Last November, India began a campaign to eliminate large bills from its currency by removing 500 and 1,000 rupee notes from circulation. The goal was to go after criminals guilty of everything from tax evasion to drug trafficking by eliminating their means of accumulating wealth. This is not just a limited effort, however, as other countries, including the United States, are monitoring the situation in India and considering following suit. Read on to see if the U.S. is ready to actually scrap the $100 bill, what impact it will have on the country, and if the rest of the world is likely to follow suit.

India’s Move

The move by India’s Prime Minister, Narendra Modi, was aimed at recouping some of the estimated $460 billion in untaxed wealth, which is equal to as much as 20 percent of India’s GDP. Modi was also seemingly attempting to fulfill a campaign promise to go after so-called “black money” in the economy. Despite these motivations, this led to a massive cash shortage that instead ended up affecting the poor the most and caused the IMF to slash their growth forecasts for India by a full percent. Nonetheless, even though the government failed to take these factors into account, some people hid their wealth in items such as gold, and the fact that the 500 rupee is not really a large bill, the move was still widely popular. The video below looks at the impact of the Indian government’s decision to eliminate the 500 and 1,000 rupee notes:

U.S. Efforts

There have also been calls in the United States that large bills should be eliminated, although the exact methods with which the nation would do so are unlikely to copy those used by India. The charge here is being led by Harvard economist Kenneth Rogoff, whose plan calls for eliminating any bill larger than $10 over a 15-20 year time period. The goal would be similar to that of India, namely to target tax evaders and money launderers. Rogoff claims this would be an especially effective move on the part of the U.S. because 75 percent of the $100 bills worldwide are actually held abroad, many by Mexican cartel leaders and Russian oligarchs. Rogoff believes that, since most transactions in the United States are done electronically, unlike in India, eliminating these bills would not be a major change.

While Rogoff and other Harvard economists such as Peter Sands have suggested making the change, there is still no plan to eliminate big bills as of yet; in fact, there is actually strong pushback against the idea. A group of government agencies that include the Treasury, the Federal Reserve, and the Drug Enforcement Agency are opposing the move for a number of reasons.

The first reason that people are opposed to the move is cost: removing $100 bills and replacing them with twice as many $50 bills would wipe out any profit made by the government through printing money. Second would be usage: while many people do not carry $100 bills, about 5.2 percent of the U.S. population still do, which equals millions of people. Lastly, although criminals may be inconvenienced by having to literally carry more bills, eliminating $100 bills would just force them to use other bills or find other means to accumulate wealth. In fact, cash shipments in smaller bills have already been seized at the border. The following video looks at whether or not the U.S. is likely to eliminate the $100 bill, and some of its potential effects:

Impact on Economy

Economically, a switch to smaller bills or to no cash altogether is also a mixed bag. As mentioned earlier, by eliminating larger bills, the government would lose out on profit made from the difference in printing the bills versus the cost of printing, because higher bills generate more revenue. The term for this is seigniorage. The estimated cost would be roughly $6 billion annually, which may seem like a lot but pales in comparison to what the government alternatively spends fighting crime funded by cash and large bills.

A potential positive economic impact of the move would be in regards to monetary policy. During recessions, central banks lower their interest rates, which makes keeping money in savings accounts less appealing and instead encourages spending. However, there is something known as the “zero lower bound,” where the interest rate actually becomes negative and banks start charging people to save their own money. At this point, rational people would withdraw their money and keep the cash until interest rates were raised. This would be much harder to do with many smaller bills and impossible if there were no bills at all.

A Global Movement?

Whether or not the United States decides to follow India’s lead in eliminating large bills, the movement is not dead on arrival. Nearly two decades ago Canada eliminated the $1,000 bill from its currency to combat the very same criminal activities India is targeting. Singapore is eliminating its $10,000 bill as well. India is not even the only nation in the developing world doing away with large notes, as Venezuela recently outlawed its $100 bill with the goal of fighting crime. There is even some precedent in the United States: in 1969, the United States did away with $500, $1,000, $5,000 and $10,000 bills because of lack of use, as they were almost entirely utilized for moving money between different Federal Reserve branches.

