Bitcoin is a peer-to-peer payment system and digital currency introduced as open source software in 2009 by pseudonymous developer Satoshi Nakamoto. It is a cryptocurrency, so-called because it uses cryptography to control the creation and transfer of money. Users send payments by broadcasting digitally signed messages to the network. Participants known as miners verify, timestamp, and record transactions into a shared public database called the block chain, for which they are rewarded with transaction fees and newly minted bitcoins.
Bitcoin has been a subject of scrutiny due to ties with illicit activity. In 2013 the FBI shut down the Silk Roadonline black market and seized 144,000 bitcoins, US$28.5 million at the time. However, theUnited Statesis currently considered to be Bitcoin friendly compared to other governments. In China, the central bank last month issued rules that prohibit financial institutions from dealing in the digital currency which means bitcoins cannot be exchanged for local currency. What’s more,China’s top Internet retailer, Alibaba, has prohibited the use of bitcoin on its shopping platforms amid a regulatory crackdown targeting the digital currency. It will take effect on January 19. The regulation will make practical use of bitcoin even more difficult inChina, despite massive interest from investors in the alternative currency. And the European Banking Authority has warned that Bitcoin lacks consumer protections. Theft of bitcoins can occur, and chargebacks are impossible.
Commercial use of Bitcoin, illicit or otherwise, is currently small compared to its use by speculators, which has fueled price volatility. Bitcoin as a form of payment for products and services has seen growth, however, and merchants have an incentive to accept the currency because transaction fees are lower than the 2-3% typically imposed by credit card processors.
Demand for bitcoin has been particularly strong inChina, where investors have eagerly embraced the currency and helped drive its price to dramatic highs above $1,000 in recent weeks.