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Bitcoin: The Virtual Currency Enters Real World

Welcome to the real world, Bitcoin. The U.S. government has officially legitimized the popular crypto-currency and other "virtual currencies" by attempting to regulate them.

The U.S. Treasury’s Financial Crimes Enforcement Network published a list of guidelines Monday applying money-laundering and record-keeping rules to companies that issue or exchange these currencies. This won't affect people using Bitcoins to purchase goods or services.

The guidelines reflect rising concerns about virtual currencies' use in illegal activities, and risks associated with hacking, account thefts and software glitches, as seen in a Federal Bureau of Investigation report last year.

They also are a testament to Bitcoin's growing popularity. Bitcoins reached an all-time-high valuation of $74 yesterday. The surge in the exchange rate this week coincided with concerns that the Cyprus government would take euros from saving accounts to pay its bailout bill. Bitcoin is increasingly seen as an alternative to traditional currencies.

Created by mysterious programmer Satoshi Nakamoto in 2009, Bitcoin removes the reliance on financial institutions from transactions. The currency, which offers users privacy and anonymity, is often celebrated as "democratic" money because exchanges can occur directly between individuals. The network is a decentralized system of tens of thousands of personal computers.

The Bitcoin Foundation responded to the new guidelines in a statement Tuesday, saying the new rules could be infeasible "for many, if not most, members of the bitcoin community to comply with." The change could affect people who "mine," or create, new Bitcoins (and are rewarded with Bitcoins as payment) by making them register with the government if they transmit Bitcoins into another currency.

Some companies anticipated the rules. BitInstant, a payment processor that exchanges dollars into Bitcoins at more than 700,000 locations, is already compliant, the Wall Street Journal reports. And there are plenty of legitimate uses for Bitcoins that could benefit from government oversight. People can use them to make purchases on the websites Reddit and WordPress, for example. One guy even listed his Canadian bungalow for sale in Bitcoins.

For Bitcoin to attract new users and larger sums of money, identification and accountability are necessary. The next step may be to increase the ease of use and integration into existing banking structures. The Bitcoin-Central currency exchange partnership with French financial firm Aqoba in December offers a model for what that might look like. The partnership allows Bitcoin-Central to issue debit cards that can convert holder's Bitcoin balance to euros, and the euro balances of the accounts can be government insured.

The buzz about Bitcoin in the euro area and the U.S.'s new guidelines are a sign: Governments can't ignore Bitcoin anymore.

How does Bitcoin work?

OK, this is a question that often causes confusion. Here's a quick explanation!

The basics for a new user

As a new user, you only need to choose a wallet that you will install on your computer or on your mobile phone. Once you have your wallet installed, it will generate your first Bitcoin address and you can create more whenever you need one. You can disclose one of your Bitcoin addresses to your friends so that they can pay you or vice versa, you can pay your friends if they give you their addresses. In fact, this is pretty similar to how email works. So all that is left to do at this point is to get some bitcoins and to keep them safe. In order to start using Bitcoin, you are not required to understand the technical details.

However, if you want to know more, keep reading!


The blockchain is a shared public transaction log on which the entire Bitcoin network relies. All confirmed transactions are included in the blockchain with no exception. This way, new transactions can be verified to be spending bitcoins that are actually owned by the spender. The integrity and the chronological order of the blockchain are enforced with cryptography.


A transaction is a transfer of value between Bitcoin addresses that gets included in the blockchain. Bitcoin wallets keep a secret piece of data called a private key for each Bitcoin address. Private keys are used to sign transactions, providing a mathematical proof that they come from the owner of the addresses. The signature also prevents the transaction from being altered by anybody once it has been issued. All transactions are broadcast between users and confirmed by the network in the following minutes, through a process called mining.


Mining is a distributed consensus system that is used to confirm waiting transactions by including them in the blockchain. It enforces a chronological order in the blockchain, protects the neutrality of the network, and allows different computers to agree on the state of the system. To be confirmed, transactions must be packed in a block that fits very strict cryptographic rules that will be verified by the network. These rules prevent any previous block from being modified because doing so would invalidate all following blocks. Mining also creates the equivalent of a competitive lottery that prevents any individual from easily adding new blocks consecutively in the blockchain. This way, no individuals can control what is included in the blockchain or replace parts of the blockchain to roll back their own spends.
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