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User:Fleetham/BitcoinHistory

< User:Fleetham

History

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Bitcoin is the first cryptocurrency, a form of money that uses cryptography to control its creation and management, rather than relying on central authorities.[1] However, not all of the technologies and concepts that make up Bitcoin are new; Satoshi Nakamoto integrated many existing ideas from the cypherpunk community when creating Bitcoin.[2]

Creation

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In November 2008, a paper was posted on the internet under the name Satoshi Nakamoto titled Bitcoin: A Peer-to-Peer Electronic Cash System. This paper detailed methods of using a peer-to-peer network to generate what was described as "a system for electronic transactions without relying on trust".[3][4][5][6] In January 2009, the Bitcoin network came into existence with the release of the first open source Bitcoin client and the issuance of the first bitcoins,[4][7][8][9] with Satoshi Nakamoto mining the first block of bitcoins ever (known as the "genesis block"), which had a reward of 50 bitcoins. The value of the first bitcoin transactions were negotiated by individuals on the bitcointalk forums with one notable transaction involving a 10,000 BTC pizza.[4]

On 6 August, a major vulnerability in the Bitcoin protocol was spotted. Transactions weren't properly verified before they were included in the transaction log or "block chain" which let users bypass Bitcoin's economic restrictions and create an indefinite number of bitcoins.[10][11] On 15 August, the vulnerability was exploited; over 184 billion bitcoins were generated in a transaction, and sent to two addresses on the network. Within hours, the transaction was spotted and erased from the transaction log after the bug was fixed and the network forked to an updated version of the Bitcoin protocol.[12][13] This was the only major security flaw found and exploited in Bitcoin's history.[10][11]

Growth

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In June 2011, Wikileaks[14] and other organizations began to accept bitcoins for donations. The Electronic Frontier Foundation begun, and then temporarily suspended, bitcoin acceptance, citing concerns about a lack of legal precedent about new currency systems, saying that they "generally don't endorse any type of product or service."[15] The EFF's decision was changed in 17 May 2013.[16] On 23 December 2011, Douglas Feigelson of BitBills filed a patent application for “Creating And Using Digital Currency” with the United States Patent and Trademark Office, an action which was contested based on prior art in June 2013.[17][18]

In January 2012, Bitcoin was featured as the main subject within a fictionalized trial on the CBS legal drama The Good Wife in the third season episode "Bitcoin for Dummies". The host of CNBC's Mad Money, Jim Cramer, played himself in a courtroom scene where he testifies that he doesn't consider Bitcoin a true currency, saying "There's no central bank to regulate it; it's digital and functions completely peer to peer".[19] In October 2012, BitPay reported having over 1,000 merchants accepting Bitcoin under its payment processing service.[20]

In February 2013 the Bitcoin-based payment processor Coinbase reported selling $1 million USD worth of Bitcoins in a single month at over $22 per Bitcoin.[21] The Internet Archive announced that it was ready to accept donations as bitcoins and that it intends to give employees the option to receive portions of their salaries in Bitcoin currency.[22]

In March the Bitcoin transaction log or "block chain" temporarily forked into two independent logs with differing rules on how transactions could be accepted. The Mt.Gox exchange briefly halted Bitcoin deposits and the exchange rate briefly dipped by 23% to $37 as the event occurred[23][24] before recovering to previous level of approximately $48 in the following hours.[25] In the US, the Financial Crimes Enforcement Network (FinCEN) established regulatory guidelines for "decentralized virtual currencies" such as Bitcoin, classifying American "Bitcoin miners" who sell their generated bitcoins as Money Service Businesses (or MSBs), that may be subject to registration and other legal obligations.[26][27][28]

In April payment processor BitInstant and Mt.Gox experienced processing delays due to insufficient capacity[29] resulting in the bitcoin exchange rate dropping from $266 to $76 before returning to $160 within six hours.[30]

Bitcoin gained greater recognition when services such as OkCupid and Foodler began accepting it for payment.[31]

