The Curious Coin: What Bitcoin Can Do for International Trade

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By Phillip Yu

Bitcoin is a peer-to-peer network-based electronic currency created in 2009 by an unknown individual under the alias Satoshi Nakamoto. Bitcoin owners store bitcoins on “digital wallets” and can transfer funds to others without the assistance of a central governing agency or a bank. The processes of acquiring, managing and trading bitcoins are largely anonymous. Some people use bitcoins as an alternative currency while others acquire bitcoins as an investment much like stock, hoping for value appreciation in the future. Currently, there are several marketplaces that allow people to buy and sell bitcoins, with Japan’s Mt. Gox being the largest.

Theoretically, bitcoins have tremendous potential positive impacts on international trade. First, international transactions can become cheaper since bitcoins are currently unregulated, thus avoiding many transaction costs. In addition, since bitcoins are not officially tied to any particular state, political risk is relatively low. Further, bitcoins are less susceptible to inflation, since bitcoin protocol demands a finite number of outstanding coins. Lastly, the fact that the bitcoin is a single, consistent currency eliminates the hassle and expense of exchanging currencies.

Despite accounting for a range of positive theoretical benefits, the mysterious anonymity surrounding Bitcoin and its connections to illegal dealings have garnered a great deal of controversy and concern. 

Being purely a digital currency, bitcoin and its institutions are vulnerable to cyber-attacks just as ordinary online businesses are. Recently, a number of major bitcoin exchanges have shut down due to a massive string of denial of service attacks. These attacks, which involved thousands of phantom transactions, forced the exchanges to shut down in order to determine the validity of each transaction. The effects of attacks like these are telling. Unlike bank accounts, bitcoins are not insured by the Federal Deposit Insurance Corporation. Wide integration of bitcoins can potentially create new avenues for international cyber warfare and computer crimes perpetuated to damage a nation’s economic infrastructure.

The anonymity surrounding the transfer of bitcoins has also stirred tremendous controversy. Charlie Shrem, the CEO of a New York City bitcoin exchange, was recently arrested for his alleged involvement in an online black market. Shrem was accused of providing over $1 million in bitcoins to users of Silk Road, a now defunct marketplace for drugs, weapons, and other contraband. Ultimately, Shrem was charged with conspiracy to commit money laundering, operating an unlicensed money transmitting business and willful failure to file a suspicious activity report.

Anonymity is the essence of things like online black markets and bitcoins. Further, anonymity may be a decisive reason why people undertake the risk to participate in black markets or choose to pay with bitcoins. Limits on anonymity may be required to avoid the risk of repeating another Silk Road bitcoin scandal, given how readily and discreetly bitcoins can be transferred. However, such limitations may compromise the underlying reasons to use bitcoins in the first place. Additionally, endorsements of bitcoin can indirectly represent validations of illegal contraband trade.

Regulation of bitcoins is still young. Recently, Benjamin Lawsky, New York’s financial services superintendent, has called for new regulations to govern bitcoins and its traders. While details are scarce, the regulations generally call for extensive disclosure to consumers about bitcoin’s unique identity as an extremely volatile electronic currency. In addition, bitcoin exchanges may be required to watch its users and report suspicious activity to law enforcement.

As of today, Bitcoin has not been fully recognized as a stable, universally-accepted currency. This is due in part to a series of crimes and controversies as well as a few of Bitcoin’s own unique features. The anonymity and mystery seems inseparable from bitcoin, which is designed and maintained by a group of unknown programmers. These unique characteristics of the curious digital coin create an interesting dilemma: What do we do with a technology that promises so much reward yet also introduces so many new risks?