Bitcoin as a novel technology brings a range of benefits and risks to the table. This section outlines some of the most well-known benefits and risks.
Bitcoin was specifically designed for fast transactions at low costs (Nakamoto, 2008). Payments can be processed with little or no fees, with the sender having the option to include a transaction fee for faster confirmations. A low transaction cost is possible because there is no single third-party intermediary. In addition to the lack of restrictions on transactions, users have full control of their bitcoins and the freedom to send and receive bitcoins anytime, anywhere, and to and from anyone.
Users may also choose to use Bitcoin to make fast cross-border transfers easily without paying expensive fees for remittances. There is great potential for remittances because the value of remittances, especially from people in developed countries to those in developing countries, is expected to increase to USD515 billion in 2015 (World Bank Payment Systems Development Group, 2013). The reduced costs of remittances could be substantial if remitted using bitcoins.
Bitcoin presents an alternative to the other methods of electronic payments accepted by businesses. Traditional credit card acceptance is expensive for merchants, with customers often having to pay for a merchant account and various fees for transactions, including but not limited to transaction fees, interchange fees, and statement fees. These fees add up and increase the costs of accepting credit cards for payments.
Yet, merchants who forgo credit card payments may lose business from customers used to the ease of paying with credit cards. Not having to pay these expensive fees may allow businesses to pass on the cost savings to consumers, benefiting everyone.
Bitcoin transactions are also secure, unlike credit card payments, which may use insecure magnetic stripes and signatures, and are irreversible, unlike credit card payments, which are subject to the possibility of fraudulent charge-backs. The low cost of transactions also allows merchants to accept micropayments, paving the way for Bitcoin to be widely accepted without a minimum transaction level.
Each Bitcoin transaction can only be effected by the user who has the private key, putting the user in full control of his bitcoins. Merchants cannot slip in unwanted charges later, unlike credit cards that offer limited protection against such charges once an unethical merchant has the card details. Transactions also do not contain substantial personal information, which is at risk of leakage and theft.
However, the converse effect of full user control is the point that the private key controls the access to one's bitcoins. Bitcoin, being a digital currency, brings specific security challenges (Kaminsky, 2013). Perhaps the most important risk to end users is that if the private key is lost, access to the bitcoins is irrecoverable. Poor wallet protection may leave users vulnerable to thefts, especially by specially crafted malicious software designed to steal bitcoins (Doherty, 2011). Bitcoin users should therefore be security conscious with Bitcoin, just as they do for other financial activities (Brito and Castillo, 2013).
The Bitcoin protocol may, in its original form, work as a payment network, but it has the potential for further innovation. What actually happens in the Bitcoin network is that data in the form of Bitcoin transactions are broadcasted and verified before being kept on the blockchain. Bitcoin technology may therefore be adapted for the transfer of other types of data, like stocks or bets (Brito, 2013).
Feature layers are beginning to be built on top of Bitcoin, which include smart property and assurance contracts (Brito and Castillo, 2013). Being an open-source technology, alternative digital currencies like Litecoin and Dogecoin, among others, have also emerged to suit different objectives.
As a community-driven project, Bitcoin continues to undergo changes as software developers improve and change the software with consensus of network users. At the same time, the price of bitcoins continues to fluctuate as current events affect the price. Some significant price changes are said to resemble a traditional speculative bubble, which may occur when optimistic media coverage attracts investors (Salmon, 2013). This may make it difficult to determine how good bitcoins are as a store of value, and merchants accepting bitcoins therefore often convert them out into fiat currency very quickly.
It is also difficult to predict the Bitcoin economy in the future as it is the first widely accessible cryptocurrency, although researchers are already working on models that will attempt to explain behavior in the Bitcoin world. At the same time, it may be possible that the value of bitcoins may become less volatile as familiarity with Bitcoin increases with time.
With the pseudoanonymity and ease of payments offered by Bitcoin, it is no wonder that governments are concerned with the use of Bitcoin in facilitating criminal activity. Indeed, one of the most well-known criminal uses of Bitcoin was on the Silk Road website, a black market often used to trade illicit drugs and counterfeit passports. Silk Road used a combination of Bitcoin payments and the anonymizing network Tor to create a marketplace for such illicit goods and services (Chen, 2011).
Another major concern regarding Bitcoin is its use to launder money and finance terrorist activity. These concerns were stoked especially after the Liberty Reserve, a private and centralized digital currency was shut down on money laundering concerns (BBC News, 2013). It is important to remember, however, that bitcoins are like money, and money can be used for both lawful and unlawful purposes. Other methods of transferring money have been used for financing crimes and money laundering even before Bitcoin existed.
