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Calling Bitcoin a "payment innovation," Fed Chair Janet Yellen said it is not easy to supervise the digital currency because "there's no central issuer or network operation."
February 27 -
Don't think of it just as currency or a new set of payment rails. To get a full sense of Bitcoin and its implications for banking, you have to think bigger than that.
February 25
Fraud just claimed a major Bitcoin casualty. This week, Mt. Goxthe virtual exchange that once
Mt. Gox's downfall stemmed from a technical weakness in the electronic currency's architecture called
The Bitcoin market seemingly withstood Mt. Gox's collapse. While the exchange rate of a Bitcoin
So what comes next for Bitcoin now that this fraud wave is past? Unfortunately, the likely answer is: more fraud.
We believe that the early days of PayPal provide the best analogy for what likely lies ahead for Bitcoin, and much of it won't be pretty.
PayPal launched in late-1999 and quickly rocketed into a
1) Transaction Fraud: PayPal's popularity led to soaring credit card chargebacks as buyers disputed transactions that went bad for reasons such as failure to ship or items not as described. It didn't matter that the buyers and sellers were conducting business through third-party marketplaces like eBay (which had yet to acquire PayPal); PayPal had the liability for chargebacks if it couldn't recover the funds from the seller.
2) Identity Theft: While PayPal's website was nearly impenetrable to hackers, account theft surged as sneaky "phishing" emails tricked users into handing over their personal financial information. In one notable early case, fraudsters registered the
3) Organized Crime: Foreign crime rings turned PayPal into a virtual cash register. While PayPal's strong encryption made user information un-hackable, there was nothing to stop mafia types from powering PayPal accounts with stolen credit card numbers obtained from the black market. They had automated scripts use those stolen cards to make payments to accounts that they controlled, before transferring the money to a bank account.
If Bitcoin is to continue growing as an alternative currency, it is likely to face all of the same types of fraud that hit PayPal. While Bitcoin does not have the same credit card chargeback risk, a hypothetical evolution into a widely accepted payment option would expose the payment system to increased risk of transaction fraud, given the inevitability of buyer/seller disputes. Theft of private keys will certainly grow as Bitcoin users become increasing targets for phishers; encryption security is no guarantee against users being tricked. And as for organized crime getting involved, Mt. Gox's demise suggests that this is already happening.
PayPal's early fraud problems forced the company's management team to launch a multi-faceted response that combined technology, financial, and operational measures. The company deployed an
In short, there were no silver bullets. But by hardening the target, PayPal drove fraud away to other competing payment services. By late-2002, Citigroup, Bank One (a predecessor to JPMorgan Chase & Co.), and Wells Fargo had all closed their online payment services or were in the midst of doing so.
The remaining players in the Bitcoin ecosystem will need to learn from PayPal's lessons if they're to survive the challenges from fraud that they will surely face over the months to come. As Wired magazine
Eric M. Jackson and Christopher Grey are the co-founders of