ASA Research Note Virtual Currency The Next Generation Banking Model

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AvLnuL nL, SLA11LL WA 98113 www.annlesearle.com 206.433.4386 Page 1 of 10

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CopyrlghL 2013, ASA lnsLlLuLe for 8lsk & lnnovaLlon
?#2@*&;$3 8lLcoln, ulglLal Currency, SaLoshl nakamoLo, vlrLual
Currency
AB$+&%'+ - 1hls research noLe descrlbes Lhe unlque feaLures of vlrLual
currencles, speclflcally 8lLcoln. lL also dlscusses Lhe reasons for lLs
consumer aLLracLlon and Lhe assoclaLed rlsks LhaL lL faces.

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C(%+ -$ ,-&+.%/ 0.&&#1'2D
vlrLual currency ls an alLernaLe form of money LhaL ls non-
governmenL creaLed, elecLronlc, and can be used Lo purchase goods
and servlces from onllne as well as LradlLlonal reLallers. Cne of Lhe mosL
currenL popular forms of vlrLual currency ls 8lLcoln. 1he concepL of
8lLcoln was lnLroduced Lhrough a 2008 paper wrlLLen by SaLoshl
nakamoLo, whlch proposed a peer-Lo-peer sysLem LhaL allowed
paymenLs Lo be senL beLween anonymous onllne users wlLhouL Lhe
lnLermedlary use of a flnanclal lnsLlLuLlon.
1
ln 2009, 8lLcoln wenL llve for
Lhe purpose of belng a peer-Lo-peer elecLronlc cash sysLem" LhaL
ensured LhaL Lhe same coln(s)" was noL belng spenL more Lhan once by
a slngle owner.
2
1hls was accompllshed Lhrough Lhe use of complex
maLh funcLlons as well as publlcly recorded Llme sLamped LransacLlons.
3

Cnce a LransacLlon has occurred, Lhe LransacLlon ls lrreverslble.
4

uesplLe Lhe efforLs of many [ournallsLs, very llLLle ls known of Lhe
developer or group of developers known by Lhe pseudonym, SaLoshl
nakamoLo. Powever, ln Aprll reporLs clalmed LhaL SaLoshl owns aL leasL
one mllllon 8lLcolns, whlch aL LhaL Llme's exchange raLe was worLh
approxlmaLely $96 mllllon.
3

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8lLcolns are unllke LradlLlonal flaL currency. 1he 8lLcoln currency ls
noL lssued by a governmenL organlzaLlon or managed by a cenLral
bank.
6
lurLhermore, 8lLcolns are noL llmlLless. 1he creaLor, SaLoshl, seL
Lhe maxlmum number of 8lLcolns allowed Lo be ln clrculaLlon aL 21
mllllon.
7
Slnce lLs lncepLlon ln 2009, 8lLcoln has over 11 mllllon colns ln
clrculaLlon, more Lhan half of Lhe LoLal avallable colns.
8

A'E.-&-19 7-+'*-1$
So how can someone galn possesslon of 8lLcolns? llrsL, an onllne
user musL obLaln a plece of sofLware, known as a vlrLual walleL, whlch
allows a user Lo sLore and conducL buslness wlLh Lhe dlglLal currency.
9

Cnce Lhe dlglLal walleL ls acqulred, Lhrough lnsLallaLlon on a compuLer
or moblle devlce, Lhe user wlll be able Lo access Lhe 8lLcoln neLwork.
10

1he neLwork ls Lhe basls for all LransacLlons assoclaLed wlLh 8lLcoln.
Whlle belng connecLed Lo Lhe 8lLcoln neLwork, users can creaLe colns"
by uslng lnLense daLa mlnlng sofLware and hardware Lools.
11
8lLcolns
are hldden ln a complex seL of unsLrucLured daLa.
12
users are Lhen
rewarded wlLh 8lLcolns when Lhey are able Lo solve Lhls complex
algorlLhmlc funcLlon. 1hese funcLlons lncrease ln dlfflculLy as Lhe
amounL of colns LhaL are found lncrease. Many have compared Lhe
process Lo dlgglng for gold."
13
uue Lo Lhe dlfflculLy and efforL lL Lakes

