If cryptocurrency and blockchain technology really are the future of money, the world’s central banks need to get involved, a former Fed governor argues.
Held for questioning in a $2 million theft of Bitcoin-mining computers, Sindri Stefansson soon escaped a low-security facility. But his arrest days later in Amsterdam made him eager to get back.
From Bitcoin to Litecoin to Ethereum, we explain how cryptocurrency transactions work.
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Cryptocurrencies and blockchain were meant to be great equalizers. Instead, women are finding that the gold rush is already stacked against them.
Here’s a photo of Kodak’s magic money making machine. pic.twitter.com/wjWeJqMUBF
There is no way your magical Kodak miner will make the same $375 every month, unless Bitcoin mining difficulty stays the same. It is currently increasing at around 15% a month, so mining output should drop around 15% a month, too. Good luck to everyone who bought this deal! pic.twitter.com/0xA2HNtHFc
In Russia, officials under President Vladimir V. Putin have floated the idea of a Bitcoin-like crypto ruble.
“When it comes to state-sensitive types of activities, this instrument suits us very well,” one of Mr. Putin’s aides, Sergei Glazyev, said last month in a conversation about the crypto ruble, according to several Russian news outlets. “We can settle payments with our business partners all over the world regardless of sanctions.”
Economists and virtual currency experts have given Venezuela’s Petro and the crypto ruble from Russia low probabilities of working in the way the governments seem to anticipate. That’s because Bitcoin and other virtual currencies are decentralized systems with no one in charge, while the Russian and Venezuelan plans would give the leaders of both countries a measure of control over the new currencies.
That runs counter to some of the most basic concepts of virtual currency.
All Bitcoin transactions are recorded on a ledger known as the blockchain, which is maintained by many independent computers. The system was designed that way explicitly to avoid central banks and large financial institutions. Just as email allowed messages to move around without going through a central postal service, the computer network maintaining Bitcoin records allows money to move around without going through any central authority.
That would provide a good way to get around sanctions, which are usually enforced through regulatory and banking disclosure rules.
But some central bankers have said that issuing their own currencies on some sort of blockchain could make it easier for citizens to use the money without going through intermediaries like banks and credit card companies. It could also make the records more resistant to tampering and hacking.
In a speech last year, a member of the German central bank’s executive board, Carl-Ludwig Thiele, said the bank’s “conceptual study shows that blockchain technology can be adapted to meet the current needs and requirements of the financial system.”
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“The prototype works,” he added.
These projects, though, have been slow to move from prototype to working systems, and many officials and programmers have pointed to many technical hurdles that still need to be overcome.
None of that has stopped Venezuela from moving forward quickly with its effort to create a digital asset that the government can control.
Mr. Maduro introduced the idea on Dec. 3 in his regular Sunday television program. He said he had been monitoring so-called cryptocurrencies and had put in place plans to create the Petro, which would be backed by the country’s gold, oil, gas and diamond reserves.
“To overcome the financial blockade, this will allow us to move toward new forms of international financing,” he said.
Since then, the government has created an office of the cryptocurrency superintendent and appointed officials to run the operation.
The Petros are set to live on a blockchain like the one Bitcoin uses, but will derive their value from the government’s natural resources.
The link between Petros and natural resources could be similar to the backing that gold provided for most international currencies a century ago. The backing might counteract the sort of hyperinflation that the real Venezuelan currency, the bolívar, has experienced in recent years because of the government’s unbridled expansion of the money supply.
The boldness of the Petro plan is in proportion to Venezuela’s desperate economic condition, which has officials looking for anything that could help.
“The country is in a social crisis,” said José Ángel Álvarez, the head of a national association, Asonacrip, that has been working with the government on the Petro. “How do we manage to build trust? Open technology, clear rules that meet the attributes of the cryptocoin: decentralization, for example.”
Mr. Álvarez said he anticipated that the first oil will be sold for Petros in the first half of 2018.
But the link between the currency and the government’s oil holdings is likely to make it unattractive to investors, given the lack of confidence that investors have shown in Mr. Maduros’s government.
There is a measure of irony in the government’s interest in cryptocurrencies. Over the last few years, Venezuelans have shown a growing interest in virtual currencies as a means of escaping Mr. Maduro’s government.
An online marketplace known as LocalBitcoins has connected Venezuelans looking to buy Bitcoin and get their money out of the bolívar, which has steadily lost value because of hyperinflation. This year, the number of transactions in Venezuela on LocalBitcoins has risen tenfold, according to Chainalysis, a data analysis firm.
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The Venezuelan government has not been nearly as welcoming of this type of virtual currency activity.
Randy Brito, the founder of the Facebook group Bitcoin Venezuela, said that in December he identified between 10 and 20 cases where people in Venezuela appeared to have been arrested for their Bitcoin activities — more than double the cases he had seen in the year up until now.
In most cases, buying any sort of foreign currency is illegal in Venezuela. That prevents residents from sending all of their money out of the country.
