Dollars to bitcoins

Dollar-Less Iranians Discover Virtual Currency

Photograph by Vahid Salemi/AP Photo

A money changer holds an Iranian banknote on Ferdowsi Street in Tehran

(Corrects the spelling of Farzad Hashemi's name)

Under sanctions imposed by the U.S. and its allies, dollars are hard to come by in Iran. The rial fell from 20,160 against the greenback on the street market in August to 36,500 rials to the dollar in October. It’s settled, for now, around 27,000. The central bank’s fixed official rate is 12,260. Yet there’s one currency in Iran that has kept its value and can be used to purchase goods from abroad: bitcoins, the online-only currency.

Created in 2009 by a mysterious programmer named Satoshi Nakamoto, bitcoins behave a lot like any currency. Their value is determined by demand, and they can be used to buy stuff. Bitcoin transactions are encrypted and handled by a decentralized global network of tens of thousands of personal computers. Merchants around the world accept the currency, from a bakery in San Francisco to a dentist in Finland. Individuals who own bitcoins and wish to exchange them for physical currencies like euros or dollars can use exchange sites such as localbitcoins.com, a Finland-based site founded by Jeremias Kangas. “I believe that bitcoin is, or will be in the future, a very effective tool for individuals who want to avoid sanctions, currency restrictions, and high inflation in countries such as Iran,” Kangas wrote in an e-mail.

The advantage for Iranians is that bitcoins can be swapped for dollars that can then be kept outside the country. Another plus: Regulators can’t easily track the transactions, since bitcoins aren’t issued from a central server. Bitcoin users can conduct business on virtual private networks, which hide customers’ identities.

At online store coinDL.com, shoppers can use bitcoins to buy Beyond Matter, the latest album from Iranian artist Mohammad Rafigh. Anyone in the U.S. downloading songs, which fetch .039 bitcoins or 45¢ each, risks violating U.S. sanctions. That doesn’t bother Rafigh, who’s studying computer engineering as well as playing music. “Bitcoin is so interesting for me,” Rafigh wrote in an e-mail. “I wish the culture of using digital money spreads all over the world, because it does not have any dependency on anything like politics.” Rafigh has translated some bitcoin software into Farsi for his friends. “I love Iran, and if bitcoin is good for me, it can be good for more Iranians like me.”

Iranian-American bitcoin consultant Farzad Hashemi recently traveled to Tehran and talked up bitcoin to his friends. “They are instantly fascinated by it,” he says. “It’s a flash for them when they realize how it can solve their problems.” Iranians working or living abroad can send bitcoins to their families, who can use one of the online currency matchmaking services to find someone willing to exchange bitcoins for euros, rials, or dollars. Bitcoins are useful to Iranians wishing to move their money abroad, either to children studying in Europe or America or simply to stash cash in a safe place.

As the value of the rial plunges, many Iranians are trying to acquire foreign currencies. “We have no idea what will happen,” says Amir-Hossein Madani, who says he’s traded tens of millions of street market dollars in Tehran over the past two years. “These days prices change every 10 minutes.”

The uncertainty has led some Iranian software developers to ask clients to pay them in bitcoins. “Anyone with a computer is able to own, send, and receive them. You can be at an Internet cafe in Iran and managing a bitcoin account,” says Jon Matonis, a founding board member of the Bitcoin Foundation, a Seattle nonprofit that promotes the currency. The exchange rate in Iran is 332,910 rials per bitcoin. It isn’t known how many Iranians use bitcoins to skirt sanctions. According to localbitcoins’ Kangas, 32 people in Iran have contacted each other through his site.

An internal FBI report in April expressed concern over the online currency. The report was leaked to Wired and Betabeat. “Since Bitcoin does not have a centralized authority, law enforcement faces difficulties detecting suspicious activity, identifying users, and obtaining transaction records—problems that might attract malicious actors to Bitcoin,” says the report. For now, Iranians are using bitcoins to maintain a fragile connection to the outside world.

Need Bitcoins? This ATM takes dollars and funds your account

Zach Harvey, right, and Matt Whitlock created this ATM that accepts dollar bills and instantly converts them to the alternative Bitcoin currency.

(Credit: Declan McCullagh/CNET)

NASHUA, N.H. -- Zach Harvey has an ambitious plan to accelerate adoption of the Internet's favorite alternative currency: installing in thousands of bars, restaurants, and grocery stores ATMs that will let you buy Bitcoins anonymously.

It's the opposite of a traditional automated teller that dispenses currency. Instead, these Bitcoin ATMs will accept dollar bills -- using the same validation mechanism as vending machines -- and instantly convert the amount to Bitcoins and deposit the result in your account.

"It's even easier than just using a regular ATM," says Harvey, 33, who demonstrated the device to CNET this weekend at the Free State Project 's annual Liberty Forum. "You could probably do it in about five seconds. The thing that would take the longest would be the bill validator taking in the dollar."

Harvey and Matt Whitlock are partners in a New Hampshire-based venture, Lamassu Bitcoin Advisors. that's hoping to commercialize the ATM by selling to retail businesses, especially ones that also want to accept the decentralized alternative currency from customers.

"If we made these machines somewhere around $1,000 to $1,500 each, depending on the commission, they could be able to buy this and make it back within a reasonable period of time," Harvey says.

Bitcoin has gradually increased in popularity since it appeared in 2009, with WordPress saying last fall that it would accept it as a payment method, and a handful of retail businesses, including Cups and Cakes Bakery in San Francisco, following suit. The exchange rate now hovers around US$30 a coin, and about $300 million is in circulation.

