EXECUTIVE SUMMARY

Bitcoin is a virtual currency that can be traded online for certain goods or services, making it a very important concern for all consumers. Understanding what it is and why it can be dangerous involves a good grasp of financial systems, as well as technology and math.

Bitcoin is risky for some of the same reasons it can be appealing to certain users. It is true that Bitcoin can be more convenient because it cuts out intermediaries like banks or PayPal—but such institutions also protect consumers in many ways that Bitcoin does not. Primarily, conventional currencies are backed by real assets and managed by trusted professionals, while Bitcoin relies on volatile exchange markets and the oversight of peer-to-peer networks.

Many criminals are drawn to Bitcoin because it is decentralized and supposedly untraceable. It provides a venue for individuals to generate, transfer, launder, and steal illicit funds with much greater anonymity than is possible through traditional financial channels, meaning individuals and groups can engage in illegal buying and selling without leaving the kind of “paper trail” that they would if they used real currency. For example, Bitcoin is the currency of the underground website Silk Road, which is an open marketplace for illegal drugs.

While we know that some criminal elements have discovered the unique traits of this virtual currency, Bitcoin is now prevalent enough that it could have an impact on the financial services industry. The inherent uncertainty and extreme volatility of Bitcoin valuation creates the potential for a bubble that, if burst, could have severe economic implications. Because is it so easy to maneuver Bitcoins in a clandestine fashion, we can only hope that financial services companies provide clear and detailed information if (or maybe when) Bitcoins find their way into more mainstream investment products.

Many questions remain about Bitcoin and the potential risks and rewards associated with its widespread use. Can it be used effectively with greater regulation? What safeguards can be emplaced to limit its abuse by criminal enterprises?

Because of Bitcoin’s rising popularity, Digital Citizens need to be informed about the issues surrounding it and participate in the discussion about its potential pitfalls for individuals and the economy.

 

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