It is in Europe, however, where the most aggressive steps have already been taken. Last march, the European Union announced it will discontinue using the 500-euro note and stop replacing it entirely by 2018. While other large currency notes are often used by criminals, the 500-euro note had become so ubiquitous among criminals that it had garnered the unflattering nickname “the Bin Laden” after the former terrorist leader. But some critics are quick to point out, as they have in other countries, that eliminating big bills just forces illicit funds into other venues. Some also contend that this is a way to force people to spend more, because banks would be forced to use negative interest rates to reduce the larger number of bills in their safes. The accompanying video looks at the impact of eliminating the 500-euro bill on Europe:

Some countries in Europe have gone even further: in Sweden, for example, there is an unofficial yet concerted effort to do away with cash entirely. In that country, only 2 percent of national wealth is held in bills or coins and only about 20 percent of total transactions are processed in cash, so the move makes some sense. However, a switch of this magnitude and nature does not come without consequences. People who do not have access to the apps that are replacing cash and cards, such as older individuals and refugees, may find themselves unable to pay for basic necessities if the transition is made. Additionally, if all transactions are made electronically they are more susceptible to hacking and government oversight. Nevertheless, Sweden is not alone in this push, with Denmark and Norway also following suit.

Conclusion

Reducing the supply of big bills or even eliminating cash altogether comes down to a simple cost benefit-analysis. Having smaller bills will force much of the money associated with the black market economy out into the open, and at the very least it will make it harder to carry. However, as had been mentioned, there are numerous alternatives to keeping illegal funds in cash.

Conversely, while by making transactions increasingly with cards or electronic forms of payment may make it harder to hide crime, it also makes everyday purchases easier to track. This includes not only tracking by the government, but also by websites or corporations. It would make it more likely that information will get stolen by hackers or other nefarious groups as well, simply because there are more opportunities. This is not even factoring in the effort it would take to acquaint many people with the new form of payment or the effect it could have on monetary policy.

In some places this trade-off has seemingly been deemed acceptable, but for the most part it has not caught on worldwide. Cash, even in large bills, is likely to remain king until security and privacy concerns are considered less of an issue compared to concerns over how criminals are hoarding their ill-gotten gains.

Michael Sliwinski

Michael Sliwinski (@MoneyMike4289) is a 2011 graduate of Ohio University in Athens with a Bachelor’s in History, as well as a 2014 graduate of the University of Georgia with a Master’s in International Policy. In his free time he enjoys writing, reading, and outdoor activites, particularly basketball. Contact Michael at staff@LawStreetMedia.com.

The post Not About the Benjamins: Is the United States on the Verge of Eliminating the $100 Bill? appeared first on Law Street.

We spend more money making pennies than pennies are worth. Right now making a penny costs 1.7 cents. Yet we continue to mint more pennies every year, costing the government millions of dollars. Both pennies and nickels cost more than their face value to produce. In 2014, the United States spent $132 million on manufacturing 8 billion pennies. That does not even take into account the added costs of using pennies, like the time it takes to find them in the bottom of your purse or pocket and for the cashier to count them. According to the organization “Citizens to Retire the Penny” the economic drain every year from the penny is almost $900 million dollars.

So why on earth are we still making pennies? The two main arguments for continuing to produce the penny are the impact that eliminating them would have on pricing and the penny’s role in charity fundraising. If there were no one-cent coins in circulation, businesses would likely round the prices of their goods up to the nearest nickel, raising costs for consumers. And charities that promote penny drives would suffer because there would no longer be coins that people don’t want and are therefore willing to give to charities. The third argument, which is more sentimental than practical, relates to President Lincoln–many simply don’t want to eliminate the coin because it commemorates him.

