Bitcoin

Vesa Linja-aho — T-76.5753 Law in Network Society

http://www.flickr.com/photos/31119160@N06/8007585111/

About me

Vesa Linja-aho, M. Sc. in electrical and electronics engineering.

Professional background: 7 years at Aalto university (research and

teaching) 1 year in Computerworld Finland magazine

(editor) 3 years at Metropolia, senior lecturer Electronics and electric safety Accounting and economics Open educational resources Everything new

http://www.google.com/#q=vesa+linja-aho

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Bitcoin = open source cryptocurrency

Bitcoin = distributed accounting system No central authority -> does not depend

on trust to single or couple of institutions. Like cash, but for the internet 1 bitcoin = 50 euros (20th of Mar 2013). Created by pseudonym Satoshi Nakamoto Based on a peer-to-peer network of

computers running the bitcoin software. The transactions are verified by proof-of-

work system of computers running a mining software.

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Pros

No unpredictable inflation by ”printing more money” by political decision.

Transactions travel instantly Send money in seconds to anyone with

internet access – with zero transaction costs.

Highly anonymous, in certain conditions Every transaction is public, though!

If you memorize your private key, the only way to steal your bitcoins (even for the authorities) is to torture you (or spy or hack your computer).

Easy to use You can choose the tool (usability /

security)4

Cons

Bitcoin is rather new and its still in marginal use -> high volatility. BTC money supply: 500,000,000 € EUR money supply: 5,000,000,000,000 €

It’s currency for the internet – take down the internet, and you cannot use bitcoins. Perhaps not suitable for any country’s

official currency. Lose your private key -> lose your bitcoins.

No means to cancel the transaction!

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Someone’s pro is someone’s con!

Stupid arguments against bitcoin

People buy guns and drugs with it! But it proves it works! And people use plain cash for the same.

Early adopters benefit too much Is it really a problem?

Bitcoin has actually no value Same applies to euros and dollars. They only have value because people

believe they have value.

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Good or at least considerable arguments against bitcoin

The value is unstable. There might be a bubble! Bitcoin can be replaced with a similar

product. The government can shut it down.

Or at least try to, by making it illegal to use bitcoins.

The slowness of transaction verification (about 10 minutes per block).

The scalability: the current version can not handle the transactions if everyone in the world used bitcoins.

MtGox handles most of the trade -> raid it -> ? 8

Is there a bubble?

Media attention will inspire people to buy bitcoins

Media attention will inspire companies to accept bitcoins (and vice versa)

The price of bitcoins rise -> media attention

The circle is ready.

As long as the price rises together with the use of bitcoin, there is (probably) no bubble. I emphasize the word probably. The

circulation speed of bitcoin is low if compared to regular money. 9

How it works

Every ”account” consists of the public key (= bitcoin address) and the private key.

Anyone who knows your public key, can send you bitcoins.

To spend bitcoins, you have to know the private key. The transaction is broadcasted to the

bitcoin network. The miners confirm the transactions

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The addresses

An example of a bitcoin address: 14nRKoXJAUpKYYbzw6Yrqh9gW2p26zerpW 2160 (about 1048)possible addresses

The corresponding private key: 5HuEupX3DNFJ7UypjFtXDTm4BVuAwZtAgY

f94sMALPyakgafVnU 256 bits About 1077 possible private keys

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Confirmations

In the process called mining, all transactions are collected in a block. A new block is mined in about every 10 minutes.

For small payments or with payments with trusted peer, 0 confirmations is usually ok.

For large amounts, 6 confirmations is considered safe.

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Double spend elimination

Because bitcoin has no central authority, one of the main security problems is eliminating a double spend fraud (wherein the same money is spent twice).

The main innovation in bitcoin is the blockchain. Each full node (= computer running the bitcoin program) in the network has a copy of all mined blocks.

Disrupting the system would need enormous computing power.

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Anonymity

Understand how bitcoin works Every transaction from address to address

is public. How much and when = public, who owns

the address = not public (can be analyzed, though).

Create a new address for every transaction Use mixing services The larger the transactions, the easier it is

to carry out traffic analysis

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Who accepts bitcoins?

Namecheap Wordpress Many nonprofits accept bitcoin donations

Archive.org Bitpay (= simple interface for merchants) Bitspend.net (order anything with bitcoins)

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Legal stuff

In Finland, the Board of Accounting recognizes bitcoin: treated like stocks or if selling and buying bitcoins is the core

business of the company, they are put in the current assets.

Its completely legal to use bitcoins as money (as it is legal to use potatoes or gold as money)

Anti-terrorism and money laundering law: selling bitcoins for > 15 000 € -> ask for ID.

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Bitcoin and taxes

I asked the tax authorities about bitcoin: 'we have a group of experts working on it’.

Currently, VAT 24% is imposed on selling bitcoins.

Exchanging bitcoins for a customer is VAT 0% That is, the dealer buys the bitcoins for

the customer.

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Bitcoin and taxes?

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Worth reading

http://www.reddit.com/r/Bitcoin http://bitcoin.it/ https://

blockchain.info/tx/8b555a4399797c784033863dda38abef7b8adcaf6748e9519dcb175fb1d04ee0

http://krugman.blogs.nytimes.com/2011/09/07/golden-cyberfetters/

https://twitter.com/carsonj/status/314382483468713984

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Tools for beginners (and everyone)

http://easywallet.org http://blockchain.info/ https://www.bitaddress.org/

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