Bitcoin and Other Virtual Currencies: Are They Here to Stay?
Authors explore virtual currencies define the concept of a virtual currency, compare it with traditional currency, and address some of the challenges facing Bitcoin in its rise toward a global currency.
In recent months the existence and use of virtual currencies have increasingly been in the news. Virtual currencies are gaining acceptance with consumers and businesses and are increasingly being scrutinized by members of Congress, the IRS, U.S. and global law enforcement, financial regulators, and banking institutions. Of the virtual currencies in the marketplace today, Bitcoin is the most well-known. Created in 2009, Bitcoin is gaining acceptance among both online and traditional retailers who are taking advantage of both the novelty of the virtual currency and the absence of traditional transaction costs associated with the regular banking system.1
Because Bitcoin transactions occur in a peer-to-peer network outside of the traditional banking and regulatory systems, the ability of the U.S. Government or other interested parties to associate transactions with an individual, organization, or foreign government is limited. The anonymity of ownership and use,2 causes governments and regulatory agencies to worry that Bitcoin can be used for illicit purposes. However, the real issue for governments and regulators is their ability to identify individuals when they enter or exit the virtual currency system (or simply put, exchange virtual currency for a fiat currency like the U.S. dollar or Euro).
This article examines what defines a virtual currency, how a virtual currency compares to a traditional currency, and what practical accounting and tax issues are relevant as the public starts to accept Bitcoin as a legitimate medium of exchange. In addition, we will explore some of the current challenges which Bitcoin must overcome in order to become accepted as the preeminent virtual global currency.