Throughout our history, the coining of money has had political ramifications that go far beyond whose face we put on our currency. Changes in the supply of money and who has access to it have the power to promote the interests of a particular class and stimulate sectors of the economy. Eliminating the penny may be efficient, but it could also have unforseen consequences for the economy.

The Penny Debate

The video below does a great job of being both an educational and entertaining introduction to the many practical, efficiency-based arguments in favor of eliminating the penny. Featured on Freakonomics.com by Stephen J. Dubner–who seems to be on an economic-moral crusade to denounce the penny–it not only shows the base numbers of how much money we are wasting by manufacturing pennies but also the added costs of keeping them around.

The numbers in favor of eliminating the penny are pretty clear. Firstly, pennies cost more to produce than they are worth, which right there should give those who are at least neutral on the penny some food for thought. Secondly, they aren’t even worth your time to bend over and pick them up, let alone the 120 million of hours of time per year that are spent counting pennies in cash transactions. In fact, when John Oliver delivered his own anti-penny rant he looked at news stories with people who actually would not bother to pick up free pennies. At first glance, one might think these people are wasteful and foolish to not pick up free money. But they are actually making a smart economic choice because the small amount of time it would take to pick up the penny is worth more to them than the penny itself.

Some people even throw pennies in the trash. Actually, a lot of people will throw pennies in the trash (2 percent actually admit to it, which makes me think that the number may actually be higher). Even for those who don’t literally throw pennies away, many will still not spend them. This means that pennies, once created, don’t circulate as much as other coins. It also means that we make more of them so that businesses can continue to have shiny new ones.

Proponents of the Penny

The penny does have its advocates. The group Americans For Common Cents advocates for the continued manufacturing of the penny. According to a 2006 Gallup survey, 55 percent of Americans said that pennies were useful, versus 43 percent who said they were not; 2 percent had no opinion (they could be the same 2 percent who end up throwing them in the trash). But Gallup broke this down even further by income per household. Lower-income groups are more likely to think the penny is useful. For example, households that make less than $30,000 a year have a 65 to 34 split in thinking pennies should be kept, while households that make $75,000 a year or more had a 45-53 split in favor of eliminating the penny. It isn’t until you reach that income strata that the anti-penny opinion takes the lead.

Americans For Common Cents cites the effect on consumers, particularly low-income Americans, as a reason for keeping the penny. Businesses would have to round to the nearest nickel if there were no pennies and therefore consumers would have to pay more. Some people might not notice, but to low-income Americans, that might actually make a difference. In its own research, Americans For Common Cents found that 73 percent of Americans were concerned that eliminating the penny would increase prices.

There is also a concern about the potential effect on charitable giving. Most of the arguments focus on gifts to charitable organizations, rather than giving to individuals, but panhandlers and homeless individuals receive loose change from people and might be adversely affected by pennies going out of circulation. Large charities like the Salvation Army also collect loose change and rely on people donating in pennies. The unpopularity of the penny may actually be a good thing for these charities, prompting people to donate them rather than throw them away or spend them. Other countries that have abandoned the penny, notably Canada, have not seen a drop in charity donations, but they may have other customs that don’t rely as heavily on penny donation to support charities.

Lincoln, Lobbying, and REAL Money

Keeping the penny has as much to do with preserving the great American tradition of specialized lobbying groups as it does with promoting the image of Abraham Lincoln. In this CBS Morning News segment, the reporters interview the head of Americans For Common Cents, which uses the mystique of Lincoln to promote the pro-penny position.

Americans For Common Cents gets a lot of its funding from Jarden Zinc, which manufacturers the zinc discs that become pennies. (fun fact: pennies are made of zinc and only covered in copper since copper is much too expensive). Jarden Zinc. has a very real financial interest in the United States continuing to produce pennies, so it spends money to promote this position. It spent $140,000 on lobbying efforts and was later awarded a contract by the federal government worth $48 million.