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Lo successfully daLa mlne for colns, users also have an opLlon Lo Lake
Lhe easy way and purchase 8lLcolns from onllne exchanges. 1hese
vlrLual exchanges, such as mLgox.com and colnbase.com, allow users Lo
purchase and sLore colns for a currency exchange fee of 1 or less.
14

8lLcolns can be used Lo purchase goods from reLallers and onllne
merchanLs. Powever, Lhe llsL of companles LhaL accepLs 8lLcolns ls
relaLlvely small. Companles such as 8eddlL.com, CkCupld, Wordress,
and loodler accepL 8lLcolns for lLs goods and servlces.
13
AlLhough Lhe
llsL of companles accepLlng 8lLcolns ls small, lL does noL mean LhaL Lhe
llsL wlll remaln small, nor does lL mean LhaL companles are noL lnLrlgued
by Lhe posslblllLles LhaL dlglLal currency brlngs.
4(# "-$# *F 7-+'*-1
AL Lhe beglnnlng of Lhe year, one 8lLcoln was only worLh $13.31.
16

Powever, ln Aprll Lhe prlce for one 8lLcoln skyrockeLed and Lraded as
hlgh as $270.
17
now accordlng Lo onllne exchanges, such as mxgox.com,
one 8lLcoln ls currenLly worLh approxlmaLely $113. uesplLe lLs
lncredlbly hlgh volaLlllLy, 8lLcoln conLlnues Lo aLLracL lnvesLors.
ln Aprll, lL was reporLed LhaL 1yler and Cameron Wlnklevoss
owned almosL $11 mllllon worLh of 8lLcoln.
18
?ou may remember Lhe
Wlnklevoss Lwlns from Lhelr legal dlspuLe and seLLlemenL wlLh Mark

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Zuckerberg over Lhe foundlng of lacebook. 1he Wlnklevoss Lwlns are
one of Lhe flrsL Lo publlcly announce Lhelr backlng of 8lLcoln. Cameron
Wlnklevoss supporLed hls flnanclal declslon, eople really don'L wanL
Lo Lake lL serlously. AL some polnL LhaL narraLlve wlll shlfL Lo 'vlrLual
currencles are here Lo sLay.' We're ln Lhe early days."
19
lL's Lrue LhaL
8lLcoln ls sLlll very much ln Lhe early sLages. uesplLe Lhls, 8lLcoln has
goLLen Lhe aLLenLlon of noL only Lhe Wlnklevoss broLhers buL also
Slllcon valley lnvesLmenL flrms LhaL have flnanced blLcoln-relaLed
companles.
20
Lven e8ay has announced lL wlll look lnLo new ways of
lncorporaLlng 8lLcoln lnLo lLs ayal buslness operaLlons.
21

ln general, Lhe aLLracLlon Lo vlrLual currency ls mosLly due Lo
lower LransacLlon cosLs from removlng flnanclal lnsLlLuLlon
lnLermedlarles. 1he fees assoclaLed wlLh uslng banks or credlL card
companles, whlch are usually passed down Lo Lhe cusLomer, are
ellmlnaLed wlLh vlrLual currency. 1hls ls especlally helpful when
conducLlng LransacLlons LhaL are low ln value, usually less Lhan a few
dollars. Also, anoLher beneflL Lo vlrLual currencles ls Lhe lnsLanLaneous
exchange and verlflcaLlon of money. Speclflcally wlLh 8lLcoln, wlLhouL a
flnanclal lnLermedlary and wlLh LransacLlon hlsLory recordlng, Lhe
exchange of money ls seamless and Lhe Llme lL Lakes Lo verlfy ls