On 15 May 2013, the US authorities seized accounts associated with Mt. Gox after discovering that it had not registered as a money transmitter with FinCEN in the US.[32][33]

On 23 June 2013, it was reported that the US Drug Enforcement Administration listed 11.02 bitcoins as a seized asset in a United States Department of Justice seizure notice pursuant to 21 U.S.C. § 881.[34] It is the first time a government agency has claimed to have seized bitcoin.[35][36]

In July 2013 a project begun in Kenya linking Bitcoin with M-Pesa, a popular mobile payments system, in an experiment designed to spur innovative payments in Africa.[37] During the same month the Foreign Exchange Administration and Policy Department in Thailand stated that Bitcoin lacks any legal framework and would therefore be illegal, which effectively banned trading on Bitcoin exchanges in the country.[38][39] According to Vitalik Buterin, a writer for Bitcoin Magazine, "Bitcoin's fate in Thailand may give the electronic currency more credibility in some circles." But he was concerned it didn't bode well for Bitcoin in China.[40]

In August Federal Judge Amos Mazzant of the Eastern District of Texas of the Fifth Circuit ruled that bitcoins are "a currency or a form of money" (specifically securities as defined by Federal Securities Laws), and as such were subject to the court's jurisdiction,[41][42] and Germany's Finance Ministry subsumed Bitcoins under the term "unit of account"—a financial instrument—though not as e-money or a functional currency, a classification nonetheless having legal and tax implications.[43]

In October 2013 the FBI seized roughly 26,000 BTC from website Silk Road during the arrest of owner William Ulbricht.[44][45][46]

Two companies, Robocoin and Bitcoiniacs launched the world's first Bitcoin ATM on October 29 in Vancouver, BC, Canada, allowing clients to sell or purchase Bitcoin currency at a downtown coffee shop.[47][48][49]

Satoshi Nakamoto

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Satoshi Nakamoto is a pseudonym for the unknown person or people who designed the original Bitcoin protocol in 2008 and launched the network in 2009. Nakamoto was responsible for creating the majority of the Bitcoin software and was active in making modifications and posting technical information on the BitcoinTalk Forum.[50]

Investigations into the real identity of Satoshi Nakamoto have been attempted by The New Yorker and Fast Company. Fast Company's investigation brought up circumstantial evidence linking an encryption patent application filed by Neal King, Vladimir Oksman and Charles Bry on 15 August 2008, and the bitcoin.org domain name which was registered 72 hours later. The patent application (#20100042841) contained networking and encryption technologies similar to Bitcoin's, and textual analysis revealed that the phrase "...computationally impractical to reverse" appeared in both the patent application and bitcoin's whitepaper.[3] All three inventors explicitly denied being Satoshi Nakamoto.[51][52] In May 2013, Ted Nelson speculated that Japanese mathematician Shinichi Mochizuki is Satoshi Nakamoto.[53]

Nakamoto's involvement with Bitcoin does not appear to extend past mid-2010.[54] In April 2011, Nakamoto communicated with a Bitcoin contributor saying he had "moved on to other things".[55]

The fork of March 2013

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On 12 March 2013, a Bitcoin miner running version 0.8.0 of the Bitcoin software created a large block that was incompatible with earlier versions of the Bitcoin software because of its size. This created a split or "fork" in the block chain since older versions of the software did not accept this block as valid. Computers with the recent version of the software accepted the block and continued to build on the diverging chain, whereas older versions of the software rejected it and continued extending the block chain without the offending block. This split resulted in two separate transaction logs being formed without clear consensus, which allowed for the same funds to be spent differently on each chain. In response, the Mt.Gox exchange temporarily halted Bitcoin deposits.[56] The exchange rate fell 23% to $37 on the Mt.Gox exchange but rose most of the way back to its prior level of $48.[23][24]

Developers at bitcoin.org resolved the split by recommending that users downgrade to "version 0.7", which utilized the oldest transaction log in the split. User funds largely remained unaffected and were available when network consensus was reached.[57] The network reached consensus and continued to operate as normal a few hours after the split.[58]

