You can’t get arrested for using BitCoin (yet) but you probably can for that pun.
To get to the point - I'm worried about BitCoin.
Well, it is a non-fiat, non-centralised electronic currency. That is, BitCoin is not issued by any government; nor is it generated centrally by some other authority; and it does not have any physical manifestation. Technically BitCoins are digital files that sit in a distributed peer-to-peer database that use electronic signatures hence encryption as a fundamental to several aspects of their function. All BitCoin transfers are made public but the parties to the transfer are not. BitCoins can be bought (form those that have generated them) or self generated. Generation occurs through a process termed ‘mining’ which is getting ones computer to solve a hard mathematical problem, the problem is sufficiently difficult that there is an infinitesimal chance that ones computer will solve it at any one try, what’s more the difficulty changes with respect to number of factors such as time - there’s also an on-going process of creation, but let’s not get too into the details.
On the face of it BitCoin seems like other electronic currencies – such as WoW Gold. However there is a wide variety in electronic currencies and BitCoin is not quite like others.
So, BitCoin is like the kinds of virtual currency we are used to talking about on TN in at least a few relevant ways: it’s not backed by any asset or state, it’s electronic and its value is determined by the market (though this is increasingly true of most types of currency). Having said that, the kinds of currencies we talk about here are not as similar as one might think, here is a quick (non-exhaustive) run down of what is out there in currency land:
Fiat currencies - Those issued by states like China’s Renminbi, or the UK’s Stirling.
Hard Electronic Money - Electronic money systems where exchanges are non-reversible – these come in several types depending on what they are based on. Thus an e-currency virtual wallet on a mobile phone and BitCoin are hard electronic currency but the former has value in virtue of is representing fiat currency value, the latter’s has value do to the belief in the value of the currency in-and-of itself.
Soft Electronic money - Electronic money systems where exchanges are reversible, again there can be multiple types of Soft Electronic Money but the ones I’m aware of stand in for fiat currencies e.g. PayPal.
Closed economy game / social currency - A ‘currency’ that is limited by contract to only be used in a game. Technically these are not currencies but rather a limited license to use an element of a game or social network which themselves have no inherent value and there is no guarantee of access or redemption. Though, in practice, of course these are often used as tokens of exchange. An example of this is WoW gold.
Ingress-only game / social currency - An ingress (my term) currency is the same of a closed economy but the ‘currency’ can be. Note the property of no guarantee of access or redemption is retained even though a user may think they have purchased the right to access the ‘currency’ and trade it for electronic goods such as games or clothes. See Habbo Hotel, Xbox Points etc.
Exhalable economy game / social currency - This is a ‘currency’ that can be both bought and sold but does not legally retain value. For example, a Linden Dollar is traded as if it holds value but legally what is being traded are limited license to use elements of software that have no guarantee that they will exist over time and explicitly no inherent or redeemable value.
Semi-regulated game / social currency - This category is more about the state in which a currency persists rather than, in part, the currency itself. For example China and Korea have laws pertaining to in-game currencies that regulate their use – in the case of China this banned the use of QQ Coin for consumer to business transactions, in the case of Korea it enabled the sale of in-game currency between players.
Other - I’m not quite sure where EvE Online sits with the invention of PLEX (Pilot License Extension) as this is an in-game object that represents game time, which in turn has a direct financial value, so it’s kind of a in-game but ingress-by-proxy-feedback-something-currency.
So BitCoin is kinda like other currencies you might be aware of. One similarly that you will have spotted is that generated BitCoins is like bot-grinding i.e. you set your computer going at a mathematics quest and it has a chance of getting a loot drop but the probability changes based on certain game factors.
It’s the ‘kinda’ that worries me. As I hope my list above illustrated as soon as we move away from fiat currencies the exact different between one thing that looks like a currency and another gets rather complex.
My worry is the one I’ve had for some time, as all this virtual stuff starts to get more political and media attention the chances of staggeringly bad regulation and statute rises. Now, I’m all for regulation when it’s appropriate and regulation of virtual world / social media currencies may be a good thing – especially to protect consumers (ingress-only currencies already seem to be out of step with EU consumer law if you ask me). But the level of literacy about the complexities and social practices that surround things like virtual currencies is worryingly low. The Internet is a series of tubes remember.
So far we have a senator in the US, Charles Schumer, talking about BitCoin though largely in relation to allegations first made in Gawker about the use of BitCoin to purchase drugs on SilkRoad and suggests BitCoin is used for Money Laundering. LulzSec say they have received USD $7200 in BitCoin (http://twitter.com/#!/LulzSec/status/77771916794011648) which is sure to upset many.
If people like Schumer make moves for an outright ban of a class of currency it’s in everybody’s interest to carve out a space where virtual currencies can exist. One way might be for us to come to some agreement about how we would characterise virtual currencies as a matter of law – that is not argue over whether these things are property or not but provide a positive workable legal definition of what a virtual currency is that can be dragged and dropped into any putative legislation.
