02 Oct 2014Working Paper Summaries

Bitcoin

by Rainer Böhme, Nicolas Christin, Benjamin Edelman and Tyler Moore

Bitcoin is an online communication protocol that facilitates virtual currency including electronic payments. Since its inception in 2009, Bitcoin has served approximately 41.8 million transactions between 62.8 million accounts, and the total market value of all bitcoins in circulation exceeds $8 billion. This article, forthcoming in the Journal of Economic Perspectives, presents the platform's design principles and properties for a non-technical audience; reviews its past, present, and future uses; and points out risks and regulatory issues as Bitcoin interacts with the conventional financial system and the real economy. Key features of Bitcoin's design are irreversible transactions, a prescribed path of money creation, and a public transaction history. Collectively, these yield a system that is understood to be more flexible, more private, and less amenable to regulatory oversight than other forms of payment--though as discussed in this paper, all these benefits face important limits. Yet the authors argue that the decentralization initially touted by Bitcoin has not fully come to fruition. Indeed there seem to be significant forces pushing towards concentration despite Bitcoin's design, calling into question the benefits that Bitcoin can offer compared to existing payment mechanisms and other stores of value. Key concepts include:

The key innovation in Bitcoin is its decentralized core technologies. In particular, Bitcoin relies on network consensus rather than central authorities both for verifying transactions and for minting new currency.
While it originally appeared that Bitcoin's decentralization made it unregulable, there now seems to be ample possibility of regulatory oversight, as well as circumstances in which such intervention could be useful.
Bitcoin receives regulatory scrutiny for three classes of criminal concerns: Bitcoin-specific crime, money laundering, and Bitcoin-facilitated crime.
The Bitcoin platform faces systemic operational risks through potential vulnerabilities in the protocol design or breakthroughs in cryptanalysis.

Author Abstract

Bitcoin is an online communication protocol that facilitates virtual currency including electronic payments. Since its inception in 2009 by an anonymous group of developers, Bitcoin has served tens of millions of transactions with total dollar value in the billions. Users have been drawn to Bitcoin for its decentralization, intentionally relying on no single server or set of servers to store transactions and also avoiding any single party that can ban certain participants or certain types of transactions. Bitcoin is of interest to economists in part for its potential to disrupt existing payment systems and perhaps monetary systems, and also for the wealth of data it provides about agents' behavior and about the Bitcoin system itself. This article presents the platform's design principles and properties for a non-technical audience; reviews its past, present, and future uses; and points out risks and regulatory issues as Bitcoin interacts with the conventional financial system and the real economy.