A:

The digital currency known as bitcoin was created in 2009 by a person called Satoshi Nakamoto, but whose true identity has never been established. It is legal to use bitcoin in the United States, and payments are subject to the same taxes and reporting requirements as any other currency.

There is no physical bitcoin currency the way there is a dollar, euro or pound. It exists only on the Internet, usually in a digital wallet, which is software that stores relevant information such as the private security key that enables transactions. Ledgers known as blockchains are used to keep track of the existence of bitcoin. It can be given directly to or received from anyone who has a bitcoin address via so-called peer-to-peer transactions. It is also traded on various exchanges around the world, which is how its value is established.

Legal and Regulatory Issues

Bitcoin exists in a deregulated marketplace; there is no centralized issuing authority and no way to track back to the company or individual who created the bitcoin. There is no personal information required to open a bitcoin account or to make a payment from an account as there is with a bank account. There is no oversight designed to ensure the information on the ledger is true and correct.

The Mt. Gox bankruptcy in July 2014 brought to the forefront the risk inherent in the system. Roughly $500 million worth of bitcoin listed on the company's ledgers did not exist. In addition to the money that account holders lost, the blow to confidence in the currency drove its global valuation down by $3 billion in a matter of weeks. The system had been established to eliminate the risk of involving third parties in transactions, but the bankruptcy highlighted the risks that exist in peer-to-peer transactions.

Bitcoin payments in the U.S. are subject to the same anti-money laundering regulations that apply to transactions in traditional currencies, and to payments by banks and other financial institutions. However, the anonymity of these transactions makes it far easier to flout the rules. There are concerns, voiced by former Federal Reserve Chairman Ben Bernanke, that terrorists may use bitcoin because of its anonymity. Drug traffickers are known to use it, with the best-known example being the Silk Road market. This was a section of the so-called dark Web where users could buy illicit drugs; all transactions on the Silk Road were done via bitcoin. It was eventually shut down by the FBI in October 2013, and its founder, Ross William Ulbricht, is serving multiple life sentences. However, numerous other dark Web bitcoin-based markets have reportedly taken its place.

International Acceptance

Bitcoin can be transferred from one country to another without limitation. However, the exchange rate against other currencies can be very volatile. This is partly because the price is often driven by speculation, but also because it is a fairly small market compared with other currencies.

Some countries explicitly permit the use of bitcoin, including Canada and Australia. It is prohibited in Iceland, which has had strict capital controls since the collapse of its banks during the 2008 financial crisis. China allows private individuals to hold and trade bitcoin, but participation by banks and other financial institutions is prohibited. The European Union does not have an overall position but may become restrictive in the wake of the November 2015 terror attacks in Paris.

RELATED FAQS
  1. What are the advantages of paying with Bitcoin?

    Learn how payments made with Bitcoins offer certain advantages over standard currency, including user anonymity, no taxation ... Read Answer >>
  2. What Does the Bitcoin Blockchain Record?

    Read about the bitcoin blockchain, a public ledger shared among all bitcoin users that records the information of every single ... Read Answer >>
Related Articles
  1. Tech

    Countries Where Bitcoin Is Legal & Illegal (DISH, OTSK)

    Although bitcoin has been in existence for five years, most countries still do not have consistent laws regulating the cryptocurrency. However, a few countries have banned bitcoin altogether.
  2. Tech

    The Rise And Fall And Rise Of Bitcoin

    A look at the reasons behind the recent spectacular surge in bitcoin prices.
  3. Tech

    Bitcoin Innovations And Obstacles

    Investopedia explains the development of the Bitcoin digital currency system and the risks associated with using and investing in it.
  4. Tech

    How Bitcoin Can Change The World

    Bitcoin has the potential to not only create savings for consumer, but also to transform global transactions.
  5. Tech

    5 Most Bitcoin Friendly Countries

    Learn which countries are the most favorable for using bitcoin as of December 2015, as well as current trends for and against its usage.
  6. Tech

    Why Is Bitcoin's Value So Volatile?

    Bitcoin's value fluctuates due to a confluence of factors, including media hype and perceived value.
  7. Tech

    Analyzing Bitcoin in 2016

    Discover the market dynamics behind bitcoin's latest price recovery in late 2015 and why its underlying value is expected to remain strong in 2016.
  8. Tech

    If You Had Purchased $100 of Bitcoin in 2011

    Your initial $100 of bitcoin bought in 2011 is now worth $2,053,278.
  9. Tech

    How to Buy Bitcoin

    It's one of the biggest buzzwords in the financial space, but many people don't know how to buy Bitcoin.
  10. Tech

    Ways To Earn Bitcoins

    There are many ways to earn and own Bitcoins other than just buying them on a Bitcoin exchange.
RELATED TERMS
  1. Bitcoin

    Bitcoin is a digital or virtual currency that uses peer-to-peer ...
  2. Silk Road

    A digital platform that was popular for hosting money laundering ...
  3. Bitcoin Whale

    Large holders of bitcoins are called bitcoin whales, whose actions ...
  4. Bitcoin Private (BTCP)

    Bitcoin Private combines the popularity of bitcoin with the privacy ...
  5. Mt. Gox

    Mt. Gox is a Tokyo-based cryptocurrency exchange that operated ...
  6. Britcoin

    Britcoin was a U.K.-based Bitcoin exchange, which was the first ...
Hot Definitions
  1. Socially Responsible Investment - SRI

    Socially responsible investing looks for investments that are considered socially conscious because of the nature of the ...
  2. Business Cycle

    The business cycle describes the rise and fall in production output of goods and services in an economy. Business cycles ...
  3. Futures Contract

    An agreement to buy or sell the underlying commodity or asset at a specific price at a future date.
  4. Yield Curve

    A yield curve is a line that plots the interest rates, at a set point in time, of bonds having equal credit quality, but ...
  5. Portfolio

    A portfolio is a grouping of financial assets such as stocks, bonds and cash equivalents, also their mutual, exchange-traded ...
  6. Gross Profit

    Gross profit is the profit a company makes after deducting the costs of making and selling its products, or the costs of ...
Trading Center