Bitcoin is typically stored in “digital wallets” that exist either in the cloud or on a user’s computer. The wallet is like a virtual bank account, allowing users to make interpersonal or merchant transactions or save their money. However, unlike bank accounts, bitcoin wallets are not insured by any government entity like the Federal Deposit Insurance Corp.
Even though each bitcoin transaction is technically recorded in a public online log, the names of buyers and sellers are never revealed — just the individual wallet identifications.
Such anonymity allows transactions to remain almost completely private, letting people buy or sell anything with no way to efficiently track them. It is one of the major condemnations leveled at cryptocurrency, which has become the exchange medium of choice for some individuals trafficking in drugs or other illicit activities online.
Potential for fraud
“We have seen a few frauds perpetrated using either bitcoin or potential investments in bitcoin,” said Keith Woodwell, director of the Utah Division of Securities. While some are using the digital currency as a medium of exchange, others have schemed to use it as a way to commit crime.
“Bitcoin, due to its nature, lends itself to potential frauds because of its anonymity,” Woodwell said. “Unlike setting up a bank account where money can be traced, you don’t know who is owning the bitcoin or trading the bitcoin and what its transactions are being used for.”
Conversely, among the advantages of bitcoin is that it can be used to buy merchandise anonymously. Additionally, international payments are easy and less expensive because bitcoin is not tied to any country or subject to any federal regulation. Small businesses may like it because there are no credit card fees. On each transaction, a business saves about 3 percent because they don’t pay bank fees related to debit and credit card use.
In January, Utah-based online retailer Overstock.com became the first major online shopping site to accept bitcoin. Worldwide, thousands of individuals and hundreds of merchants accept cryptocurrency.
Overstock is partnering with San Francisco-based Coinbase.com to process the payments and handle the conversion of bitcoin into U.S. dollars. Earlier this month, the company announced it had sold over $1 million in product to bitcoin users since the online shopping site started accepting the digital currency.
Of the more than 4,300 bitcoin customers that made purchases since then, Overstock estimated that almost 60 percent were new customers.
Noting the lower cost of doing business, Overstock.com Executive Vice Chairman Jonathan Johnson said, “I think people are going to be using bitcoin more and more. I can foresee a time when there may be a credit card price and a (cheaper) bitcoin price,” similar to the lower cash prices offered at some gas stations.
While bitcoin is still only accepted on a very limited basis, bitcoin community organizer Alan Walker believes that will eventually change. He travels the state, educating people on how to use the currency and what to do if problems arise.
“I think we're ahead of the game," Walker said. "Utah has a great entrepreneurial spirit, and because of that, there's a lot of people looking into it."
Despite the optimism of some supporters, the future of cryptocurrency is still somewhat uncertain. While it is unregulated for the most part, that could change as governments investigate and work to determine the taxation consequences and the current lack of control over the currency.
In Washington, D.C., and other national capitals worldwide, leaders are convening hearings to discuss the current and future economic implications of the latest entry into the world of digital currency. Currently, many countries around the world heavily restrict the use of bitcoin and other digital currency.