bitcoin: the virtual currency conquers the real world

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Bitcoin: the virtual currency conquers the real world Advantages and disadvantages of the most widespread “democratic” payment system October 2015

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Page 1: Bitcoin: the virtual currency conquers the real world

Bitcoin: the virtual currency conquers the

real world Advantages and disadvantages

of the most widespread “democratic” payment system

October 2015

Page 2: Bitcoin: the virtual currency conquers the real world

3 January 2009Release of the virtual currency Bitcoin, an open source software using a peer-to-peer method to manage a common database (block chain) in which all transactions are recorded. It is a system that is:

The cryptocurrency

safe: all transactions are public and traceable, even if the identity of the user remains secret; easy: to use Bitcoins all you need to do is install a software to create your own digital portfolio – wallet – to which you associate a Bitcoin address where you store your coins (the address corresponds to your bank account, but has no operating expenses); convertible: algorithms are used to calculate the exchange rate (not by a central bank) that is updated every minute. Today 1 Bitcoin is worth roughly 1,000 dollars;

next

Page 3: Bitcoin: the virtual currency conquers the real world

widespread: it is accepted as online payments in many specialised shops (Amazon, E-bay) or music or game platforms; several Apps provide maps of the (real) shops/services that accept Bitcoins;

it has a capped growth: Bitcoins will be issued until its maximum number has been reached (21 million); a Bitcoin block is ‘issued’ every four years: in 2017 the number of Bitcoins will have reached 3/4 its maximum growth; the process will be complete in 2040.

The cryptocurrency

Page 4: Bitcoin: the virtual currency conquers the real world

A revolution still looking for its inventor

It’s not clear who invented Bitcoin. The person who invented Bitcoin used the pseudonym Satoshi Nakamoto, but no-one knows whether it represents a single individual or a group.It’s thought that Bitcoin was invented as a fallout to the 2009 financial crisis by an online community called Cypherpunks committed to promoting free global information.In 2014 Leah McGrath Goodman, a journalist at Newsweek, wrote that the inventor of this virtual currency may indeed be called Satoshi Nakamoto, a man of Japanese origin living in California. So far Dorian Prentice Satoshi Nakamoto has denied

“having created, invented or worked at developing Bitcoin”.

Page 5: Bitcoin: the virtual currency conquers the real world

Bitcoin is a cryptocurrency; it is not made of paper or metal, but bits, arithmetic operations that are part of cryptography and ensure safety.These operations require more and more computing power, and this power is provided by the users who let their personal computers be used to execute the calculations required: it’s a rather complicated calculation system, like trying to open a safe using one combination from amongst the three billion possible combinations!This operation is called mining and the virtual currency operators are called miners. Mining pools are quite common, i.e., a system whereby users combine the computational power of their personal computers to carry out mining. The reward (Bitcoins) for the computational input provided is then split proportionally between the members.

How to earn coins

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Bitcoin: the advantages

It’s instant: members can make online payments from and to anywhere in the world almost in real time. Low transaction fees: transactions cost significantly less than traditional payment methods. This makes Bitcoin ideal even for small payments, for example in cafés, restaurants, etc. – you can use a smart phone to pay for your coffee!It’s available round the clock: you don’t have to wait for your bank to open and you can always withdraw/deposit Bitcoins. It cannot be blocked or limited by Governments as a economic policy measure. It cannot be depreciated: when the maximum number of Bitcoins has been issued, no more Bitcoins will be issued and therefore there is no inflation.

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It’s not accepted in many places: although it’s steadily becoming popular, very few people know about Bitcoin, and even less use it. It’s volatile: since it’s a young currency and is not used everywhere, the value of Bitcoin varies substantially. It can be improved: the technology is still being developed; many features still have to be added/enhanced. It’s irreversible: transactions cannot be cancelled, not even if you punch the wrong key or send coins to the wrong address. Be careful with your wallet! It’s anonymous: this could encourage the use of Bitcoins in illegal operations.

Weak points

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Several operators exchange Bitcoins for traditional currency: the exchange rate, calculated at the time the transaction takes place, is based on the Bitcoin demand/supply mechanism – the greater the demand, the greater its value.

In Italy this service is provided by the Robocoin Italia platform. It has installed Bitcoin ATMs in Milan, Rome and Florence. The number of affiliated merchants is gradually increasing.

Roughly 200 shops all over Italy accept payments in Bitcoins. The declared goal is

“hundreds of outlets by the end of 2015”.

Bitcoin and (non digital) reality: how to buy traditional currency and goods/services

Page 9: Bitcoin: the virtual currency conquers the real world

It’s not a real coin, so it can be considered a common asset, a product one can invest in. In fact, some people have bet on (and turned a profit) by investing in Bitcoin.