Lobbying efforts like this are found on nearly every issue in American politics, many of which involve much more money. When it comes to getting rid of the penny, Jarden Zinc is very passionate, while most of us have not considered the issue much at all. And if we have, we don’t feel that it is an issue of grave national importance and so no action is taken on it, allowing the status quo to continue.

There may be another compelling reason to keep pennies that Americans for Common Cents hasn’t touched on much in their advocacy efforts. Our monetary system was initially based on precious metals. Paper money (fun fact: paper money is actually made out of linen and cotton–not paper) became a stand-in for precious metals like gold and silver, but early on the money was still backed by gold and silver. Paper money was more convenient to use than carrying around bars of gold with you but the money had a bar of gold somewhere that gave it value. A dollar was actually worth something tangible.

Our currency is no longer backed by precious metals, except for pennies and nickels because those are actually made from semi-precious metals. But these are substances with value. It’s illegal to do it, but you could melt down a bunch of pennies and get zinc out of them (and a small amount of copper), which you could then sell. And because the zinc in the pennies is worth more than the pennies themselves that would be a great idea–if the government hadn’t made it illegal precisely because people started doing that.

Keeping pennies avoids the potential issues for charity donations and price increases but it also, according to Brian Domitrovic of Forbes, is a symbol of a monetary policy that we should encourage. One that responds to market signals and promotes a more healthful economy. In his view, keeping the penny, even if it is inefficient, is worth doing for that reason.

Conclusion

The penny has great sentimental value to many Americans. We have countless aphorisms about pennies. About picking them up, which we don’t do. About saving them, which we also don’t do. Even about giving them to people for their thoughts–which Stephen Dubner from Freakonomics considers to be an insult. But what we don’t have for pennies is a policy that deals in rational economic terms with the cost-benefit of producing and using them. Concerns about the impact on charities and on pricing are hurdles that our neighbors to the north and around the world have dealt with when abolishing their one-cent coins. We merely lack the political will to confront it as an issue because to most Americans pennies are unimportant, but to some, they are worth millions. It is literally a case of being penny wise and pound foolish.

Resources

Primary

United States Mint: 2015 Annual Report

Additional

History Matters: Cross of Gold Speech

Freakonomics: Pennies

Huffington Post: Get Rid Of The Penny 

The Odyssey Online: Why Are Pennies Still A Thing?

The Wall Street Journal: Easy To Lose and Expensive To Produce: Is The Penny Worth It? 

Fortune, Don’t Mess With the Penny Lobby

Retire The Penny

Americans For Common Cents

Gallup: Penny Worth Saving Say Americans

Forbes: Don’t You Dare Eliminate The Penny

 Editor’s Note: This post has been updated to make the cost of producing a penny clear. 

Mary Kate Leahy

Mary Kate Leahy (@marykate_leahy) has a J.D. from William and Mary and a Bachelor’s in Political Science from Manhattanville College. She is also a proud graduate of Woodlands Academy of the Sacred Heart. She enjoys spending her time with her kuvasz, Finn, and tackling a never-ending list of projects. Contact Mary Kate at staff@LawStreetMedia.com

The post Should We Get Rid Of The Penny? appeared first on Law Street.

There are some truths I know to be absolute: gas station sushi is a bad idea, Betty White is a national treasure, and the internet is full of racist people. And if you need proof of that third claim, look no further than the internet’s response to the Treasury Department’s announcement that Harriet Tubman will be replacing Andrew Jackson on the $20 bill.

First of all–this shouldn’t come as a surprise. Plans to redesign the most commonly used bills have been underway for some time, and the push to place a female face on American currency has been a longstanding effort. Additionally, Tubman won’t be the only woman to be featured on paper currency come the 2020 redesign–according to WIRED:

And so Hamilton will remain on the face (you can thank, or blame, the hit musical Hamilton for that), while the obverse will feature abolitionists and women’s rights activists Lucretia Mott, Sojourner Truth, Susan B. Anthony, Elizabeth Cady Stanton, and Alice Paul. The $5 bill is changing as well, to ‘honor historic events that occurred at the Lincoln Memorial in service of our democracy,’ according to the Treasury. The Rev. Martin Luther King, Jr., Marian Anderson, and Eleanor Roosevelt will appear on the bill.

