Bit by Bit

Bitcoin: the biggest thing since the internet?

There is no Bitcoin billboard in Fort Greene, or even a sign. I was somewhat surprised to discover this after getting off the A train at Lafayette Avenue. After all, I was in the supposed hub of Bitcoin in New York City, so wouldn’t they want to shout it from the rooftops?

My hesitation grew as I wandered into the first destination on the list where you can supposedly get a mani-pedi in exchange for a fraction of a Bitcoin. It was a bit shocking to realize that no one knew what I was talking about, and even more so to see that my question had been unsettling. After the simple inquiry of “Do you accept Bitcoin?” all I got in return were four pairs of eyes avoiding my gaze. I may as well have been asking, “when was the last time you cleaned the bathroom?” for the level of discomfort my presence inspired—not exactly what I was expecting after seeing Bitcoin splashed across all the big news sources (for both positive and negative reasons) and hearing Fred Wilson, a venture capitalist, testify at the New York Bitcoin hearings last month that “they [virtual currencies] represent exactly the kind of potential in innovation...as the internet when it came of age.” After all, Wilson is not the only person to have expressed excitement about the world-changing potential of virtual currencies.

Professor Steven Bellovin, a computer science professor who took a federal leave of absence last year to work as the Chief Technologist for the Federal Trade Commission (and one of the few accessible people who could speak about Bitcoin with authority), provided some context for these seemingly grandiose claims. He says that although it seems to many that Bitcoin popped out of thin air and into our cultural vernacular in the way of PinkBerry or Instagram, the fundamental ideas that drive it are actually older than the internet itself.

In fact, the concept of digital currency is about 30 years old. Although David Chaum, creator of one of the first digital currency schemes, understood that an effective digital currency could exist without a traditional legal identity, he could not figure out how to create such a currency. And this problem—that of finding a way to create a digital currency that is both anonymous and secure—remained for 25 years unsolved and unknown to those outside an esoteric but impassioned community of virtual currency enthusiasts.

Then in 2009, a “brilliant piece of cryptographic mathematics”—as it was described by Bellovin—was introduced to this waiting community and all that was hypothetical became suddenly real. The paper that gave birth, so to speak, to a digital currency with the properties of Bitcoin was released in the form of open source software published under the pseudonym Satoshi Nakamoto. Thus, Bitcoin was born in much the same way it exists—free for all to use with the simple download of a Bitcoin address or Bitcoin wallet and unencumbered by specific human identity.

During Bitcoin’s initial foray into public use, and before it had any quantifiable worth, those who were in the know could use software on their personal computers to run algorithms designed to search for the key to the encryption scheme that allows for the existence of Bitcoin. If, during this process, they happened to hit upon such a key, they would “earn” a block of Bitcoins. This is that virtual “mining” that people are talking about. Now that there are more than 12 million Bitcoins in circulation, it is becoming increasingly difficult for the average person to mine Bitcoin; rather it is more common to exchange Bitcoins for another currency.

Through the Bitcoin network, individuals can create a Bitcoin wallet. The difference between this digital wallet and a bank account is simply that there is a register, referred to as “the block chain,” which is maintained within the network by peer-to-peer broadcasting. The more Bitcoin is used, the more its price appreciates—thus the value of Bitcoin is dependent upon its day-to-day use. That’s why it’s so volatile. If something is limiting the legitimacy or popularity of Bitcoin on a given day, the price will drop, and the reverse can happen as well. Furthermore, spenders of Bitcoin are identifiable only by the “username” associated with their Bitcoin wallet. This username does not have to have any legal legitimacy.

It is important to define more precisely these aforementioned “philosophies” and “ideologies.” Gener-
ally speaking, Bitcoin has, according to Bellovin, a “libertarian anarchist” mentality. This becomes increasingly evident when you consider the fact that there are for the moment a finite number of Bitcoins. This is due to philosophical reasoning—because there are a finite number of Bitcoins that can be mined and put into circulation, it is “not possible for the government to inflate the supply,” says Bellovin. This stands in comparison to a government that adjusts the number of dollars in circulation to balance economic stagnation or inflation. Instead, it is very much in keeping with “libertarian anarchist fetishes,” Bellovin says. The adjustment in the number of Bitcoins is determined by the algorithm, not by political goals.

That being said, Bitcoin is entering into the popular and commercial world. There are people—well, a few people—who buy their groceries with Bitcoins. And there are people who invest a lot of money in Bitcoins. There are websites (both legal and illegal) that accept Bitcoins exclusively as a means
of transaction. And as Bitcoins become more and more popular, many have begun to believe that regulating Bitcoin is necessary for its survival in the current economic climate. Others have expressed that government regulation and legislation may be necessary for the stability of the traditional economic system with the addition of Bitcoin. Put more simply, Bitcoin has grown to the extent that the government can no longer ignore it. Furthermore, federal regulators have had to face the fact that they still don’t really understand the intricacies of virtual currencies. That’s why they held hearings about Bitcoin last week to have experts explain how it works and on the question of opinions about further regulation.