See tVPN’s work on virtual items and currency as a background doc: http://www.virtualpolicy.net/wp-virtual-items-public-policy
Is this anything more than an electronic version of a LETS scheme?
Apart, that is, for the temporary bootstrapping of mining, and even that isn't much different from the starter-pack of credits some LETS schemes offer new entrants.
Posted by: bhagpuss | Jun 10, 2011 at 09:08
When local alternative currencies form (like Ithaca Hours in Ithaca, NY or Valley Dollars in W. Massachusetts) they typically have some kind of disbursement mechanism (which BitCoin does) and also some anchor institutions -- people, companies, or banks that agree to exchange these currencies for something of value (labor, goods, or US dollars).
The US Dollar has a big anchor institution in the US Government itself, and also in a set of laws that requires the dollar be accepted as a legal payment. Basically, the value of the US dollar is anchored by your faith in the US Government and its laws. If the government of the United States collapses (or defaults), so goes its currency. (Same for other countries.)
How often do countries collapse? It happens. The smaller they are, and the less politically stable, the more likely the collapse. Compared to other countries, the US is a decent bet, as is the Euro.
With the Linden dollar, the currency is anchored by Second Life, where it can be traded for virtual goods and services, by the Lindex, Virwox and other currency exchanges that let you convert this currency to US dollars. However, everything is based on Second Life -- if the company shuts down, the exchanges will immediately close up shop (they're not idiots). How likely is it that Second Life will shut its doors? Reasonably likely. Several other virtual worlds have closed shop, most recently There.com. Or it might be acquired, and the buyer can convert everyone's Linden dollar holdings to their own virtual currency at any exchange rate they choose.
What are BitCoin's anchor institutions? What companies groups or individuals HAVE to accept BitCoins and can't change their minds on a whim? Right now, it's shaping up that these anchors are likely to be sellers of illegal goods which can't be purchased with other kinds of electronic payment mechanisms. Is this enough to sustain a virtual currency? It might be.
For example, while I, myself, would never ever consider buying drugs or child porn or doing illegal gambling online (really, I'm not just saying that) I'm pretty positive that there are plenty of people out there who do just that, and I can always unload my excess BitCoins on them.
Other companies, governments, exchanges, and people can choose to accept other payment mechanism. Even if they promise to accept BitCoins, there's no guarantee that they'll do so tomorrow if something happens to those anchor tenants.
It's highly unlikely that the authorities can stamp out porn and gambling and drugs -- but they might be tempted to go after BitCoins as a way to get at the bad guys, to shut off their funding.
So there are definite risks to holding BitCoins which may or may not be compensated for by their rise in value.
The usual advice applies: don't gamble any money that you can afford to lose, and keep the majority of your investments in a diversified portfolio. (After all, if all the major governments collapse, the fact that you lose your retirement savings will probably be the least of your worries.)
Posted by: Maria Korolov | Jun 10, 2011 at 11:26
I do not understand what BitCoin does that regular money does not... unless you don't want to use regular money because either: a) you have access to the kind of machines that can generate BitCoins without additional effort on your part; b) you want to do illegal things and not have the regular money traced. If find it kind of silly and, if at all something to watch, interesting only because of its danger.
What worries me is that we're calling certain things "currency" that aren't, and that may bring regulators down on the heads of gamers for doing game-y stuff (rather than Real World-y Stuff) that shouldn't be regulated the same way economies and finances are (and should be).
I wish Second Life had had the sense to not call Linden Dollars "Linden Dollars," but something like "Second Life Points," or "SLoot," or something fun/funny. Even calling the currency in WoW "gold" is troublesome, because that's a real world thing that is often used as money. I know it's also a staple of fantasy economics (as is the ubiquitous "credit" in SciFi games), but you run the risk of non-gamers (most politicians falling into that group) pricking up their ears for a nice media-friendly fight over something that isn't really a serious issue, won't be solved by regulation, might ruin perfectly good gaming features, and isn't really (really...) related to money in the sense of the word as we've used it.
Gold, for example, in WoW can't buy you anything outside of WoW. It is a kind of point. It is redeemable for other kinds of in-game points. I can keep a bag of 10,000 gold and say, "Hey, lookit my character! He's rich!" or I can trade it for a Purple Hat of Glorious Nonsense and say, "Lookit my character! He's stylin'!" Both states are equivalent expressions of how well (or long) I've played the game.
I won't get into RMT here (I hate it, but I've done that rant here before), except to say that RMT would exist (where technically possible) regardless of what you called the in-game system of point exchange. Heck, you can use real money to buy a character that's been leveled up... but which has *no* in game gold.
I don't mind paying taxes on the money I make in the real world. If I did a significant amount of barter, I'd be amenable to paying taxes on the net-value of what I took in. I believe in the system of government that requires taxes.
