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Bitcoins: Primer on A New Currency


At its core, an exchange of Bitcoin is a simple P2P transaction. For personal use, a user installs a Bitcoin “wallet” on a computer, tablet or smartphone. The wallet stores a collection of cryptographic keys. When the user enters into a transaction, a key is used. No key is ever used twice, and new keys can be generated as often as needed. The wallet keeps secret data that is the “signature” of the user — proving ownership and preventing the transaction from being altered after it is issued. Once a deal is finalized, the user issues the payment in the form of a transaction key.

While most users believe their Bitcoins are also kept within their wallet, the truth is that their bitcoins are maintained as part of a blockchain, residing in cyberspace. The blockchain is a form of shared public ledger, which is the Bitcoin network. Every “confirmed” transaction made throughout the world is recorded in the blockchain. This does not mean that the personal identity of the parties is recorded; it means that the unique keys used in the transaction and the identifiers that belong to the unique wallets of the transacting parties are stored in chronological order within the ledger that is the blockchain.

Before a transaction can be entered into the blockchain, it must be confirmed. This is done through a network of users in a process referred to as “mining.” Each transaction made is packed into a block that is sent through the network to multiple “miners” who have agreed to use all or part of their computers’ processing capacity to verify transactions. Transactions are broadcast between the payer and payee and typically, the transaction confirmation process begins within moments.

The idea behind mining Bitcoins is that by passing through multiple “hands,” the transaction is verified and enforces the chronological order within the Bitcoin blockchain. It also prevents anyone from altering the transaction in any way, either during the confirmation process or afterward when the transactions are confirmed and become part of the blockchain.

In exchange for the use of their computer processing power, miners are paid a commission on each transaction they handle during the verification process. These fees are significantly lower than fees charged by traditional banks and financial institutions, which saves users money. The fees also serve as a way to generate new Bitcoins.

Additional advantages that Bitcoin transactions have over traditional credit card or electronic transfers is the ability to require multiple and specific “signatures” on each transaction. This makes the system ideal for non-profits or other organizations requiring two or more managers’ approval for expense payment.

Because of the ease of cross-border transactions and low cost of using Bitcoin,  it is rapidly becoming a mainstream currency throughout the business world. Quickbooks, which is reported to maintain 85 percent of the small-business accounting market in the U.S., recently began to offer their users the ability to accept Bitcoins as payment from customers along with traditional credit cards and bank wire transfers. Virtual stores like Amazon.com, Overstock.com and TigerDirect.com all welcome the use of Bitcoin, as do brick-and-mortar stores such as Home Depot, Kmart, Sears, and CVS Pharmacies.

While the use of virtual currency now makes global commerce between users easy and quick, it may also make cross-border crimes like extortion and kidnapping a bit easier. It is no secret that a key hurdle perpetrators face in kidnapping and extortion plots is obtaining payment from the victims. If notified, law enforcement will typically attempt to follow the ransom money back to the bad guys. But cryptocurrency like Bitcoin makes it more difficult to track transactions.

Bitcoin has already been adopted as a currency of the Dark Web, being used for transactions of illegal goods on a daily basis on such sites as the Agora Marketplace, which replaced the FBI-confiscated Silk Road as the largest drug marketplace on the Internet.

While calls continue to legislate controls upon or place an outright ban on cryptocurrency, the fact seems that the positive sides of cryptocurrency far outweigh the problems that are associated with its use for nefarious deals. Bitcoins and other cryptocurrencies are here to stay. As a consequence, law enforcement and Internet security firms will be tasked to develop methods to protect themselves from the potential increase in extortion and other crimes that are now made easier on a global scale.

Compounding security problems now seen by the use of Bitcoin is a growing number of new cryptocurrencies entering the cyber realm. At least eight new cybercurrencies were introduced in 2014, and more are on the way. Ultimately, like the fight between Beta and VHS, a winner will prevail as the dominant international cryptocurrency. Unfortunately, one or more may also become favored by dark forces, keeping security and law enforcement busy well into an unknown future.end_icon