The promise and perils of digital currencies

Interest in digital currencies, especially Bitcoin, has exploded over the past year. The cryptocurrency Bitcoin was created in 2009 by an anonymous entity operating under the pseudonym Satoshi Nakamoto. Using cryptographic primitives to create a digital currency is not particularly new – David Chaum proposed electronic cash nearly thirty years ago. What is different about Bitcoin is its success in gaining adoption. More than $1 billion of Bitcoin currency is in circulation, while Bitcoin startups are attracting tremendous interest from venture capitalists. But not all the attention attracted by digital currencies is positive. In 2011, two U.S. Senators asked that Bitcoin be shut down after they learned that it was used to pay for hard drugs in an underground marketplace called The Silk Road. Recently, the Costa-Rica-based digital currency, Liberty Reserve, was closed down because it allegedly laundered more than $6 billion on behalf of cyber criminals who had turned to the currency as a favored means of exchange. Bitcoin itself is frequently targeted by hackers, who exploit operational security failures to steal from the “wallets” of consumers and firms.