. Treasury creates dollars.”

Three years after Bitcoin’s peer-to-peer network went live, more and larger entities are using it as a means of quickly transferring money online, despite accusations that Bitcoin is essentially a pyramid scheme linked to drug trafficking and other illicit activity.

Bitcoin’s particular advantages and liabilities are the result of its unique nature: Unlike online services such as PayPal, Bitcoin is the first truly digital currency.

“Most ‘digital currencies’ are not really digital currencies at all,” explains Erik Voorhees, director of marketing and communication for Bitinstant (a Bitcoin transfer service). “[This is] because they are pegged to standard currencies. Credits in your PayPal account are really just USD-backed – they are not a unique currency themselves. Other ‘digital currencies,’ such as Facebook Credits, can be created out of nothing and without limit, so they are not serious money. Ironically, the U.S. dollar is more like Facebook Credits than Bitcoin, because both USD and Facebook Credits can be created out of thin air, whereas Bitcoin cannot be.”

Andrew Schrage of Money Crashers agrees. “No real money is involved,” he says. “Bitcoins can be used as a method of payment for goods and services, can be exchanged for real currencies such as the U.S. dollar, and are transferable.”

While anonymous and easy to use, Bitcoin has another advantage that makes it attractive to the user: There are no transaction costs.

“Bitcoin is two things which share a name,” says Voorhees. “One, it’s a payment system, and two, it’s a currency. You use the Bitcoin payment system to send bitcoins as currency from one account holder to another. The transfer is instantaneous, carries no fee, works anywhere in the world, and is private.”

Voorhees describes that payment system as absolutely revolutionary.

“Nothing like it has ever been done,” he tells WND. “The system is decentralized, so there is no ‘server farm’ or corporate office which controls payments. Transactions occur ‘peer to peer’ just like file-sharing. To use the system, you can either download the client software (which runs on your computer and stores money locally) or you can use an ‘ewallet,’ which is a website run by a third party that holds the funds for you (which is simpler, but introduces counter-party risk if the third party is not trustworthy.”

The lack of oversight also makes Bitcoin an attractive prospect to both cyber criminals and those financing illegal ventures.

“Bitcoin has been linked to black-market websites,” says Andrew Schrage, “namely the drug business Silk Road, which some have accused of money laundering. A savings and trust opened in the name of Bitcoin was recently closed, after accusations that it was a Ponzi scheme.”

Schrage also points out that users may lose their bitcoins to hacking or user error if they’re not careful.

“They have to be accessed and sent virtually,” he explains. “Due to the fact that there are no chargebacks, someone who buys something with Bitcoins has no protection. If a seller chooses not to ship the product, the buyer has no recourse. If your computer crashes, you can potentially lose your Bitcoins, and nothing can be done to recover them.”

In April, a report from the Federal Bureau of Investigation (as leaked to and shared by Wired) described Bitcoin as presenting “unique challenges for deterring illicit activity.”

“Bitcoin will likely continue to attract cyber criminals,” reads the report, “who view it as a means to move or steal funds as well as a means of making donations to illicit groups. If Bitcoin stabilizes and grows in popularity, it will become an increasingly useful tool for various illegal activities beyond the cyber realm.”

The “stabilization” to which the FBI refers – widespread acceptance of Bitcoin as a medium of exchange – is close at hand.

“Around the world,” says Erik Voorhees, “there are somewhere between 100,000 and 1,000,000 users. … In the last 24 hours, about 30,000 transactions occurred, or over one thousand transactions per hour. [This] is an invention which people will look back on and say, ‘Wow, that was obviously needed,’ just as we look back on the Internet today.”

“[Bitcoin] is running viral now,” says James Angleton. “If enough people are fed up with Big Brother, the IRS, misuse of funds… they are turning to this system.”

“Like the Internet,” says Voorhees, “Bitcoin will change the way people interact and do business around the world. But it’s a process that takes years, and it’s only just getting started.”

 

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