What is Bitcoin?
Bitcoin is a so-called virtual currency that has been devised for anonymous payments made entirely independently of governments and banks. In recent years, Bitcoin has generated a great deal of attention on several fronts. Bitcoin payments are based on a new interesting technical solution and function differently to traditional payments. In certain payment situations, Bitcoin can bring advantages in the form of lower costs, rapidity, anonymity, etc. over traditional payment methods. However, usage can also be more risky because Bitcoin is not directly covered by the laws that govern other payment mediation. Weak consumer protection is also a reason for why it may be difficult for Bitcoin to become generally accepted and viable as a means of payment. Use of Bitcoin for payments is low today, and although Bitcoin’s future is uncertain, it is an interesting innovation worthy of description. This article explains what a virtual currency is, and how Bitcoin works. Bitcoin use in Sweden – which is very limited – is also described. Finally, the future of Bitcoin and other virtual currencies is discussed.
Bitcoin is what is known as a virtual currency. A virtual currency is a means of payment; that is, units of the virtual currency represent a value. It is intended for use in payments within a specific virtual community, such as a particular website, or in a network of users with special software for managing the virtual currency and making payments. This type of virtual community can thus be said to resemble a voluntary agreement to use a specific item as a means of payment. This is an important difference to national currencies, such as the Swedish krona. For the latter, it has been established in law that the monetary unit in Sweden shall be called the Swedish krona. The virtual currency thus has a different unit of account than national currencies. For Bitcoin, the unit of account is the Bitcoin itself. The issuer of the virtual currency can be a non-financial company or even a private individual, but such an issuer is not under the supervision of a government authority. The issuance of virtual currency is thus not a government-regulated activity. However, each virtual currency has some type of rules of its own governing where and how it may be used, and some form of technical infrastructure in which the payments are carried out. The virtual currency, the own set of rules and the technical infrastructure combined form a small payment system, hereinafter referred to as a virtual currency scheme. There are a large number of virtual currency schemes that have been built up, and function, in different ways. They can be broken down into different categories depending on the extent to which it is possible to buy and sell the virtual currency. Here, we divide them into virtual currency schemes that are closed, with unidirectional flow and bidirectional flows. In closed virtual currency schemes, the virtual currency can be neither bought nor sold, but only earned and used on certain websites (such as World-of-Warcraft Gold). If the virtual currency can be bought for national currency but not exchanged back, the scheme has a unidirectional flow (such as Amazon coins). When the virtual currency can both be bought and sold and used outside of a certain website, the scheme has bidirectional flows. As explained below, Bitcoin is an example of a scheme with bidirectional flows. However, these categories can overlap.