However, it’s the Tubman addition that the internet is freaking out about, and while a lot of reactions have been overwhelmingly positive, there are plenty of jerks responding with bigotry, racism, and general idiocy. Here’s some examples:

@FoxNews who in the world is that? Never heard of her & don’t want her on the money period. I will refuse any $20 bill with that on it #tcot

— thetruthishere (@marctyler30) April 20, 2016

The Wonkette collected some charming examples from the comment sections of articles written about the addition of Tubman to the $20; here are some particularly vomit-worthy standouts from an article written by Jim Hoft on the Gateway Pundit:

I would think the EBT card would be more appropriate.

Can you guess how many of them will be defaced… and how fast? As much as they try to rid the enword from our language, this will increase it’s use exponentially.

this will go the way of the sacagawea golden dollar. i will not accept a twenty dollar bill until it has jackson back on it. give me 10’s and 50’s…i’ll deal with it…you should too. these self serving racist do gooders must be stopped

Here’s, of course, a call for our future savior Donald Trump to step in and put an end to the malarky:

@FoxNews

Whats next, There is nothing in this country that is good enough anymore. We need Trump to stop all the PC crap.

— OhReally (@OhReally22) April 20, 2016

It wasn’t just the anonymous people on the internet getting involved in the debate. Talking head Greta Van Susteren went on a rant last night on Fox about how the addition of Tubman on our $20 bill and removing Jackson is “dividing the country” and “creating a completely unnecessary fight,” which is amusing given that she propagated a fight that didn’t actually exist by bringing it up on her show. 

And then, of course, you have Republican hopeful himself, Donald Trump, who came out against putting Tubman on the $20 as “pure political correctness,” suggesting that she be featured on the $2 bill instead. He also defended Jackson, the man who was responsible for the Trail of Tears saying that he should remain on the $20. 

America, this is why we can’t have nice things. 

Anneliese Mahoney

Anneliese Mahoney is Managing Editor at Law Street and a Connecticut transplant to Washington D.C. She has a Bachelor’s degree in International Affairs from the George Washington University, and a passion for law, politics, and social issues. Contact Anneliese at amahoney@LawStreetMedia.com.

The post Of Course There are Racist Responses to Harriet Tubman on the $20 Bill appeared first on Law Street.

The Treasury Department made history Wednesday when it announced its decision to have a woman on a new version of the $10 bill. This move marks an important step forward for the equality of men and women in American history.

In a press release on the topic, Treasury Secretary Jack Lew stated:

America’s currency is a way for our nation to make a statement about who we are and what we stand for. Our paper bills–and the images of great American leaders and symbols they depict—have long been a way for us to honor our past and express our values. 

We have only made changes to the faces on our currency a few times since bills were first put into circulation, and I’m proud that the new 10 will be the first bill in more than a century to feature the portrait of a woman.

The new bill will be released in 2020, exactly one century after the 19th Amendment guaranteed women the right to vote.

There have already been several advocates for a female face on U.S. paper currency. Earlier this year the Women on 20s campaign was launched, with the goal of getting a woman on the $20 bill by 2020. Senator Jeanne Shaheen (D-N.H.) introduced a bill directing Lew to “convene a panel of citizens” to recommend an appropriate person. The campaign conducted a ten week poll in May to find out which woman Americans wanted to see represented, with Harriet Tubman finishing in first place.

It doesn’t appear that the Treasury Department will take the Women on 20s campaign’s advice on who the new bill should feature. Instead, officials plan to hold town hall meetings and roundtable discussions to discuss “what qualities best represent democracy to help guide the design process.”