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pracLlcally lmmedlaLe. AlLhough vlrLual currency ls noL a new concepL,
8lLcoln has succeeded ln areas where lLs prevlous predecessors have
falled. 8lLcoln verlfles money ls noL belng double counLed or
counLerfelLed Lhrough Lhe use of anonymous LransacLlon Llme
sLamplng.
22
noL only does Lhls ensure lmmedlaLe exchange and
verlflcaLlon buL lL also allows users Lo remaln anonymous whlle dolng
so. 8lLcoln has also aLLracLed many users and lnvesLors wlLh lLs
approach Lo conLrol supply.
23
uue Lo Lhe llmlLed supply, many people
speculaLe LhaL Lhe value of a 8lLcoln wlll conLlnue Lo lncrease as Lhe
supply decreases. Powever, as we have seen wlLh pasL bubbles,
speculaLlon wlll noL always lead Lo flnanclal wealLh.
4(# A$$*'-%+#; "-$8$
1here are several legal and eLhlcal lmpllcaLlons LhaL arlse wlLh any
vlrLual currency, especlally when looklng aL Lhe 8lLcoln buslness model.
8lLcoln essenLlally ensures anonymous LransacLlons over Lhe lnLerneL,
whlch makes lL lmposslble Lo Lrack Lhe parLles lnvolved. 1hls could
aLLracL lllegal enLlLles such as drug dealers and crlmlnals lnvolved ln
money launderlng. Accordlng Lo many sources, 8lLcoln ls wldely used
on Sllk 8oad, an anonymous markeLplace LhaL has been llnked Lo Lhe
purchase and sale of lllegal drugs.
24
LssenLlally, Lhe anonymous naLure

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of 8lLcoln can aLLracL oLher crlmlnals LhaL have a deslre Lo successfully
launder money by exchanglng dlrLy" money lnLo 8lLcolns and Lhen
back lnLo clean" money.
Slmllar Lo Lhe convenLlonal currency, dlglLal currency can also be
losL or sLolen. Slnce lncepLlon, Lhere have been several 8lLcoln LhefLs
from hackers.
23
1here have also been sysLem crashes LhaL resulLed ln
losL" currency.
26
Agaln, losL and sLolen currency would be very
dlfflculL, nearly lmposslble, Lo Lrace as all users are anonymous. unllke
LradlLlonal flnanclal lnsLlLuLlons, 8lLcoln currency ls noL backed by
lnsurance of any klnd.
27
Cnce a 8lLcoln ls losL or sLolen, lL ls gone for
good.
erhaps Lhe blggesL rlsk Lo 8lLcoln ls LhaL Lhe concepL of vlrLual
currency applled Lo pracLlce ls sLlll ln Lhe early sLages. lL ls very posslble
LhaL consumer confldence ln vlrLual currency becomes so low LhaL lL
deems 8lLcolns valueless.
28
vlrLual currency does noL have Lhe years of
LrusL nor does lL have Lhe regulaLlons LhaL flaL currency has. ?ears of
lawsulLs and lobbylng have lnsplred laws and regulaLlons for
convenLlonal currencles. lf 8lLcoln hopes Lo conLlnue Lo operaLe for Lhe
long Lerm, a governlng body wlll mosL llkely need Lo lnLervene Lo deflne
whaL Lhose laws and regulaLlons should be. llnanclal dlsclosure ls one

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area ln parLlcular LhaL can affecL 8lLcoln. lL was reporLed earller Lhls
monLh by 1he llnanclal 1lmes LhaL Lhe u.S. CommodlLy luLures 1radlng
Commlsslon (Cl1C) ls currenLly dlscusslng Lhe posslblllLy of 8lLcoln
belng under Cl1C [urlsdlcLlon, whlch could make Lhlngs dlfflculL for
vlrLual currency exchange companles.
29
1he managlng parLner of unlon
Square venLures, lred Wllson, sLaLed hls concern for cerLaln regulaLlons
on 8lLcoln, "lf l really saL down and LhoughL abouL wrlLlng a flnanclal
dlsclosure sLaLemenL, l could probably llsL dozens of rlsks."
30

0*1'/.$-*1
Many people sLlll belleve LhaL vlrLual currency ls speculaLlve and
LhaL many slgns polnL Lo anoLher bubble. 1he hlgh volaLlllLy of 8lLcoln
was demonsLraLed ln Lhe large swlngs LhaL Lhe markeL experlenced
from Lhe beglnnlng of Lhe year unLll now. 1hls has proven Lhe markeL
for 8lLcoln ls sLlll an unsLable one. Powever, Lhe need for lnsLanL, lower
cosL, and prlvaLe LransacLlons wlll malnLaln, lf noL lncrease ln Lhe
fuLure. Wlll 8lLcoln be Lhe vehlcle for Lhese Lypes of LransacLlons ln Lhe
fuLure? 1lme wlll only Lell where Lhe ouLlook of vlrLual currency lles.

