Mining for digital gold

Thailand is urged to update its laws and rules to keep abreast with the latest technologies.

Consider this. Early this year, you could buy one Bitcoin for US$13. By April 9, it changed hands for $230, an all-time high for this digital currency. Among the factors which may have contributed to the rise were the European sovereign-debt crisis, particularly the Cypriot financial crisis, its improving legal standing and rising media and internet interest.

If the Bitcoin network keeps churning out the virtual currency as planned, by 2140, there will be 21 million Bitcoins in circulation worldwide. That's $2.97 billion in today's Bitcoin value. And that's it, not a coin more will be digitally created.

On Friday, at least two firms announced plans to ship out Bitcoin ATMs in the coming months. Robocoin, the Las Vegas-based firm rolling out the world's first Bitcoin ATMs in Canada this autumn, plans to ship 12-15 of the units by year-end, according to the Time website.

The other firm, Lamassu, also said it has 15 Bitcoin ATMs shipping out over the next several weeks to 13 countries including Australia, New Zealand, Canada, China, Brazil, France, Denmark, Finland, Slovakia and the US.

Bitcoin has its own wiki or online user-contributed knowledge base. Wordpress.com, a well-known blog, accepts it and this month eBay is said to be "warming up" to it while US regulators are reportedly weighing political donations in Bitcoins.

As Bitcoin popularity grows in several countries, the use of the digital currency has sparked curiosity and controversies in Thailand, especially after the Bank of Thailand said on July 31 this year buying and selling Bitcoins, using them to buy or sell goods and services, and transferring them in and out of Thailand were all "currently illegal".

It cited the absence of local laws to support the transactions.

Since Bitcoins are backed by no one and nothing and completely unregulated, the Thai central bank said a law and technology needed to be in place to trace its transactions to minimise the risk or loopholes that it may be used to speculate on the local currency, as well as gamble and launder money.

In May, the US Homeland Security Department seized a number of accounts controlled by Mt. Gox, the Japanese exchange which handles a lion's share of Bitcoin trading. It cited the US intermediary which owned the accounts trading on Mt. Gox exchange was not registered as a money-service agent, raising the risk of them being used for money-laundering.

It is important to note here that the department did not crack down on Bitcoin itself, just on how it was being exchanged by Mt. Gox.

Using the Bitcoin network is free, except for a voluntary fee for "miners" who want to speed up their transaction process, said Lusarun Silpsrikul, founder of Page 365, a technology entrepreneur who plans to offer Bitcoin exchange service in Thailand.

Bitcoin is a useful payment method for online merchant with no credit card charging service. But, right now, it is mainly used for buying domain names, said Mr Lusarun.

Daniel Garniron, a freelance stock trader, said there are very few businesses which currently use Bitcoin for engaging in financial activities due to its complexity.

Bitcoin had two major bubbles, leading to wild fluctuations in January 2011 and April 2013. Its prices are driven by confidence in the virtual currency and its legal standing.

According to the LocalBitcoins.com website, a marketplace for trading Bitcoins locally for cash or online payments, Bitcoin is available in 2,866 cities in 162 countries including Thailand. As of 3pm on Friday, the buying rate is 4,042 to 5,255 baht apiece while the selling rate is 3,759 to 3,786 baht.

Having been denied permission to operate as a local Bitcoin broker exchange by the Thai central bank, Bitcoin Co has found a new source of revenue by selling Bitcoin USB miner devices (shown above) for 1,699 baht per device. Running this device, a miner can earn 0.0019 Bitcoins per day.

A Bitcoin expert who asked for anonymity said the invention of Bitcoin is a historical step, one that has the potential to transform the use of currencies similar to the creation of an airplane, which altered the entire transport industry.

"I believe that in the next 5-10 years, Bitcoin will gain in popularity and in the next 120-130 years, it will demote the role of conventional money, said the expert.

In countries such as the US and Germany, there is no legal support for trading Bitcoin, yet they do not suspend or ban the virtual currency, he said.

Despite the fact that Bitcoin users' identities are anonymous, regulators can always trace money trail by looking at block chain history which comprises transaction records at http://blockchain.info/.

He said by allowing Bitcoin exchange brokers to operate legitimately in Thailand, regulators can monitor local Bitcoin transactions more easily than tracking exchange activities in the grey market.

In Thailand, there are about 5,000 Bitcoin users, a relatively small group.

Rom Hirunpruk, a technology expert, said that a federal judge in Texas has recently declared that Bitcoin is a genuine currency and should therefore be regulated just like the dollar or gold. Other countries may follow suit soon.

Virtual currency is gaining momentum in many forms. With its online nature, it is hard to control it. Regulators need to come up with a way to enforce it effectively by amending the existing laws to be in line with technological changes.

Regulators should issue licenses for fair competition. Bitcoin enables online transaction and payment with low fees which benefit consumers. However, it has a direct impact on banks which they currently benefit from high international transfer fees.