Mr. Brito, who left Venezuela in 2004 and now lives in Spain, said everyone in his group was aware of how the government was punishing its citizens for doing the same thing that the government was trying to do within the broader financial system.
“The irony is in front of us,” he said. “They have been blockaded by the U.S., just like they blockade their own people from operating.”
The Russian government has also not looked kindly upon its citizens’ use of Bitcoin and other virtual currencies. While the government’s policies have remained opaque, officials with the Russian Central Bank have talked about blocking the access of people inside the country to virtual currency websites, and Mr. Putin has pointed out the many potential illegal uses of the technology.
“First and foremost, this is an opportunity for laundering illegal gains, tax evasion and even financing of terrorism, not to mention the proliferation of scams to which ordinary people can fall victim,” he said in October.
But Mr. Putin has indicated that he is open to potential uses of the technology that would be under his control. In June, he had a much publicized conversation with Vitalik Buterin, the creator of one of the largest virtual currency networks, Ethereum. Mr. Buterin was raised in Canada and has dual Russian and Canadian citizenship.
The efforts in Russia are much less urgent than those in Venezuela because the Russian economy is doing much better. But leaders there have been looking widely for any way to push back against American sanctions.
The Russian minister of communications, Nikolai Nikiforov, said in October that a crypto ruble would be designed quite differently from Bitcoin, with no need for the mining process through which Bitcoins are released into the world.
Such a currency would make it easier for the government to track and tax transactions, which is an advantage that other countries have spoken about as well.
The authorities in the United States have long been aware that virtual currencies might be used to evade sanctions. David S. Cohen, a Treasury official focused on terrorism and financial intelligence, said in 2014 that the American authorities were not seeing any widespread efforts to get around sanctions with virtual currencies.
But, he said at the time, “these are adaptable actors who are drawn to ungoverned spaces and so may increasingly look to this technology as an attractive way to transfer value.”
In an email, the leaders of several of the largest Bitcoin companies said that “unfortunately, it is clear that we have not built sufficient consensus for a clean block size upgrade at this time.”
The New York Times Explains…
The price of Bitcoin shot up immediately after the email went out, hitting a new high, above $7,800, before retreating. The price has been steadily climbing and is up nearly 1,000 percent over the last year.
The rising price has attracted many new users, from places like Japan and South Korea and from big hedge funds, even as the authorities in places like China have cracked down on the currency.
All of the new people seeking access to Bitcoin have run up against a limit on the number of transactions that can flow through the system every 10 minutes, which was put in place during Bitcoin’s early years.
Because of the limit, the network can process only around five transactions a second. That has led to delays on the network and has pushed up the price of getting a Bitcoin transaction through.
Companies that help process Bitcoin payments have been pushing to lift the limit on Bitcoin transactions for several years, arguing that it will be necessary if Bitcoin wants to compete with Visa or PayPal.
The opposing camp has argued that quickly expanding the number of transactions flowing through the network would mean only large companies could track Bitcoin transactions, taking power away from individual users.
The proponents of keeping the so-called blocks of Bitcoin transactions small said Bitcoin should be viewed more as digital gold: a secure place to keep money, even if it can’t be moved around as quickly and cheaply.
Many of the programmers working on the basic Bitcoin software — the so-called core developers — said they would stop working on Bitcoin if the block size was increased.
They also complained that the companies pushing through the block size increase were doing so without properly consulting the community.
Leaders on both sides of the Bitcoin debate have complained about receiving death threats and hacking attacks, and some top developers have migrated toward other virtual currencies.
In August, some of the most outspoken proponents of expanding Bitcoin created their own version, known as Bitcoin Cash, which can handle more transactions than traditional Bitcoin.
The price of Bitcoin Cash has gone up since August, but it remains only a small fraction of the size of Bitcoin.
On Wednesday, the companies that had been pushing for big blocks said they were calling off their plans in order to restore some measure of peace to the community.
“Although we strongly believe in the need for a larger block size, there is something we believe is even more important: keeping the community together,” the email said.
The announcement said that the companies still believed that an increase in the size of Bitcoin blocks would be necessary, but that they were willing to wait until the community agreed on a way to deal with the issue.
The people opposed to quickly expanding the network say they still wanted to make it easier and cheaper to use Bitcoin. But they hope this will be made possible by new networks built on top of Bitcoin, keeping the Bitcoin network itself more secure and decentralized.
SAN FRANCISCO — The chief executive of JPMorgan Chase, Jamie Dimon, has called Bitcoin a fraud and made it clear that he will not allow his bank to begin trading the virtual currency any time soon.
But that has not stopped a growing wave of big Wall Street investors — many of them hedge funds — from pouring their money into Bitcoin, helping extend an eight-month spike in its price.
The price of a single Bitcoin climbed from below $6,000 two weeks ago to above $7,400 on Monday, more than it moved in the virtual currency’s first seven years in existence.