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"#F#&#1'#$

1
needleman, Sarah L. and AnLe, Spencer L. A 8lLcoln rlmer: WhaL ?ou need Lo know AbouL
Lhe new vlrLual Currency." !"# %&'' ()*##) +,-*.&'. 8 May 2013. Web. 10 May 2013.
<hLLp://blogs.ws[.com/dlglLs/2013/03/08/a-blLcoln-prlmer-whaL-you-need-Lo-know-
abouL-Lhe-new-vlrLual-currency/>
2
Lhe new vlrLual Currency." n. pag.
3
4
SchuLzer, uan. 8lLcoln and CLher non-ConvenLlonal llnanclal roducLs." /0!( 12.&.32&'
(#*423#5 6,-.7)&8'#9 May 2013. Web. 10 May 2013.
<hLLp://www.blLs.org/publlcaLlons/C1C/C1CCornerMay2013.pdf>
3
PaLhaway, !ay. MysLerlous lnvenLor 'SaLoshl nakamoLo' may be holdlng $100 mllllon ln
8lLcoln." !"# :&2'; :,). 18 Aprll 2013. Web. 10 May 2013.
<hLLp://www.dallydoL.com/buslness/saLoshl-nakamoLo-blLcoln-forLune-100-mllllon/>
6
kumar, nlkhll. 1he dazzllng rlse and fall of Lhe vlrLual currency 8lLcoln." !"# 0.7#<#.7#.). 12
Aprll 2013. Web. 10 May 2013. <hLLp://www.lndependenL.co.uk/money/spend-
save/Lhe-dazzllng-rlse-and-fall-of-Lhe-vlrLual-currency-blLcoln-8370386.hLml>
7
8
kumar, n. pag.
9
kumar, n. pag.
10
kumar, n. pag.
11
SchuLzer, n.pag.
12
SchuLzer, n. pag.
13
SchuLzer, n. pag.
14
13
SLaLL, nlck. 8rave 8uslnesses 8uy lnLo 8lLcoln: ls lL A 8ubble?" 6#&7%*2)#. 22 Apr 2013. Web.
10 May 2013.
<hLLp://readwrlLe.com/2013/04/22/brave-buslnesses-buy-lnLo-blLcolns-bubble>
16
Slvy, n. pag.
17
kumar, n. pag.
18
opper, naLhanlel and LaLLman, eLer. never Mlnd lacebook, Wlnklevoss 1wlns 8ule ln
ulglLal Money." =#> ?,*@ !2A#5. 11 Apr 2013. Web. 10 May 2013.
<hLLp://dealbook.nyLlmes.com/2013/04/11/as-blg-lnvesLors-emerge-blLcoln-geLs-ready-
for-lLs-close-up/>
19
opper, n. pag.
20
opper, n. pag.

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21
needleman, Sarah L. and AnLe, Spencer L. 8lLcoln SLarLups 8egln Lo ALLracL 8eal Cash." !"#
%&'' ()*##) +,-*.&'. 8 May 2013. Web. 11 May 2013.
<hLLp://onllne.ws[.com/arLlcle/S810001424127887323687604378469012373269932.hL
ml>
22
Slvy, Mlchael. 1he 8eal Slgnlflcance of Lhe 8lLcoln 8oom (and 8usL)." !2A#. 12 Apr 2013.
Web. 11 May 2013. <hLLp://buslness.Llme.com/2013/04/12/Lhe-real-slgnlflcance-of-Lhe-
blLcoln-boom-and-busL/>
23
Slvy, n. pag.
24
1he LconomlsL. Mlnlng dlglLal gold." !"# B3,.,A25). 13 Apr 2013. Web. 11 May 2013.
<hLLp://www.economlsL.com/news/flnance-and-economlcs/21376149-even-lf-lL-
crashes-blLcoln-may-make-denL-flnanclal-world-mlnlng-dlglLal>
23
1he LconomlsL, n. pag.
26
1he LconomlsL, n. pag.
27
kumar, n. pag.
28
kumar, n. pag.
29
needleman, Sarah L. and AnLe, Spencer L. 8lLcoln SLarLups 8egln Lo ALLracL 8eal Cash." n.
pag.
30
needleman, Sarah L. and AnLe, Spencer L. 8lLcoln SLarLups 8egln Lo ALLracL 8eal Cash." n.
pag.

ASA Research Note Virtual Currency The Next Generation Banking Model

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