Bitcoins – the future or the past?

bitcoinsThe evolution of ‘money’ has progressed from exchanging cattle, to coins, cash and most recently crypto currency. But the question to be considered in this digital era is – can you completely discard traditional forms to work with just an all-electronic currency? Satoshi Nakamoto’s vision was that it is possible, and in 2008, he proposed the idea of ‘Bitcoin’ – a system which is a form of digital currency available for users on the internet. Using Bitcoins and other crypto currencies such as Litecoins or Dogecoins, all monetary transactions could be completely anonymous, just like a cash transaction. A new wave of digital evolution is born this way, catapulting the use of currency to a whole new level.

Comprehending crypto currencies

Crypto currencies (or virtual currencies) such as Bitcoins use cryptography and computer security to process payments, thereby eliminating the use of third parties and central monetary authorities from the transaction process. One of key reasons which could be attributed to the creation of these independent and decentralized virtual currencies is increase in taxes and fees imposed by Governments across the world on transactions.

Unlike traditional currencies, the virtual currency does not have a physical representation. It is stored in “e-wallets” and traded virtually peer to peer or person to person.  These virtual currencies are decentralised, which is unlike the traditional currencies that are governed and regulated by Reserve Bank of India (RBI) or Federal Reserve System. They have no central authority and are generated by crypto currency systems at a pre-defined rate. Encryption is used on these virtual currencies to regulate generation of new units and also to verify the transactions made. Some of these currencies now also provide anonymity, meaning there is no way of tracking the parties when a transfer is made using this currency.

Initially, the idea of virtual currency was not taken into consideration by many countries. But as these crypto currencies gained popularity, and more and more people started using it, countries took notice of them and re-evaluated their stand. For instance, the use of crypto currency is permitted in the US and the UK. That said, there are many others where the use still remains contentious. For example, RBI released a circular which discouraged the use of crypto currencies in December 2013.

There are approximately 200 crypto currencies available today which can be used for online trading. But with time, Bitcoin’s value has come down to $390, since its peak of $949 on 25th November 2013.

Is rising popularity leading to rising risks?

Crypto currencies provide an alternative financial option as opposed to traditional currencies. In many cases, banks charge processing fees for traditional transactions, and such fees varies depending on the bank as well as types of transactions. Consumers tend to be wary of paying these fees and there have been some instances in the past where banks have been criticized for levying these charges. Hence, crypto currencies are popular among people who want to avoid the fees and restrictions that come along with traditional transactions. The costs therefore can be reduced significantly.

While the concept and usage of crypto currencies is quite revolutionary, its credibility has been questioned over the last few years. One of the key reasons here is the spurt in fraud and cybercrime using the crypto currencies. These events have cast a shadow over the virtual currency system, thereby creating a damaging perception about its misuse over use. Users are now fairly hesitant and reconsider before investing or trading using virtual currency.

The interest level continue to rise but overall awareness of using bitcoins and other crypto currencies still remains limited to a few. The virtual currency system is still grappling with issues; with not much clarity, it is difficult to say if these would get ironed out in the near future.

Another challenge in dealing with the Bitcoin system is that it is capable of facilitating tax evasion or illegal activities because of the anonymity factor which is built into the system. This is the reason why Bitcon is preferred mode by hackers for ransomware.

This is similar to the features of cash transactions. But on a practical note, the IP address of the bitcoin could be traced back to the individual, hence complete anonymity may be doubtful. It is probable that the bitcoin system in future would resemble a centralized banking system, as only certain computers will be handling the block chain processing, which is the core of the bitcoin system and the shared public ledger Bitcoins works on a peer-to-peer technology hence verification of transactions is done by miners who validate transactions in blocks. One block approximately would consist of verified transactions at 10 minute intervals. Each block is linked to the previous block as each transaction is made at a specific time. These linked blocks together are known as block chains.

  • Frauds – Crypto currencies could also be used to fuel money laundering activities, leading to terrorist financing and other geopolitical risks. This could pose a severe challenge for enforcement authorities as they look to tackle these issues head on. Other fraud cases include creation of a part of the fraudulent “Pump and Dump” schemes, where the users are fooled into investing in these virtual currencies.

Traditional payment methods tend to protect buyers from fraudulent sellers by providing an option to cancel or reverse payment. However, virtual currency systems does not allow payment cancellation, which is crucial for e-Commerce transactions. Hence, buyers have to be more vigilant while dealing with crypto currencies.

  • The Silk Road – The Darknet Market – This online underground market is known for selling various kinds of illegal commodities such as drugs, stolen credit cards etc., is one of the major portals where the virtual currencies are used. In order for the seller and the buyer to remain anonymous, only crypto currencies like Bitcoin etc. are accepted. As per news reports, this underground market has been raided multiple times, only to resurface shortly after. These raids too may have added to the worries of the users. Some still believe that even with Bitcoins involved, users cannot remain completely anonymous. To give an example, if a user orders drugs online, a physical delivery address has to be provided, which will always leave a trail.
  • Cyber attacks – Another big concern for the users recently has been the fact that that these crypto currencies have been the target of major cyber-attacks. When the world’s largest bitcoin exchange was hacked, $460 million worth of bitcoins were stolen, forcing the company into bankruptcy. Similarly, Bitcoin payment processers and other exchanges have also been targeted, leading to substantial losses in these attacks. The weak security and intractability tends to make these virtual currencies an easy target for hackers.

Conclusion

Cyber-attacks, raids and fraud may have been a dampener on the future of crypto currencies, but the number of transactions show a completely different picture. For example, the number of transactions per day for Bitcoins have doubled from approximately 100,000 transactions in January 2015 to more than 200,000 transactions in January 2016. This shows that even adverse publicity seems to have resulted in more popularity for virtual currencies.

The computing power required for crypto currency systems is increasing with its growing use. Thus, the risks around the possibility of systems being compromised could be almost negligible. But change is the only aspect that is constant is life and in technology – with the uncertainty that tomorrow bring,  there is always a possibility that these systems may be seized in future with innovations in technology.

Follow @EY_India and track #EYForensic for regular updates


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