Since the beginning of the year, the value of Bitcoin has jumped over 600 percent, putting the combined value of all Bitcoin at about $120 billion, or more than many of the largest banks in the world.
The rise has been fueled by several factors, including the sudden interest in virtual currencies from small investors in Japan and South Korea.
Now market watchers say a significant amount of the new money is coming from large institutional investors, many of them hedge funds looking to capitalize on the skyrocketing price.
Many of the hedge funds were set up over the last year to invest exclusively in virtual currencies. The research firm Autonomous Next has said the number of such hedge funds has risen from around 30 to nearly 130 this year alone.
More general-purpose hedge funds have also been buying up Bitcoin, like one run by Bill Miller, a well known mutual fund manager who spent most of his career with Legg Mason.
Even more big investors are looking at the space after the Chicago Mercantile Exchange announced last week that it would launch a Bitcoin futures contract in the next few months. The contract will make it easier for financial institutions plugged into the exchange to get involved with the Bitcoin market without having to worry about holding Bitcoin itself.
Bobby Cho, the head trader at one of the largest Bitcoin trading businesses, Cumberland, said that after years of hesitancy, institutional investors now accounted for most of his business.
“The vast majority of the trading we do is with institutions,” Mr. Cho said. “The education and research have turned into real-life activity.”
The entrance of these big investors creates new risks for Bitcoin.
Kevin Zhou, a longtime trader in the space, said that hedge funds were more likely than small investors to pull out a lot of money at once, and that Bitcoin was still small enough that a single fund’s cashing out could cause the price to drop sharply.
“You could get a possible run on the bank if one large investor withdraws and that causes the price to tank,” said Mr. Zhou, a co-founder of the trading firm Galois Capital. “That could cause a cascade of withdrawals.”
The rising importance of Wall Street is an unexpected turn for a virtual currency that was invented in 2008 by an anonymous creator known as Satoshi Nakamoto and designed to operate outside the traditional financial system.
Bitcoins, even those held by hedge funds, are recorded and stored on a decentralized database known as the blockchain, kept on a network of computers around the world. The whole system is governed by so-called open source software that is maintained by a community of volunteer programmers.
The lack of backing from any government or established institution has concerned many large banks. The chief executive of Credit Suisse, Tidjane Thiam, said last week that he saw no inherent value in Bitcoin, joining the list of bankers who have called the market a bubble.
But some financial leaders, including Goldman Sachs’s chief executive, Lloyd Blankfein, and Christine Lagarde, the head of the International Monetary Fund, have defended the idea that virtual currencies could one day play a role in the global financial system because they can be obtained by anyone with internet access.
The debate about Bitcoin has been part of a broader explosion of interest this year in the various technological concepts introduced by the virtual currency. Many banks, including JPMorgan, have been trying to find ways to create their own decentralized databases, like the Bitcoin blockchain, that could provide a more reliable and secure way to track information.
In the technology industry, there has been a rush this year of so-called initial coin offerings, a way for entrepreneurs to raise money by creating and selling their own custom virtual currencies. Initial coin offerings have taken over $3 billion from investors this year after attracting almost no interest before.
These coin offerings have created their own demand for Bitcoin because the new coins generally have to be bought with an existing virtual currency like Bitcoin.
The interest in Bitcoin could be dampened in the coming weeks, however, by a debate among Bitcoin followers.
Bitcoin start-ups and programmers have been fighting for nearly three years about the best way to update the software that governs the currency and the network on which it lives.
The battle is expected to come to a head this month when new Bitcoin software, backed by many of the biggest virtual currency start-ups, is released. The new software aims to double the number of transactions flowing through the network. Currently, the computers processing Bitcoin transactions are limited to about five transactions per second.
Most of the programmers who maintain the Bitcoin software have opposed the changes because they say it would make it harder for individuals to track their own Bitcoins.
Some of the computers on the network are likely to update to the new software while others stay with the existing rules, creating a split, or fork, in the network that would result in two separate Bitcoins.
A Bitcoin fork could prove disruptive and drive away investors. But several signals suggest that the proposed rule changes are not likely to win enough support to survive for long, which would leave the status quo in place.
Bitcoin has already survived past attempts to fork the software and create imitators. In August, a group of former Bitcoin supporters created Bitcoin Cash, a totally separate virtual currency that makes it easier to do small transactions, like paying for a cup of coffee.
The price of Bitcoin temporarily wavered before Bitcoin Cash was introduced. All previous holders of Bitcoin were automatically granted the same number of Bitcoin Cash, and the value of those has also been rising, essentially doubling in the last month.
Chris Burniske, a co-author of a book on virtual currency investing, “Cryptoassets,” said most of the new investors weren’t too concerned about the exact design of Bitcoin or the current debates.
“I don’t think a lot of the new buyers are overly concerned about the long-term technical aspects of Bitcoin,” he said. They are “simply approaching it as a financial instrument.”