I have started experimenting with BitCoin, which is a relatively new form of digital currency. It’s an interesting idea and design which cuts out all the usual middlemen in online payments through a peer-to-peer network, though the price of that is being unable to obtain a refund of a transaction (e.g. a chargeback).
It does, however, provide a method of performing transactions which are simultaneously transparent and anonymous. Users create BitCoin addresses, which are a hash of relevant data (and appear like this: 19E4GYgVJrpSZ4kDnNB7NxdEFed8U13Aq5). A user can create as many such addresses as they wish, even to the extent of creating a new address for each transaction. So even though an address and associated transactions can be viewed by anyone it is still very difficult to determine the parties involved, if not impossible.
So what’s the point? Well, aside from the currency being unable to be manipulated by the normal state based actors (e.g. the Reserve Bank of Australia or the US Federal Reserve), there are a small, but growing number of people and sites accepting BitCoin payments. There is also currency trading between BitCoin and state currencies, as well as sites like CoinCard which enables purchasing BitCoins through PayPal or converting BitCoins to PayPal funds.
This means that it provides a very real method of exchanging money with no real state based scrutiny. This would certainly appeal to people who may wish to disguise what a certain transaction actually involved or who the parties involved were. While many people may assume that only certain illegal transactions (e.g. drugs and arms trafficking) would benefit from this, there are actually plenty of others. One obvious example of often legal, but potentially embarassing, transactions is the sex industry. Really, though, any transaction in which one or both of the parties involved wants a degree of privacy can benefit from BitCoin.
Some governments might raise the spectre of tax evasion via BitCoin, but that is easily countered. When converting BitCoin currency to one’s local currency and bank account, it becomes income which would be declared like any other and the tax paid on that income. Even without converting the BitCoin currency to the local currency of a recipient it would still be possible using the BitCoin currency markets to calculate the tax owed on any given transaction. Other alternative currencies, like Barter Card, have already found methods of addressing tax related issues and they are not insurmountable.
Given the level of distrust with a number of currencies, particularly following the global financial crisis, BitCoin has the potential to gain more than just a handful of computer geek users. Especially since the software is simple to use and available for Windows, Mac and Linux. The source code is also available to guarantee transparency of the entire system.
I have, of course, installed it and obtained a tiny amount of BitCoin currency using the BitCoin Faucet to see just how easy it is to use. The answer is that it is very easy to use. The example BitCoin address I included in this post (19E4GYgVJrpSZ4kDnNB7NxdEFed8U13Aq5) is an active one I generated using the software. It did not take very long to generate and could be used by anyone to send BitCoin donations or payments to me, not that I really expect that to happen. That, however, is all it takes: providing an address hash to another party to send a payment through.
As with any other online payment method, BitCoin can be configured to accept payments via a web server. Alternatively the free MyBitCoin service can be used to accept online payments through BitCoin on a commerce site quickly and easily. The advantage there is not having to worry about maintaining one’s own BitCoin payment code to integrate with an existing shopping card. The disadvantage is that the BitCoin wallet is stored on the MyBitCoin servers instead of one’s own system, although this disadvantage can be minimised by automatically forwarding payments to a local BitCoin address.
All things considered, I think this particular implementation of a virtual currency has great potential, depending on the degree to which it is adopted.