Who?

The producers of the digital infrastructures, platforms and financial software used to Exchange Bitcoins and buy goods and services.All over the world you can count the number of Bitcoin investors on the fingers of one hand; young entrepreneurs who were the first to believe in this cryptocurrency. A few examples of these virtual finance markets: Mt. Gox, BTC China, First Meta, Bitstamp.

Virtual currency, real returns: who invests (and turns a profit) in the Bitcoin world

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Bitcoins and the tax system: it’s neither an asset nor a currency – how should it be taxed?

Debunking mythes

It’s not true that transactions/investments in Bitcoins are not taxed because it’s an intangible currency - goods/services purchased with Bitcoins are taxed as if they had been purchased with traditional currencies. For example, if I buy a car, I cannot expect it to be exempt from VAT!

Regarding VAT: the EU Court of Justice has ruled that Bitcoin is not a currency and that exchange with a traditional currency (and vice versa) is a provision of services in return for payment; since it falls into this group, it has to pay VAT.

A step forward regarding the tax system for Bitcoin.

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According to the judicial organ of the European Union, No Country has adopted a regulatory frame work for digital currencies:

Singapore, Germany and Slovenia have taxed crypto-currency operations on a case by case basis: as capital income, private currency/barter etc.In Denmark, profits from Bitcoin are tax free. China, instead, is against e-money and has forbidden its use in the financial sector. The United States consider Bitcoins as property (like owning a share or a house) with a value that fluctuates over time and produces capital income; hence, it has to be taxed.

Bitcoins and the tax system: it’s neither an asset nor a currency – how should it be taxed?

Page 12: Bitcoin: the virtual currency conquers the real world

What’s the situation in Italy?

In Italy there is no legislation as it (nearly always!) happens when technological novelties are truly revolutionary. Since the issue significantly affects consumer protection – given the growing number of users – Italian Institutions should take urgent action. Many people hope that the EU will approve harmonised legislation for all Member States.

Page 13: Bitcoin: the virtual currency conquers the real world

Bitcoin and cryptocurrency are not yet widespread in Italy, but the issue of how to regulate and integrate them into the monetary system is now on the country’s political agenda. Some call for caution, others instead do not want the free development of the sector to be hindered by legislation.

2013

The Bitcoin Foundation Italia was created.

“We support the universal right of every human being to carry out free financial transactions, without interference by third parties. We believe that decentralised finance can

lead to a free and just economy and society”.

Bitcoin in Italy: growing stakeholder interest. Early initiatives

Page 14: Bitcoin: the virtual currency conquers the real world

2014

In June the Hon. Stefano Quintarelli (Per l’Italia) organised first meeting at the Chamber of Deputies: “Bitcoin in Italia: what opportunities for ‘arithmetic currencies’ in Italy?” - #bitincamera.

A second meeting, entitled “Bitcoin in the real economy” was organised by the Hon. Sergio Boccadutri (SEL).

The CashlessWay Association dedicated their “No Cash Day” annual meeting to Bitcoin.

Bitcoin in Italy: growing stakeholder interest. Early initiatives

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July 2014

Boccadutri (SEL) presented the Draft Law “Mandate to the Government to regulate the issuance and circulation of complementary currencies”; the Finance Commission, charged with examining the proposal, has yet to table it for discussion.Boccadutri stated:

“I am acting on a request by the market: when contacted by those who accept Bitcoins,

the Tax Agency said it was waiting to see what to do. I’m a MP and I asked myself how should we deal

with this problem”.

The legislative proposal

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Mandates the Government to adopt ad hoc regulations to:

establish a definition of complementary currencies as well as the criteria required to identify them;

oblige the entities that issue cryptocurrencies to indicate a fixed exchange rate with the Euro;

specify that it is a voluntary payment system;

enhance the traceability of the payments;

oblige the entities that issue cryptocurrencies to send a biannual report to the Bank of Italy regarding its management and the protection of the interests of those involved.

The contents of the Draft Law

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The Draft Law defines the currency as an exchange tool and not a deposit tool.In other words:

it regulates purchases but not accrual, hence it does not regulate the objective value of Bitcoin, whereas the main weak point of e-money is precisely the fact its

value is so volatile.

The critical point?

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There’s no question that cryptocurrencies are here to stay, there’s no going back now and banks were the first to realise its potential: Goldman Sachs, Barclays and Ubs have all become interested in investing in the sector.

This innovative phenomenon called Bitcoin will undoubtedly develop; it would be impossible to backtrack now, nor would it be advisable. However important steps have to be taken before we can consider cryptocurrencies equivalent to traditional currencies; regulation is the first and most important step.

Possible developments

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