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Bitcoin: What it is, its uses and controversies

Gayatri Vinayak

Ever since WannaCry, the ransomeware programme, has been attacking computers and creating havoc worldwide, news about the digital currency Bitcoin has been doing the rounds. Hackers have been encrypting the data of victims and asking for ransom payments in bitcoins. A number of government websites, internationally, have fallen prey to the ransomware. Back home, more than 150 computers of the Gujarat Police have already been affected, with the cyber criminals demanding USD 300 in bitcoins.

Bitcoin has been gaining popularity worldwide. In India, Zebplay, a domestic Bitcoin exchange, recently revealed that it was adding around 2, 500 users in the country every day, and had already reached five lakh downloads on its Android operating system. So, what is this mysterious digital currency that is suddenly making so much noise. We take a look at what Bitcoin is, what are its uses, and the controversies that surround it:

What is Bitcoin:
Bitcoin is a cryptocurrency and digital payment system that was created by Satoshi Nakamoto on 31 October, 2008. Nakamoto is actually a pseudonym and the real inventor’s or inventors’ identity is still contested. In May 2016, Australian composer scientist and businessman Craig Wright revealed that he was the real person behind the pseudonym, however was unable to provide proof of the claim. Being a digital currency, which has no connection to any bank or central authority, Bitcoin allows users to spend money anonymously. No one owns or controls Bitcoin and managing transactions and issuing of bitcoins is done collectively by the network. The money does not pass through a third party or middle man, and is hence a completely decentralised peer to peer payment system. While transactions and accounts can be traced, the owner accounts are usually not easily traceable. Hence, the whole logic behind creating the Bitcoin was to be able to transact online without having to rely on intermediaries, or be regulated by authorities.

What is it used for:
Bitcoin can be used to make payments, international transfers and transactions online, and, with the value of bitcoin going up in recent years, some people even use it for investment purposes. A large number of individuals and even businesses have started using the digital currency, including retailers, restaurants,  and even law firms. Many online websites also use bitcoins. According to a report from CoinDesk, a website that provides information on Bitcoin, the number of bitcoin wallets doubled to 12.77 million between end of 2014 and end of 2015.

How does Bitcoin work:
Users download a mobile app or a computer programme that provides them with personal ‘bitcoin wallets’ . These wallets allow users to send and receive bitcoins. There are different kinds of wallets – desktop wallets, mobile wallets, online wallets, hardware wallets and even paper wallets. These wallets store the private keys that are needed to access the Bitcoin address and use the funds. Bitcoin addresses are alphanumeric and are used to identify the recipient of the Bitcoin payment. To transfer bitcoins to someone, you just need to enter the recipient’s address, the payment amount and press send. Bitcoins can be acquired by buying them at a Bitcoin exchange, by exchanging them with someone else, by accepting them as payment for goods and services you have offered, or by earning bitcoin through competitive mining. There are currently more than two billion dollars worth of bitcoins in circulation.

What is Bitcoin mining:
In the absence of a centralised authority, Bitcoin is policed by large number of users called Bitcoin miners. These miners, who are located worldwide, use special computer programme and resources to solve highly complicated math problems, and get a certain number of bitcoins in exchange. They do this by verifying transactions and adding them to a public ledger, which is known as the block chain,  holding the transaction history of all bitcoins in circulation. These miners secure the network and ensure that everyone’s systems are synchronised together. New coins are released every ten minutes and are given to those miners who help accurately track the transactions and maintain the network.

Concerns and controversies:
Right from its anonymous creation by Satoshi Nakamoto, and the Australian entrepreneur Craig Wright’s claim of being the inventor of the cryptocurrency, to its subsequent rise and use, Bitcoin has been surrounded by much mystery and controversies. While some countries such as Bangladesh, Kyrgyzstan and Bolivia have banned the use of the currency, many other countries have warned against its use. The RBI, while not regulating the currency, has also stated that the virtual currencies such as Bitcoin pose potential financial, security and legal risks.

Safety wise as well, there are a number of concerns with regards to using virtual currency such as Bitcoin. While Bitcoin miners work to keep the network safe, in the absence of a centralised authority, if your bitcoins are lost or stolen, there is no one that you can approach and report to. As the owner, it is your responsibility to keep your Bitcoin wallet safe by implementing additional levels of security. Also, since it is not an accepted form of payment in many countries, if your bitcoins get lost, there is very little legal recourse.

In 2014, Mt. Gox, a Japan based bitcoin exchange which handled 70 percent of all bitcoin transactions, suspended its trading and filed for bankruptcy protection from creditors. It also announced that 850,000 bitcoins belonging to customers, valued at more than USD 450 million at that time, were missing and likely stolen. In 2016, almost 120,000 bitcoins worth USD 78 million was stolen from the Hong Kong based Bitcoin exchange, Bitfinex. The value of Bitcoin dropped by nearly 20 percent after the news became public.  There are also fears of Bitcoin being used for organised crime, because of its relative anonymity, with many moving from hard cash to bitcoin. The recent wave of cyber attacks has also prompted authorities to focus their attention on the possibility of using the digital currency for illegal activities.