Bitcoin, a software-based online-payment system, as well as the synonymous payment unit, was introduced in 2009 by the perhaps pseudonymous Satoshi Nakamoto. Bitcoin is virtual money exchanged online via any of various apps. Traded on online exchanges as an investment commodity, it is subject to few fees and, for the time being, no government regulation. Bitcoin, sometimes referred to as “cryptocurrency,” is one of more than 500 virtual currencies, most of which are similar to and derived from it. Bitcoin is the first fully implemented and decentralized cryptocurrency, and the largest in terms of market value. It is a desirable payment mechanism for international transactions because it does not rely on international borders, and has an appeal in countries where the domestic currency is not trusted.
Consumers purchase Bitcoin with traditional currency, store the virtual money in an online wallet, and transfer it directly to a vendor’s virtual wallet to pay for products or services, thereby cutting out intermediary banks and credit card processors. No one owns, per se, the rails on which Bitcoin operates, and certain market-makers have made Bitcoin easier to use by building platforms on top of that existing infrastructure. Individual established businesses already accepting Bitcoin payment include Dell, Dish Network, Expedia, Overstock.com, TigerDirect, and Virgin Galactic. In late 2014, PayPal offered North American merchants the ability to receive payment for digital goods in Bitcoin.
Every Bitcoin transaction appears in a permanent public ledger called the “block chain,” a novel solution to prevent fraudulent double-spending of the same Bitcoin. Bitcoin is difficult to hack or subterfuge because manipulative actions of any consequence require consensus of the subject network’s participating devices.
Nonetheless, an arguable risk involved in transacting in Bitcoin is that it lacks federal monetary protections. As with any other currency, Bitcoin may, and is perhaps more likely to (a) be used to purchase illegal goods and services, and (b) lose its value or liquidity.
Among lingering legal issues concerning cryptocurrency is tax treatment. The IRS announced its position on the income tax treatment of Bitcoin in 2014, decreeing that Bitcoin is essentially property rather than currency and is subject to capital gains. One may thus expect that general tax principles applicable to property transactions will be increasingly applied to virtual currency transactions. New York is the first state to formulate proposed virtual currency regulations.
New York University offers the first graduate-level course focused on Bitcoin (Launching the Law and Business of Bitcoin and Other Cryptocurrencies), with Duke University to follow. Georgia Tech is the first U.S. university to accept Bitcoin for payment transactions such as tuition, stadium concessions, and student dining.
Geoffrey Miller, Professor at NYU Law, foresees the long-range future of Bitcoin as residing in its technology, as opposed to its payment mechanism functionality. The comparatively enhanced security it provides will be utilized in fields totally detached from payment instrument infrastructure.