These Bitcoin Hearings were held in a small court room in Tribeca on Jan. 28 and 29 and were presided over by the New York State Department of Financial Services— which monitors the legality of activities on Wall Street. In a series of panels that focused on the economic, legal, and academic aspects of Bitcoin, the hearings in large part signaled the future prospects for the use of Bitcoin in day-to-day monetary transactions and the potential pitfalls of its mainstream usage. And despite the seeming generality of the hearings in their exploration of Bitcoin, the predominant theme was clear: State financial regulators are willing to overlook past illegal behavior associated with Bitcoin—namely its use in money laundering and its essential role in the “Amazon-for-drugs” scheme known as the Silk Road—in the interest of innovation and development. These hearings signal that the New York state government (and in time, hopefully the federal government) is willing to accept the potential rise of Bitcoin, which is already being used by select businesses in New York City.

And here is where Fort Greene enters into the conversation, where I found Dan Lee behind the bar at his restaurant Oxford Kitchen. He is the man responsible for making Fort Greene, in his words, “probably the most Bitcoin friendly neighborhood in the U.S.” So when I asked “why Fort Greene?” he somewhat sheepishly replied that his parents own the businesses that accept Bitcoin in the neighborhood—including a pizza place, a grocery store, and Oxford Kitchen. Considering the rarity of Bitcoin’s use in such institutions, this is enough to put the entire neighborhood on the map.

Lee describes his decision to integrate the currency as a result of his “curiosity to see how it works in the real world.” He’s seen in the past year a handful of regulars opting to pay with Bitcoin. “I know it can be done in a brick and mortar business,” he says, because it works just like any other payment option. However, he admits that it isn’t quite there yet. “It needs to be more convenient,” he says. Most importantly, people need to be able to feel secure in the value of their Bitcoins, which “is still a ways away...probably at least a year or two” in Lee’s opinion.

Bellovin echoes this sentiment. “I do think there’s an important market niche” for digital currency, he says. This niche is micropayments—purchases between one dollar and up to eight dollars—because unlike credit cards, Bitcoin incurs no enormous overhead each time it is used. In fact, it incurs none at all. Thus, Bitcoin has the potential to be very convenient in cases where the use of credit cards causes merchants to lose money. That’s why Lee claims that if merchants were to choose among all potential payment options—credit cards, cash, checks, or Bitcoin—“they would pick Bitcoin every time.”

And although the niche that Lee has begun to exploit is part of the mainstream potential use for Bitcoin, there is another hugely significant realm to explore in order to fully understand what Bitcoin means in today’s world. River Keefer, a freshman School of Engineering and Applied Science student, deals with Bitcoin from a vastly different perspective than either Lee or Bellovin. Keefer began mining Bitcoins around the age of 15, back when they were each “worth $5.” (They are now worth, depending on the day, between $500 and $1,000—a still significant devaluation since their short-lived, all-time high of $1,203 per coin in December 2013). When he came to Columbia in September, Keefer met a School of General Studies student who mentioned that he was interested in buying and selling Bitcoins to exploit the fact that Bitcoin is highly volatile. Keefer realized he could “probably write the program to do that.” And he did. He didn’t really explain how this works or how it is profitable, but I feel pretty confident that I wouldn’t have understood if he had. What is clear is that he now owns 33% of a Bitcoin hedge fund with a variety of international “clients” who are predominantly based in the U.S., Japan, and Slovenia.

And, although Keefer’s experience with crypto currencies is rooted in financial gains, he stipulates that the implications of Bitcoin transcend simple dollars and cents, or even economic theory. Keefer defines these implications as a truly revolutionary ideology for shared ownership. He suggests that Bitcoin could be the beginning of a “big, unstoppable movement toward decentralization,” and adds, “I think that Bitcoin could be the best thing that happens to humans” in the near future. Bitcoin may introduce an entirely new conception of how the world understands the economic and political hierarchical systems that we simply accept. This harkens back to the world-shaking effect that the introduction of the commercial internet introduced: Time and space were utterly shaken.

So here we return to the question posed by the Bitcoin hearings: How should Bitcoin be regulated by governmental systems? “That seems like that biggest question to me,” Keefer says, “is it even possible to regulate Bitcoin?” This is a seemingly straightforward question that speaks to the gravity and complexity of the Bitcoin discussion. Can something designed to be outside of governmental influence truly fit into the legal and economic system that is in place? And if that isn’t possible, doesn’t that make it inherently illegal? To be sure, the discussions in New York focused on finding a way to work with Bitcoin; yet, there are other groups and governments—such as China and Russia—who have determined that Bitcoin is without a doubt illegal.

The hearings last month did not broach Keefer’s question. Clearly, there are two conversations going on at the moment. The first and more evident question is how to regulate Bitcoin in a way that allows it to benefit everyday transactions. The other is more complicated—how can something ideologically opposed to any sort of regulation possibly be regulated?  

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