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Bitcoin: An Innovative Alternative Digital Currency -SSRN-id1817857

Bitcoin: An Innovative Alternative Digital Currency -SSRN-id1817857

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Published by Carl Mullan
Bitcoin is a digital, decentralized, partially anonymous currency, not backed by any government or other legal entity, and not redeemable for gold or other commodity.
Bitcoin is a digital, decentralized, partially anonymous currency, not backed by any government or other legal entity, and not redeemable for gold or other commodity.

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Published by: Carl Mullan on May 15, 2011
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Electronic copy available at: http://ssrn.com/abstract=1817857
1
Bitcoin:AnInnovativeAlternativeDigitalCurrency(PRELIMINARYDRAFT)
Apr.21,2011ReubenGrinberg
1
IMPORTANT:Thisisafirstdraftthatismissingadiscussionofanumberofimportantlegalissues,particularlymoneylaunderingandwhatthee-goldsagameansforBitcoin,taxes,etc.Someorallofmyconclusionsmaychangeinlaterdrafts.IampostingthispubliclytogetearlyfeedbackfromtheBitcoincommunity.Pleasefeelfreetoemailmeyourcommentsatreuben.grinberg+bitcoin@gmail.com.Inthespiritofbitcoin,donationscanbesentto1Het2qD6Yab9vaLUs3JrM1aYMXNSJ42Rdc.
Introduction..............................................................................................................................3
I.BitcoinPrimer.......................................................................................................................5
II.BitcoinEcosystem..............................................................................................................8
III.ComparingBitcointoitsCompetition.....................................................................11
a.Facilitationofe-commerce.....................................................................................................12
1.Traditionalecommerce.........................................................................................................................12
2.Micropayments.........................................................................................................................................14
3.VirtualWorldandGame-RelatedCommerce..............................................................................14
b.Gold-BackedCurrencies..........................................................................................................16
IV.IsBitcoinSustainable?..................................................................................................18
a.IraqiSwissDinar........................................................................................................................18
b.Confidence....................................................................................................................................19
1.ImproperUseofDiscretionaryAuthority.....................................................................................19
2.SuperiorCompetingCurrency...........................................................................................................20
3.GovernmentCrackdown.......................................................................................................................21
4.DeflationarySpiral..................................................................................................................................21
c.PotentialTechnologyFailures...............................................................................................23
1.AnonymityFailure...................................................................................................................................23
2.Theft..............................................................................................................................................................23
3.DenialofService.......................................................................................................................................24
V.Legal.....................................................................................................................................25
a.FederalGovernment’sMonopolyonIssuingCurrencies..............................................26
1.TheStampPaymentsActof1862.....................................................................................................27
2.ProhibitiononCoiningCurrentMoneyandtheLibertyDollarSaga................................31
b.SecuritiesRegulations..............................................................................................................35
1.NoteorStock.............................................................................................................................................36

1
YaleLawSchool,J.D.expectedMay2011.IthankprofessorJonathanR.Maceyandmywifefortheirtimeandinsights.IalsothankAUSAJillWestmorelandRoseandBernardvonNotHaus,opposingpartiesintheLibertyDollarcaseswhotookthetimetoanswermyquestions.
 
Electronic copy available at: http://ssrn.com/abstract=1817857
2
2.InvestmentContract...............................................................................................................................37
3.Commodity.................................................................................................................................................39
4.Currency......................................................................................................................................................40
Conclusion...............................................................................................................................43
 
3
Introduction
Bitcoinisadigital,decentralized,partiallyanonymouscurrency,notbackedbyanygovernmentorotherlegalentity,andnotredeemableforgoldorothercommodity.Itreliesonpeer-to-peernetworkingandcryptographytomaintainitsintegrity.
2
Bitcoinhasmanypropertiesthatcouldmakeitanidealcurrencyformainstreamconsumersandmerchants.Comparedtomostcurrenciesoronlinepaymentservices,suchasPayPal,bitcoinsarehighlyliquid,havelowtransactioncosts,andcanbeusedtomakemicropayments.ThisnewcurrencycouldalsoholdthekeytoallowingorganizationssuchasWikileaks,hatedbygovernments,toreceivedonationsandconductbusinessanonymously.
3
Amazingly,asofMarch2011,abitcoin(currencyticker“BTC”)isworthaboutthesameasaU.S.Dollar(“USD”),thereareabout$5millionworthofbitcoinsinexistence,
4
thereareprobablysomewherebetween5,000to30,000Bitcoinusers,andabout$150,000worthofbitcoinsaretradedeveryday.
5

2
See
http://en.wikipedia.org/wiki/Bitcoin;SatoshiNakamoto,Bitcoin:APeer-to-PeerElectronicCashSystem(2009),http://www.bitcoin.org/sites/default/files/bitcoin.pdf;BitcoinFAQ,http://www.bitcoin.org/faq.
3
See
KeirThomas,
CouldtheWikileaksScandalLeadtoNewVirtualCurrency? 
,PCWorld:BusinessCenter(Dec.10,2010),http://www.pcworld.com/businesscenter/article/213230/could_the_wikileaks_scandal_lead_to_new_virtual_currency.html;RaineyReitman,ElectronicFrontierFoundation,
Bitcoin–aStepTowardCensorship-ResistantDigitalCurrency 
(Jan.20,2011),https://www.eff.org/deeplinks/2011/01/bitcoin-step-toward-censorship-resistant(“Bitcoinisparticularlyinterestinginthewakeofrecenteventsthatdemonstratedhowfinancialinstitutionscanmakepoliticaldecisionsinwhomtheyservice,showcasedbythedecisionsofPayPal,Visa,MastercardandBankofAmericatocutoffservicestoWikileaks.”).Infact,Anonymous,alooselyorganizedgroupofhacktiviststhathaveattackedWikileaks’foes,amongothers,TheWeek,
 Anonymous:Thesecretgroup’s5biggesthacks
(Mar.7,2011),http://theweek.com/article/index/212846/anonymous-the-secret-groups-5-biggest-hacks,acceptdonationsinBitcoinsontheiranonymousnewssite,AnonNews.
 AnonNews–EverythingAnonymous,DonatingthroughBitcoin
,http://www.anonnews.org/bitcoin.html(lastvisitedMar.7,2011).
4
See
PageIndicatingUSD-BitcoinExchangeRateProvidedBy“Mt.Gox,”http://bitcoincharts.com/markets/mtgoxUSD.html.Mt.Goxis,accordingtotheBitcoinwiki,“themostwidelyusedbitcoincurrencyexchangemarket.”https://en.bitcoin.it/wiki/MtGox.
5
GavinAndresen,Video,MakingMoney:creatingadecentralizedelectroniccurrency,IgniteAmherst(2011),availableathttp://blip.tv/file/4771178[hereinafterAndresenVideo];
see
http://bitcoinwatch.com/(lastvisitedMar.28,

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