Regulatory issues

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On 18 March 2013, the Financial Crimes Enforcement Network (or FinCEN), a bureau of the United States Department of the Treasury, issued a report regarding centralized and decentralized "virtual currencies" and their legal status within "money services business" (MSB) and Bank Secrecy Act regulations.[28][33] It classified digital currencies and other digital payment systems such as Bitcoin as "virtual currencies" because they are not legal tender under any sovereign jurisdiction. FinCEN cleared American users of Bitcoin of legal obligations[33] by saying, "A user of virtual currency is not an MSB under FinCEN's regulations and therefore is not subject to MSB registration, reporting, and recordkeeping regulations." However, it held that American entities who generate "virtual currency" such as bitcoins are money transmitters or MSBs if they sell their generated currency for national currency: "...a person that creates units of convertible virtual currency and sells those units to another person for real currency or its equivalent is engaged in transmission to another location and is a money transmitter." This specifically extends to "miners" of the Bitcoin currency who may have to register as MSBs and abide by the legal requirements of being a money transmitter if they sell their generated bitcoins for national currency and are within the United States.[26]

Additionally, FinCEN claimed regulation over American entities that manage bitcoins in a payment processor setting or as an exchanger: "In addition, a person is an exchanger and a money transmitter if the person accepts such de-centralized convertible virtual currency from one person and transmits it to another person as part of the acceptance and transfer of currency, funds, or other value that substitutes for currency."[27][28]

In summary, FinCEN's decision would require Bitcoin exchanges where bitcoins are traded for traditional currencies to disclose large transactions and suspicious activity, comply with money laundering regulations, and collect information about their customers as traditional financial institutions are required to do.[33][59][60]

Patrick Murck of the Bitcoin Foundation criticized FinCEN's report as an "overreach" and claimed that FinCEN "cannot rely on this guidance in any enforcement action".[61][non-primary source needed]

Jennifer Shasky Calvery, the director of FinCEN said, “Virtual currencies are subject to the same rules as other currencies. … Basic money-services business rules apply here.”[33]

In its October 2012 study, Virtual currency schemes, the European Central Bank concluded that the growth of virtual currencies will continue, and, given the currencies' inherent price instability, lack of close regulation, and risk of illegal uses by anonymous users, the Bank warned that periodic examination of developments would be necessary to reassess risks.[62]

In 2013, the U.S. Treasury extended its anti-money laundering regulations to processors of bitcoin transactions.[63][64]

In June 2013, Bitcoin Foundation board member Jon Matonis wrote in Forbes that he received a warning letter from California's Department of Financial Institutions accusing the foundation of unlicensed money transmission, Matonis denying the foundation is engaged in money transmission and saying he viewed the case as "an opportunity to educate state regulators."[65]

In late July 2013, the industry group Committee for the Establishment of the Digital Asset Transfer Authority began to form to set best practices and standards, to work with regulators and policymakers to adapt existing currency requirements to digital currency technology and business models and develop risk management standards.[66]

2013 bitcoin prices

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The bitcoin to USD exchange rates at one of the exchanges

The price of a bitcoin reached an all-time high of US$230 on 9 April 2013, up from just $13 at the start of the year.[67] Among the factors which may have contributed to this rise were the European sovereign-debt crisis—particularly the 2012–2013 Cypriot financial crisis—statements by FinCEN improving the currency's legal standing and rising media and Internet interest.[68][69][70][71]

As the market valuation of the total stock of Bitcoins approached 1 billion USD, some commentators called Bitcoin prices a bubble.[72][73][74] In early April 2013, the price per bitcoin dropped from $266 to around $50 and then rose to around $100. Over two weeks starting late June 2013 the price dropped steadily to $70. The price began to recover, peaking once again on October 1 at $140. On October 2nd, The Silk Road was seized by the FBI. This seizure caused the price to collapse to $110 before closing at $123.[75]

References

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