Elwell, Craig Kent, M. Maureen Murphy, Michael V Seitzinger, Library of Congress, and Congressional Research Service.
Bitcoin Questions, Answers, and Analysis of Legal Issues. Washington, D.C.: Congressional Research Service, 2013. (updated: January 28, 2015)
Summary
Bitcoin first appeared in January 2009, the creation of a computer programmer using the pseudonym Satoshi Nakamoto. His invention is an open-source (its controlling computer code is open to public view), peer-to-peer (transactions do not require a third-party intermediary such as PayPal or Visa) digital currency (being electronic with no physical manifestation). The Bitcoin system is private, with no traditional financial institutions involved in transactions. Unlike earlier digital currencies that had some central controlling person or entity, the Bitcoin network is completely decentralized, with all parts of transactions performed by the users of the system.
With a Bitcoin transaction there is no third-party intermediary. The buyer and seller interact directly (peer to peer), but their identities are encrypted and no personal information is transferred from one to the other. However, unlike a fully anonymous transaction, there is a transaction record. A full transaction record of every Bitcoin and every Bitcoin user’s encrypted identity is maintained on the public ledger. For this reason, Bitcoin transactions are thought to be pseudonymous, not anonymous. Although the scale of Bitcoin use has increased substantially, it still remains small in comparison to traditional electronic payments systems, such as credit cards, and the use of dollars as a circulating currency.
Congress is interested in Bitcoin because of concerns about its use in illegal money transfers, concerns about its effect on the ability of the Federal Reserve to meet its objectives (of stable prices, maximum employment, and financial stability), and concerns about the protection of consumers and investors who might use Bitcoin.
Bitcoin offers users the advantages of lower transaction costs, increased privacy, and long-term protection of loss of purchasing power from inflation. However, it also has a number of disadvantages that could hinder wider use. These include sizable volatility of the price of Bitcoins, uncertain security from theft and fraud, and a long-term deflationary bias that encourages the hoarding of Bitcoins.
In addition, Bitcoin raises a number of legal and regulatory concerns, including its potential for facilitating money laundering, its treatment under federal securities law, and its status in the regulation of foreign exchange trading.
