Bitcoin: origin, functionalities and risks of the virtual currency

Bitcoin is a virtual currency, independent and decentralized since it is not controlled by any State, financial institution, bank or company. It is an intangible currency, although it can be used as a means of payment just like physical money. As stated in the document “Virtual currencies or currencies: the case of Bitcoin”, prepared by the General Directorate of Operations, Markets and Payment Systems “virtual currencies or currencies”, including bitcoin, “ they constitute a heterogeneous set of innovative payment instruments that, by definition, lack physical support to support them. ”

The term bitcoin has its origin in 2009, when it was created by Satoshi Nakamoto (pseudonym of its author or authors), who created it with the aim of being used to make purchases only through the Internet. The same document that we referred to earlier from the Bank of Spain expands this objective: “Bitcoin is born with high ambitions: to provide citizens with a means of payment that allows the execution of fast value transfers, at low cost and that, in addition, does not can be controlled or manipulated by governments, central banks or financial entities ”.

The virtual currency uses cryptography to control its creation. The system is programmed to generate a fixed number of bitcoins per unit of time through computers called miners. Currently, that number is set at 25 bitcoins every ten minutes, although it is programmed to be halved every 4 years. Thus, as of 2017, 12.55 bitcoins will be issued every ten minutes. Production will continue until 2140, when the limit of 21 million units in circulation is reached.

How does it work

To make use of this virtual currency we will need to download software on our computer or our mobile that will serve as a virtual “wallet” and that will generate a bitcoin address, which can be used to send and receive money from other users. In addition, the sending of bitcoins is instantaneous and any operation can be monitored in real-time. Transactions with this currency involve a transfer of value between two bitcoin addresses, public though anonymous. To ensure security, transactions are secured using a series of key cryptographies, since each account has a public and a private key.

Bitcoin Risks

As in other virtual currencies, bitcoin also has a number of risks that need to be highlighted to know exactly the magnitude of this currency. To identify them, we resort again to the report of the General Directorate of Operations, Markets and Payment Systems of the Department of Payment Systems of the Bank of Spain, which groups them into:

Financing of illegal activities and/or money laundering. Due to the decentralized nature of the scheme, transfers occur directly between the payer and the beneficiary, without the need for an intermediary or administrator. This implies a difficulty in the identification and early warning of possible suspicious behavior of illegal activities.

The fact that organized crime networks use widespread electronic payment systems, in general, can create a negative reputation for digital payment methods.

Although in principle, any computer can actively participate in the process of creating new bitcoin units, the high computational capacity required implies that, in practice, this activity is dominated by a small group of actors.

Possible fraudulent transactions. To the extent that the protocols on which bitcoin is based are open software developments, the implementation of its different versions does not have to occur uniformly among all users.

Impact on price stability and on financial stability, since private trading platforms where Bitcoins can be exchanged for legal tender are marked by high price volatility due to speculative movements.

From the point of view of fraud, bitcoin presents an important weakness compared to other payment methods extended in the online world, such as cards.

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