The Treasury Department is also accepting social media submissions using the hashtag #TheNew10, and through comments posted to a dedicated part of the Treasury website, with the decision announced later this year.

The decision made by the Treasury Department has certainly been a win for those who advocate for women’s rights. Placing a woman’s face on the $10 bill will celebrate a female leader in a very public way, which is a long time coming. Over the past century, a few women have been featured on currency, including Susan B. Anthony and Sacagawea. But they have been limited to dollar coins, a currency that does not really receive prominent circulation.

Secretary Lew’s press release referred to how currency reflect the country’s values. The point is well taken, because while women have made notable progress in the United States, there is still more work to be done. The gender imbalance among the country’s leaders can be found in the lack of CEOs on the Fortune 500 list and, the absence of women leading tech companies, or even their lack of presence within our government. There also still exists a persistent wage gap between the sexes. The presence of high profile female leaders and role models can have a significant impact on increasing the leadership skills and educational attainments of young girls and women. Even though the United States is taking in step toward elevating the lesser told stories of important female leaders, this step is long overdue.

Angel Idowu

Angel Idowu is a member of the Beloit College Class of 2016 and was a Law Street Media Fellow for the Summer of 2015. Contact Angel at staff@LawStreetMedia.com.

The post It’s About Time: A Woman Will Be on New $10 Bill appeared first on Law Street.

Bitcoin first started making headlines in 2009 and has continued to grow into one of the world’s most well-recognized, thorough, and usable cryptocurrencies. But with multiple legal controversies and the general public’s skepticism when it comes to something as new as “cryptocurrency,” it’s difficult to tell whether Bitcoin has much of a future. Read on to learn more about the currency and its future.

What is Bitcoin?

Bitcoins are widely known as a digital or cryptocurrency. Unlike conventional currencies that are regulated by central authorities in their respective regions (such as the Federal Reserve Bank for the United States Dollar), Bitcoin is border-less and managed by a cryptographically-secured peer-to-peer network. The demand for Bitcoins determines their value in the market, and their supply is determined by complex mathematical algorithms developed by the founder–a person who goes by the pseudonym Satoshi Nakamoto. This supply generation process is called Bitcoin mining. So, Bitcoins are usually created by being “mined” by computers solving a complex string of processing problems, although one can now purchase existing Bitcoins.

Only fifty were created at the time of the cryptocurrency’s genesis and the maximum number of coins that can be issued is locked at 21 million. Just like the lowest value that the United States dollar can be divided into is one-cent pennies, a Bitcoin can at most be divided into eight decimal places. It gained prominence in April 2013 when its value spiked to $266 US Dollars compared to only $22 earlier that  same year. More than 10 million coins had been issued at that point at a total market value of $2 billion.

Courtesy of Idology.com.

Who likes Bitcoins?

Proponents of the cryptocurrency appreciate its purity in terms of supply and demand without any governmental interference. Bitcoins mitigate privacy concerns because they eliminate the need to enter information such as name and address for online transactions. For many tech aficionados, the cryptocurrency provides the thrill of following a new trend in the virtual world. Bitcoins are now being accepted by many platforms like WikiLeaks, restaurants, mobile payment applications, and retail apps that have partnered with major consumer brands like GAP and Sephora.

A federal district court recently ruled that Bitcoin is indeed a currency, given that it can be either used to purchase goods and services directly, or to purchase currency that can in turn be used to purchase goods and services. According to a study conducted by the European Central Bank, Bitcoins do not pose a risk to price instability given that their supply is capped at 21 million coins, and will not negatively affect  the economy as long as the government monitors it to ensure that its not being used for fraudulent purposes.

Who doesn’t like Bitcoins?

Opponents worry that the unregulated and anonymous nature of cryptocurrency lends itself to be used for illegal trade, tax evasion, money laundering, and investment frauds like Ponzi schemes. Dread Pirate Roberts, the owner of Silk Road, an online drug market in the deep web that is now shutdown, blatantly admitted that Bitcoin helped him win the war of drugs against the state.