However, many Bitcoin exchanges are beginning to employ antimoney laundering features that include keeping records of their customers, which will reduce the attractiveness of Bitcoin to criminals. Bitcoin, however, also offers benefits over traditional money that protect against some forms of financial crime. For example, the mining process of verifying transactions, which solves the double-spending problem, makes it extremely difficult for bitcoins to be double-spent or counterfeited. An adversary needs to amass sufficient computing power to overcome the combined network computing power in order to be able to attempt to modify present and future transactions before the rest of the network catches up.
As Bitcoin is novel, its regulation by governments run the gamut of being permissive to outright bans. The regulatory landscape continues to change as governments grapple with the risks and benefits of Bitcoin to their country. For a start, regulators in some jurisdictions are beginning to provide rules and guidance on the treatment of digital currencies in their country, especially in measures relating to antimoney laundering and the countering of terrorist financing, as well as taxes.
The challenge for regulators is to encourage beneficial uses and future innovations while minimizing the risks posed and to do so without preventing such innovations from spawning.
Bitcoin is something that is very different from the existing financial system for which country regulators have experience regulating. The innovative use of Bitcoin may be disruptive to the financial and payment markets in that Bitcoin, for example, can scale up to replace money transmission and card payment services, or even stock exchanges, which renders the incumbent service providers obsolete. If these changes occur rapidly, there is a risk that this will destabilize the financial and payment markets and ultimately price stability in a market.
Freedom of Payments
Users may also choose to use Bitcoin to make fast cross-border transfers easily without paying expensive fees for remittances. There is great potential for remittances because the value of remittances, especially from people in developed countries to those in developing countries, is expected to increase to USD515 billion in 2015 (World Bank Payment Systems Development Group, 2013). The reduced costs of remittances could be substantial if remitted using bitcoins.
Merchant benefits
Yet, merchants who forgo credit card payments may lose business from customers used to the ease of paying with credit cards. Not having to pay these expensive fees may allow businesses to pass on the cost savings to consumers, benefiting everyone.
Bitcoin transactions are also secure, unlike credit card payments, which may use insecure magnetic stripes and signatures, and are irreversible, unlike credit card payments, which are subject to the possibility of fraudulent charge-backs. The low cost of transactions also allows merchants to accept micropayments, paving the way for Bitcoin to be widely accepted without a minimum transaction level.
User Control
However, the converse effect of full user control is the point that the private key controls the access to one's bitcoins. Bitcoin, being a digital currency, brings specific security challenges (Kaminsky, 2013). Perhaps the most important risk to end users is that if the private key is lost, access to the bitcoins is irrecoverable. Poor wallet protection may leave users vulnerable to thefts, especially by specially crafted malicious software designed to steal bitcoins (Doherty, 2011). Bitcoin users should therefore be security conscious with Bitcoin, just as they do for other financial activities (Brito and Castillo, 2013).
Platform for further Innovation
Feature layers are beginning to be built on top of Bitcoin, which include smart property and assurance contracts (Brito and Castillo, 2013). Being an open-source technology, alternative digital currencies like Litecoin and Dogecoin, among others, have also emerged to suit different objectives.
Internal change and volatility
It is also difficult to predict the Bitcoin economy in the future as it is the first widely accessible cryptocurrency, although researchers are already working on models that will attempt to explain behavior in the Bitcoin world. At the same time, it may be possible that the value of bitcoins may become less volatile as familiarity with Bitcoin increases with time.
Facilitation of criminal activity
Another major concern regarding Bitcoin is its use to launder money and finance terrorist activity. These concerns were stoked especially after the Liberty Reserve, a private and centralized digital currency was shut down on money laundering concerns (BBC News, 2013). It is important to remember, however, that bitcoins are like money, and money can be used for both lawful and unlawful purposes. Other methods of transferring money have been used for financing crimes and money laundering even before Bitcoin existed.
However, many Bitcoin exchanges are beginning to employ antimoney laundering features that include keeping records of their customers, which will reduce the attractiveness of Bitcoin to criminals. Bitcoin, however, also offers benefits over traditional money that protect against some forms of financial crime. For example, the mining process of verifying transactions, which solves the double-spending problem, makes it extremely difficult for bitcoins to be double-spent or counterfeited. An adversary needs to amass sufficient computing power to overcome the combined network computing power in order to be able to attempt to modify present and future transactions before the rest of the network catches up.
Legal regulatory attitude
The challenge for regulators is to encourage beneficial uses and future innovations while minimizing the risks posed and to do so without preventing such innovations from spawning.
Economic Risk
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