BUT... If I paid income tax on the $50 I earned to pay for the WoW disk, and I paid for the sales tax, AND I paid tax on the monthly fee... that's it. I shouldn't have to pay tax on the time I spend in WoW because the word we use to describe "points" is a synonym for "money" in the real world, just because some people (cheaters, imho) exchange real money for those points. It is the equivalent, in my opinion, of me being asked to pay tax on the sex I have with my wife because somewhere people are illegally paying for sex with prostitutes.
By that logic, everyone else should pay money for reading books for pleasure, because some people (reviewers, editors, teachers, librarians) do so as part of their jobs.
Posted by: Andy Havens | Jun 10, 2011 at 12:05
@Andy
For me, the thing that BitCoin does that regular money does not is have a fairly straightforward way of regulating its supply without the need for some Fed that manipulates the amount of currency and interest rates. Especially for political ends. See: Greenspan and Clinton.
Posted by: thoreau | Jun 10, 2011 at 16:32
Linden Dollars are different from many other in-game currencies because there are a number of third-party exchanges, encouraged by Linden Lab (it provides a convenient API) that exchange Linden Dollars for hard currencies such as the US dollar and the Euro. In addition, Linden Lab actively promotes the use of Linden Dollars for in-world business where the business owners take that money out of Second Life and convert it into real-world income (on which they do pay taxes). Until last fall, Linden Lab used to publish regular data about how many people pulled how much money out of Second Life.
The general rule of thumb right now for tax authorities is to tax such income only AFTER it's converted to real money.
But this creates a number of accounting problems if the currency can be used to buy non-game goods. Say, for example, I pay my housekeeper with Linden Dollars. At the end of the year, the total amount I withdraw from my Second Life account is now that much lower - so I pay less taxes. In effect, my housekeeper becomes a tax-deductible expense, as is anything else I buy with Linden Dollars.
Now, if my business operates inside Second Life, then its reasonable to assume that all the stuff I buy in there (or a sizeable chunk of it) is related to work in some way or other and I can deduct it. (Just as a guy who makes his living selling trading cards can deduct the expense of subscribing to collector magazines.)
But if the Linden Dollars become used for anything outside of Second Life, it becomes a potential problem.
So, as long as virtual currencies are not convertible to hard currencies AND they can only be used for in-game purchases, they're not a significant problem for tax authorities.
If the virtual currencies spread out beyond their virtual walls, then how different, are they, really, from PayPal accounts, just with a different label on the balance? And PayPal is regulated -- depending on the jurisdiction, either as a bank, or as a money sending service.
Posted by: Maria Korolov | Jun 12, 2011 at 23:12
I think the decentralized bit is what really makes BitCoin different - there's no central entity that BitCoin relies on for its validity, so there's no one for the government (any government!) to target and be able to cripple or kill the BitCoin economy by taking down. So a BitCoin economy will survive for as long as people want it to.
Posted by: pjz | Jun 13, 2011 at 12:20
A significant point to make about BitCoin specifically, which I discovered today, is that right now it is the currency used for the (apparently) burgeoning TOR-based CL-like/EBay-like anonymized illegal narcotics website, "The Silk Road".
If this isn't driving law enforcement attention to BitCoin now, it will be, shortly.
Posted by: kmellis | Jun 17, 2011 at 18:42
Actually, BitCoin *1s* a fiat currency because it's value is not pegged to any specific commodity. The words that come to my mind are "pyramid scheme", though.
Andrew Tepper over at A Tale in the Desert is a big fan of BitCoins. You can pay for your game subscription with them. I suppose he wants them to use in his on-line casino.
Posted by: CherryBombSim | Jun 18, 2011 at 18:10
kmellis > A significant point to make about BitCoin..."The Silk Road"
That would be why I made that point in the post.
Posted by: Ren Reynolds | Jun 19, 2011 at 15:58
CherryBombSim > Actually, BitCoin *1s* a fiat currency because it's value is not pegged to any specific commodity.
No. Fiat currency refers to one that exists by order of a state.
> The words that come to my mind are "pyramid scheme", though.
Part of the BitCoin FAQ explains why they are not a pyramid scheme. You might think that they are scam, but that are not that type of scam.
> Andrew Tepper over at A Tale in the Desert is a big fan of BitCoins. You can pay for your game subscription with them.
Interesting
>I suppose he wants them to use in his on-line casino.
I was not aware he ran a gambling site, is that what you are suggesting / alleging? Given inter-state gambling laws in the US that’s a quite a suggestion.
Posted by: Ren Reynolds | Jun 19, 2011 at 15:59
http://www.dragons.tl/
I don't mess with Bitcoins, so I haven't looked into it too deeply.
Posted by: CherryBombSim | Jun 19, 2011 at 20:59