Opponents also criticize Bitcoin’s algorithmic design for specifically inducing rise and fall in its value. But unlike traditional currencies, Bitcoin is not insured by the government in case it gets devalued enough to cause a major financial crisis in its market. Some claim that Bitcoin is being used more like a stock than a currency and that once the initial hype dies down its value will eventually decrease to nothing because it doesn’t have anything to offer except for its cool factor. Since Bitcoin is primarily digital (though coins are now available), it can be lost forever if a user loses his/her computer or account in which it’s stored.

What’s next for Bitcoin?

Bitcoin’s future is somewhat uncertain. While the cryptocurrency is still growing, there are many concerns that it’s not worth it. Detractors point out things like a possible Ponzi-style scheme involving Bitcoin in North Texas as indicative of the worthlessness of the currency. On the other hand, Bitcoin-based ventures have been growing, such as the development of startups like Coinffeine, which aims to create a new way to exchange Bitcoins. These are just a few examples of the ways in which Bitcoin is slowly breaking its way in into the mainstream, albeit with many setbacks.

Conclusion

Bitcoin. and other similar digital currencies, is just one of many interesting developments that has come about because of the internet. In essence, it’s a pretty revolutionary and fascinating idea, but whether or not it is actually good for the global economy remains to be seen. The potential for the use of Bitcoin as part of illegal activity though, should not stop people from using it for legitimate means. It’s only through incorporating online tools into the mainstream that it will become a genuinely useful and productive innovation.

Resources

Primary 

Bitcoin: Official Site

US District Court: Securities & Exchange Commission v. Trendon T. Shavers  and Bitcoin Savings & Trust

Additional

European Central Bank: Virtual Currency Schemes

Techland: Online Cash Bitcoin Could Challenge Government, Banks

Coindesk: Confirmed: Bloomberg Staff Are Testing a Bitcoin Price Ticker

CIO: In Kenya, Bitcoin :Linked to Popular Mobile Payment System

ParityNews: The Internet Archive Starts Accepting Bitcoin Donations

Webcite: In Bitcoin We Trust: The Berlin District Where Virtual Currency is as Easy as Cash

Readwrite: What’s Bitcoin Worth in the Real World?

Wire: Today’s Bitcoin Shows Why It’s Not Really a Currency

Fox Business: The Consumer Risks of Bitcoins

Slate: My Money is Cooler Than Yours

Washington Post: Imagining a World Without the Dollar

Social Science Research Network: Are Cryptocurrencies ‘Super’ Tax Havens?

The New York Times: Winklevoss Twins Plan First Funds for Bitcoins

Forbes: Goodbye Switzerland, Hello Bitcoins

Treasury Department: Application of FinCEN’s Regulations to Persons Administering, Exchanging, or Using Virtual Currencies

GAO: Virtual Economies and Currencies: Additional IRS Guidance Could Reduce Tax Compliance Risks

Forbes: IRS Takes a Bite Out of Bitcoin

The New York Times: New York and U.S. Open Investigations Into Bitcoins

TechCrunch: New York’s Financial Services Subpoenas Bitcoin Firms To “Root Out Illegal Activity”

Salome Vakharia

Salome Vakharia is a Mumbai native who now calls New York and New Jersey her home. She attended New York School of Law, and she is a founding member of Law Street Media. Contact Salome at staff@LawStreetMedia.com.

The post Bitcoin: What’s Next? appeared first on Law Street.

For those of you who are behind the times, Bitcoin is a unique electronic currency developed five years ago. Among many currencies, Bitcoin is the first decentralized digital currency, enabling individuals to exchange Bitcoins through the Internet without having to go through a middleman such as a bank. Bitcoins are revolutionizing traditional currencies, as anyone can “mine” the electronic coins. This is a significant reason why Bitcoin is becoming increasingly popular, as anyone can “mine” coins and make money. For a more extensive breakdown of Bitcoin, check out this article.

