Digital Currency
Kody Myers
Definition
Currency that does not exist in any physical form, but can be used similarly
to physical currency while retaining the three main properties of money: a
store of value, a medium of exchange, and a unit of account.
Subsets of Digital Currency
Virtual Currency
Cryptocurrency
Intended for purchase of virtual
goods.
Intended for purchase of real
goods.
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Gold (World of Warcraft)
Microsoft Points
Amazon Coin
Linden Dollars (Second Life)
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Bitcoin
Litecoin
Peercoin
Namecoin
Subsets of Virtual Currencies
Closed
One-way
No legal exchange
provided for real
currency.
Can be purchased with
time, real currency, or
some other criteria.
Black markets exist to
provide exchanges.
Cannot be converted to
real currency.
Gold (World of Warcraft)
Frequent Flyer Points
Amazon Coin
Convertible
Open exchange for
conversion to and from
real currency.
Linden Dollars (Second
Life)
Cryptocurrencies
•
Named such because they use
cryptography to secure transactions
and control the creation of new units.
•
Uses peer-to-peer networks to
decentralize control.
•
All transactions are publicly
announced so that they can be
verified by the network’s
participants.
•
Similar to a stock exchange, though
the transactions are visible, the
identities of the parties are not
disclosed.
•
Transactions take seconds, but
verification can take up to 10
minutes.
Bitcoin Mining
Currency “Mining”
•
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Mining is the process of spending
computing power to process
transactions, secure the network, and
keep everyone in the system
synchronized together.
Mining software listens for
transactions broadcast through the
peer-to-peer network and performs
appropriate tasks to process and
confirm these transactions.
For new transactions to be confirmed,
they need to be included in a block
along with a mathematical proof of
work.
•
Proofs are very hard to generate
because there is no way to create
them other than by trying billions of
calculations per second.
•
As more people start to mine, the
difficulty of finding valid blocks is
automatically increased by the
network to ensure that the average
time to find a block remains equal to
10 minutes.
Mt. Gox
•
Originally existed as the “Magic: The
Gathering Online eXchange” for
trading collectible cards as stock.
•
Rechristened as a Bitcoin exchange
in July 2010.
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Handled 70% of all Bitcoin
transactions by 2013.
•
Suspended operations in February
2014 and filed for bankruptcy
protection.
•
During the liquidation process,
850,000 BTC, valued at $450 million,
was reported missing or likely stolen.
beenz.com
•
Founded in 1998 by Charles Cohen.
•
Raised about $80 million in venture
capital.
•
Companies purchased beenz, then
issued them to customers for
completing certain actions.
•
Customers could redeem earned
beenz with on-line merchants.
•
Sold off in 2001 after the dot-com
bubble burst.
Flooz.com
•
Founded in 1998 by Robert Levitan.
•
Spent at least $35 million in venture
capital.
•
Utilized by a Russian crime syndicate
to launder money from stolen credit
cards.
•
Closed in 2001.
Legal and Regulatory Concerns
•
Consumer protections
•
Collection of economic statistics
•
Exchange rate policy
•
Payment systems
•
Tax evasion
•
Money laundering
Public Acceptance
•
Long term stability
•
Security
•
Anonymity
•
Nothing to “tuck under the mattress”
Google Image search: bitcoin
References
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http://www.bitcoin.com/
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http://www.sec.gov/oiea/investor-alertsbulletins/investoralertsia_bitcoin.html
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http://worldhistoryproject.org/1998/floozcom-is-founded
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http://www.nytimes.com/2001/08/27/business/e-commerce-report-seller-ofonline-currency-may-have-been-victim-of-fraud.html
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http://qz.com/180876/the-failure-of-mt-gox-could-be-a-mortal-wound-forbitcoin/
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http://www.washingtonpost.com/blogs/the-switch/wp/2014/02/25/no-thefailure-of-mt-gox-wont-kill-bitcoin/
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http://us.battle.net/wow/en/shop/anti-gold/
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https://bitcoin.org/en/how-it-works
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http://www.forbes.com/sites/investopedia/2013/08/01/how-bitcoin-works/