Laura Barnes delves into the growing world of ‘impossible to counterfeit’ digital currency Bitcoin – how safe is it and what are the benefits for accepting it in your store? She asks security experts for more info…
Although the concept of digital currency has been around for a while, it’s Bitcoin that’s making the headlines right now – whether it’s about Android exploits, criminal usage or how it’s boosting businesses.
As the new currency takes off, its list of global merchants is rapidly growing. In the UK there are already a number of online services accepting Bitcoin, as well as some physical merchants. While some suggest its anonymity can attract illegal activities, others praise the digital currency for its security.
With Germany and the US recently announcing that they recognise Bitcoin as a legal unit of currency, it might not be too long until the same happens in the UK.
So, how does it work? Bitcoin is a digital currency which has a decentralised peer-to-peer payment network – the first of its kind. The network is powered by its users with no central authority or middleman.
The ‘crypto-currency’ was created by developer Satoshi Nakamoto back in 2009. Its protocol and software are both published openly so any developer around the world can review the code or make their own modified version.
Bitcoin payments are made through a wallet application, either on your computer or smartphone, by entering the recipient’s Bitcoin address and payment amount. You can buy Bitcoins using real money.
Addresses can be obtained by simply copy/pasting or scanning a QR code or touch two phones together with NFC technology. Most wallet apps also have an address book function.
It is generally thought to be easier to make a Bitcoin payment than debit or credit card payments as they can be received without a merchant account.
Bitcoin has complete payment freedom, users can send and receive money instantly anywhere in the world and transactions are not held up by bank holidays or imposed limits. Bitcoin payments are currently processed with either no fees or extremely small fees. Users are free to include fees with transactions to receive priority processing if they wish.
“It costs a couple cents to send millions of dollars worth of Bitcoin across the globe,” said Jon Holmquist, who has been involved in the Bitcoin Store, news site The Bitcoin Channel and currently works as community liaison for OpenCoin.
Transactions are irreversible and do not contain customers’ personal information – which protects retailers from losses caused by fraud and also means there is no need for PCI (Payment Card Industry) compliance.
Merchants are free to expand into any markets they wish without worrying about fraud rates or even the availability of credit cards.
While all this sounds great, it is worth remembering that Bitcoin is an ongoing development with its software still in beta, meaning there are still many changes that improvements that can be made, as well as some flaws still to be uncovered.
The number of Bitcoins in circulation and the amount of businesses using them are still relatively small, meaning minor movements in the market can significantly affect the price.
“The big issue with physical payments is for large payments you either need insurance or you need to make the customer wait 30 minutes for confirmation from the network that the payment is valid,” said Holmquist.
The Bitcoin technology has a strong security track record and uses cryptography to keep it safe, with its vulnerabilities mainly occurring in user error. However, security flaws have been found and fixed over time in various software implementations.
“The biggest feature for Bitcoin, in my opinion, is that it is impossible to counterfeit,” explained Holmquist. “Also, the network is secured by the laws of mathematics and cryptography. For four years no one has been able to break it."
“Everyone who runs a Bitcoin node possesses a ledger, this ledger lists every transaction ever made on the network. This means each node knows exactly where each Bitcoin is, and where it has ever been."
“Because each node possesses a copy, the network is decentralised. There is no one point for an attacker to hit the network at.”
BullGuard’s head of product management, Alex Balan, told PCR: “I would imagine that if a hole was to be found in the Bitcoin software (and there are a number of implementations out there), that would be the most probable scenario regarding a security issue. And, of course, malware can infect the system operating with Bitcoins.
“I admit I don't know of any security issues that should worry people right now but the probability of that happening is quite high."
While Bitcoin is a huge step forward in making money more secure, the anonymity it offers its users can act as significant protection against financial crime.
“Bitcoins are used by criminals as a way to efficiently and discreetly move money around,” commented Jerome Segura, senior security researcher at Malwarebytes.
“The lack of control around Bitcoins is certainly a problem and something taken advantage of. Since it goes from ‘Person A’ to ‘Person B’, the government does not see anything [from a tax perspective], which could open up possibilities for tax evasion.”
So, is Bitcoin actually legal? According to Bitcoin.org, the currency has not been made illegal by legislation in any jurisdiction. However, some jurisdictions – such as Argentina – severely restrict or ban all foreign currency. With regards to taxes – tax liability accrues regardless of the medium used.
With more countries and websites recognising Bitcoin (see ‘Who accepts Bitcoin?’ below), the digital currency looks set to continue its upward spiral.
David Henderson-Begg from Labyrinth Technology said: “Bitcoin has the power to become a major factor in the future of the internet."
“I suspect that some form of digital currency will take hold in the not too distant future, but whether or not that currency is Bitcoin remains to be seen.”
- One Bitcoin equals £87.10 (€103.99/$138.81)
- Each Bitcoin is subdivided down to eight decimal places, forming 100 million smaller units called Satoshis.
- Various vendors offer banknotes and coins denominated in Bitcoins. The coin or note has a seal that has to be broken to reveal a Bitcoin private key, which can then be used to make a transaction
Who accepts Bitcoin?
There are currently 13 physical merchants in the UK accepting Bitcoin including pubs, hotels, restaurants, a piano teacher, a photographer and a cab firm.
Germany and the US have both recently recognised Bitcoin as an official currency. Plus, popular websites such as WordPress, Reddit and more than 93 vendors on marketplace site Etsy all accept Bitcoin payment.