As Bitcoin emerges into a recognized currency, much of the legality and security of the e-currency has yet to be interpreted and standardized. This poses the complex question of what is needed to create a new currency? Often, the use of the Bitcoin is illegal, though the bitcoin system itself is not. Thus, the issue is not with the currency, but rather with it’s tendency to be prone to illegal activity. Therefore, does Bitcoin enhance criminality?

As Bitcoin is the newest globally recognized currency, agencies including the Internal Revenue Service, Canada Revenue Agency, and Her Majesty’s Revenue and Customs are developing new methods of taxing the e-currency. Exclusive to the United States, the Internal Revenue Service affirms the awareness of the potential tax-compliance risks posed by virtual currencies. Consequently, the lacking regulation permits malicious activity detrimental to the states well-being.

Bitcoin incorporates the option of anonymity into every exchange, making it prone to illegal activity. Provided in a case study by the Federal Bureau of Investigation, “cyber criminals may increasingly use bitcoins to purchase illegal goods and services and to fund illegal activities.” Specifically, this untraceable digital currency has an inherent proclivity towards criminality. However, if a transaction is not anonymized, a third party can geographically locate the individual. Every Bitcoin transaction is public and documented through archiving its Internet Protocol addresses.

As bitcoin technology increasingly becomes popular, criminals develop intricate methods to create an incognito transaction. An example of this illicit method is using a third party eWallet, attempting to consolidate Internet Protocol addresses. Research from the Federal Bureau of Investigation further concludes, “some third-party services offer the option of creating an eWallet that allows users to consolidate many bitcoin address and store and easily access their bitcoins from any device”

Bitcoin is the currency of choice–it has been used on many sites including the late Silk Road. An electronic market to buy potentially illegal goods, the hidden site was seized by the FBI in conjunction with the IRS Criminal Investigation Division, ICE Homeland Security Investigations, and the Drug Enforcement Administration. Prior to the injunction, private brownish markets were prone to criminal activity. The Silk Road allowed “parties to communicate anonymously for the purchase and sale of illegal goods, including the purchase of illegal narcotics, in addition to using Bitcoin.” Prior to the implementation of Bitcoin, Silk Road received very little traffic. Currently, hundred of thousands of transactions have been made through Silk Road and the newest platform, Silk Road 2 via Bitcoin. Such illicit websites cause for questioning the integrity of Bitcoin around the world.

What about this…

Although regulative agencies spanning across the world have yet to concretely define the boundaries, actions against criminality have been taken. On January 27, 2014 Charlie Shrem was arrested for engaging in currency laundering–directly connected to the Silk Road. Regarding the innovative currencies connections to criminal activity, Manhattan U.S. Attorney Preet Bharara stated, “truly innovative business models don’t need to resort to old-fashioned lawbreaking, and when bitcoins, like any traditional currency, are laundered and used to fuel criminal activity, law enforcement has no choice but to act.”

Bitcoin is highly susceptible to theft. Thieves intending on stealing bitcoins target and exploit third-party Bitcoin services “because there is no central Bitcoin server to compromise.” Malicious actors can steal user “mined” bitcoins by exploiting “the way bitcoins are generated by compromising victim’s computers.” Accomplished by installing malware on a victim’s computer, criminals can then use the compromised computers to generate bitcoins. The evolution of Bitcoin towards a more sustainable and legal future exemplifies the nature of an ever-changing currency. Yet the activity associated with Bitcoin can destroy the currency ad infinitum.

 [Business Insider] [Federal Bureau of Investigation]

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Zachary Schneider

Feature image courtesy of [Antana via Flickr]

Zachary Schneider

Zach Schneider is a student at American University and formerly an intern at Law Street Media. Contact Zach at staff@LawStreetMedia.com.

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