Reference no: EM131917221

Problem: Bitcoin: The Rise and Fall of a Virtual Currency

A paper published anonymously in 2008 outlined a method for creating a digital currency that could be exchanged on a peer-to-peer basis, but which would not be susceptible to unauthorized duplication. A year later the first Bitcoins were "mined" using an opensource program, which by design constrains how many digital coins can be created and at what intervals (currently 25 every 10 minutes, but dropping in half every four years, with a total cap of 21 million). Digital currencies, of which Bitcoin is just one example, although the one with the largest circulation thus far, are creatures of the Internet. They may have no issuing or governing body, can be self-authenticating, and are usable worldwide by members of the general public to engage in the same types of direct, one-to-one transactions that daily occur using government-issued currencies. As a currency, a digital currency may have some advantages over other mediums of exchange. For example, merchants may prefer payment in Bitcoins because there is little or no transaction cost, in contrast to the 2 to 3 percent charged on most credit card transactions. Fees are charged on exchanges of Bitcoins into or out of a specific national currency, which is also true for any foreign-exchange transaction. But the global nature of Bitcoin makes such exchanges less necessary-or at least will make them less necessary if its fluctuation in value ultimately settles down. At present, however, its value can fluctuate tremendously. For example, as of early March 2013, one exchange showed its historical high closing at $1,147 on December 4, 2013, but on February 25, 2014, the closing was $535, following the announcement that the world's largest Bitcoin exchange, Mt. Gox in Japan, was likely to file for bankruptcy following its discovery of a large theft from its exchange. Just a week later, however, the price was hovering around $660.120 Another cause of its fluctuating price is that the currency has largely gone unregulated by the world's governments. The United States has exerted some authority over the regulation of exchanges that deal in Bitcoin, but the currency itself is largely free of governmental interference. If the currency is going to survive, that likely will change at least to some degree.

Question: The questions for digital currencies are, of course, should they be regulated and, if so, by whom? Based on Bitcoin's short history, what could regulation achieve? What might it impede?