The fact that the Bitcoins network generates not more than 21 million coins in total means it cannot have an impact on a country's currency stability. There are criticisms that it can be a channel for money laundering, but this may be an excessive concern. This is because Bitcoin is too complex and its transactions are traceable at blockchain.info. Similarly, a criminal can always use the convention method of opening a bank account in some places such as the Cayman Islands to launder money.

Virtual currency such as Bitcoin can be compared with voice-over-IP or internet telephone in the last decade. The technologies were first deemed illegal since there was no law supporting them. However, they can truly help consumers save huge international communication bills, said Mr Rom.

Surangkana Wayuparb, director of the Electronic Transactions Development Agency (ETDA) under the Information and Communication Technology Ministry, said the agency will study the business model of Bitcoin, as well as possible regulations and public awareness of this digital currency since the central bank said the issue was not within its authority.

Don Sambandaraksa, a Bitcoin user and technology reporter, said the decision by the central bank to ban trading of Bitcoins in and out of the country while still allows Bitcoin mining doesn't make any sense.

Every Bitcoin is already accounted for in a ledger or block chain that exists in every machine running Bitcoin. The currency was designed as a peer-to-peer unit with no central authority to control it. It therefore knows no border.

BITCOIN: FACTS AND FIGURES

What is Bitcoin?

Bitcoin is the world's most widely used alternative currency with a market capitalisation of about US$1 billion. Its network is made up of thousands of computers run by individuals all over the world. It is a cryptography currency created under the pseudonym of Satoshi Nakamoto in 2009. At the heart of each Bitcoin is a chain of characters defined by complex algorithmic rules.

Where does it come from?

Bitcoins are generated out of thin air from the peer-to-peer computer network made up of its users' machines, similar to file-sharing services. Bitcoins are mathematically generated as the computers in this network execute difficult number-crunching tasks, a procedure known as "mining". The mathematics of the Bitcoin system were set up so that it becomes progressively more difficult to mine Bitcoins over time.

As the network has set the goal of generating no more than 21 million coins by 2140, there is no way for a central bank to issue a flood of new Bitcoins and devalue those already in circulation. As of Friday, 11.69 million Bitcoins were in circulation.

A user doesn't need to be a miner. For miners, a little app sits on your computer and very slowly creates new Bitcoins in exchange for providing the computational power to process transactions. When a new batch of coins is ready, they are distributed in probabilistic accordance to whoever had the highest computing power in the mining process. The system is rigged so that no more than 21 million Bitcoins will ever exist, so the mining process will yield less and less as more people sign up. This makes the whole system a lot sweeter for early adopters.

How can I get one?

- Accept Bitcoins as payment for goods or services.

- The most common way to buy Bitcoins is via Bitcoin Exchanges.

- Several services enable Bitcoins to be traded for traditional currency.

- Find someone to trade cash for Bitcoins in person through a local directory.

- Participate in a mining pool by installing software and putting your computer to work.

- If you have a lot of mining hardware, you can solo mine and attempt to create a new block.

- Visit sites that provide free samples and offers.

How do I use it?

When you transfer money to your friend, it is moved from your account by your bank to your friend's bank, and then your friend withdraws it as cash. With Bitcoins, there are no middlemen. Money goes straight from you to the other party.

Users need to install a wallet application in their computers to send or receive Bitcoins. The application assigns an address automatically, but if users need to generate a large number of Bitcoins, they have to use high computing power.

Compared with international money transfer services such as Western Union, Bitcoin has cheaper transfer fees. Bitcoin helps fuel cross-border transactions as it has the ability to bypass banking regulations and the central authority has no control over it.

There are also claims that the virtual currency has no inflation because of the limit on generating Bitcoins.

A normal Bitcoin transfer fee is 0.0005 BTC (0.2 baht), whereas a typical international wire transfer fee costs 700 to 1,300 baht.

Using credit cards with a conventional service will generally cost 3-5% of the transfer amount, which again is much more expensive than a Bitcoin transaction.

International wire transfers can take from a few days to more than a week, whereas Bitcoin transactions are generally confirmed within an hour.

Where can I use it?

A list of vendors accepting Bitcoins can be found at www.spendbitcoins.com/places/. You can buy the services of web designers, PC games, homemade jewellery, guns and travel products.

Just like you can exchange baht for dollars, you can swap Bitcoins with other users for several currencies. The Bitcoin was worth $127.9 on Friday.

How safe is it?

Bitcoin has military-standard encryption, so it is difficult to hack its network. However, hackers can steal Bitcoins stored in the computer by either stealing the gadget or hacking the users' password.

To safeguard the quantity of Bitcoins, users can use alternative options such as printing Bitcoins as a paper wallet or turning to a cloud-based wallet service provider such as Coinbase to store their Bitcoins.

What's the catch?

Bitcoin's price is very volatile and this explains the low adoption of using it. For example, one Bitcoin can be worth $147.50, but its value can suddenly slump to $80 in 15 minutes.

About the author

columnist
Writer: Suchit Leesa-nguansuk
Position: Senior Reporter