The inventors want to place this Bitcoin ATM in thousands of bars, restaurants, and grocery stores. This prototype charges a 1 percent transaction fee. (Click for larger image.)

(Credit: Declan McCullagh/CNET)

The technology represents an easy way to transfer funds across national borders, a process that currently can be slow and cumbersome with wire transfers. Bitcoin is less risky for online sellers than accepting credit cards, which can be disputed by customers. While not truly anonymous. it can be relatively private -- and is far more difficult for the U.S. or other governments to trace.

Unlike modern currency, which can be brought into existence at the whim of politicians or a central bank, leading to each note being devalued, the number of Bitcoins is governed by predictable mathematical algorithms. That's made Bitcoin popular among libertarians and other activists skeptical of the Federal Reserve; the Free State Project accepts payment for its summer festival in Bitcoins, for instance. (The U.S. dollar has lost 96 percent of its value over the last century because of cumulative year-over-year inflation, according to federal government data .)

Harvey came up with the idea of a Bitcoin ATM when living in Tel Aviv and running an online guitar retailer, StompRomp.com. that accepted payments in the currency. He said accepting Bitcoin was more reliable and safer than dealing with charge-backs, credit card fraud, and "scam sales from certain Asian countries like Malaysia or Indonesia."

To obtain Bitcoins, people use an iPhone app like Blockchain or Android 's BitcoinSpinner to show the ATM a QR code with their desired address for payments. After they insert a dollar bill (denominations up to $100 are accepted), the ATM automatically credits their Bitcoin account with the proceeds. There's a 1 percent transaction fee.

"Even people who have been in the Bitcoin world for a while and have used every type of exchange are blown away by the simplicity of this machine," Harvey says. "I'm just putting in a dollar. Before they really know what's going on, their phone tells them, 'You have Bitcoin.'"

Jeff Berwick on the Angel Clark Show: Bitcoin will go to a million dollars!

Bitcoins Are Digital Collectibles, Not Real Money

The bitcoin logo (Photo credit: Wikipedia)

In case there is any doubt after yesterday’s market action, Bitcoins are not money. They also can never be money, in the sense of providing an alternative to the U.S. dollar for operating the U.S. economy. Rather, they are “digital collectibles,” the cyber equivalent of rare postage stamps.

Money has three basic functions, and Bitcoins don’t do a good job of performing any of them.

First, money provides our fundamental unit of market value, the yardstick against which the market value of everything else in the economy is expressed. For example, a car might be 200 inches long, weigh 4000 pounds, go 120 miles per hour, and cost $50,000. These numbers express data concerning the car, as measured in the American units of length, weight, time, and market value.

The most important thing about any unit of measure is that it has a constant, unchanging magnitude. Since President Nixon abrogated the Bretton Woods gold standard in August 1971, the dollar has not provided a particularly stable unit of market value. However the Bitcoin is far worse in this respect.

On April 9, the market value of the Bitcoin closed at $233. During trading yesterday, the Bitcoin popped up to $266 and plunged to $105 before closing at $130. This left it down by 44.2% on the day in terms of dollars and by 43.3% in terms of gold.

Over the past two months, the value of the Bitcoin in dollars has varied between 15.4% and 204.6% of its April 10 closing value. During the same period, the price of gold in dollars has ranged between 98.4% and 105.7% of its April 10 close.

It would not be possible to base an economy on a currency whose real value was as volatile as the Bitcoin’s. For one thing, money is used to mobilize society’s capital to create real, productive assets, like factories and chemical plants. Obviously, no one could take the risk of buying or selling 10-year bonds denominated in Bitcoins, when the long-term real value of the Bitcoin is so uncertain.

Interestingly enough, as a unit of market value, the Bitcoin suffers from the same basic flaw as our fiat dollar. At any given moment, the supply of the “currency” is fixed, and the market is asked to determine the value of the monetary unit via supply and demand. In contrast, a good monetary control system would fix the value of the currency unit (in terms of gold or something else real) and then adjust the size of the monetary base on a moment-by-moment basis in order to maintain this value in the markets.

The second major use of money is as a medium of exchange. While it is possible today to use Bitcoins to purchase certain items, it would not be possible to substitute Bitcoins for dollars on a large scale. As of the end of March 2013, the U.S. monetary base was $2,961 billion and there were only about 8 million Bitcoins in existence.

To replace our entire dollar base money with Bitcoins would require that each Bitcoin be valued at more than $370,000. Perhaps this fact is what drove speculators to bid up the price of the Bitcoin to $266 yesterday.

Also, by design, there can never be more than 21 million Bitcoins, and that number won’t be reached until 2040. As a practical matter, this means that Bitcoins were never designed to be used as money. Whether this was intentional or not doesn’t matter. It is simply a fact that there will never be enough Bitcoins to use as a substitute for the dollar. No modern economy could survive the constant, grinding deflation that having a fixed monetary base would eventually produce.

The third important function of money is that it provides a way to hold wealth in a completely liquid form. The volatility of the real value of the Bitcoin makes it completely unsuited for this role. However, Bitcoins carry with them an additional risk that is not shared by the dollar. They could all simply vanish into the ether from which they were “mined.”

In the computer world, there is no security without physical security, and it is not possible to protect a computer system from its own administrators. Consider the following account of Bitcoin events in 2010, taken from Wikipedia:

On 6 August, a major vulnerability in the bitcoin protocol was found. Transactions weren’t properly verified before they were included in the transaction log or “blockchain” which allowed for users to bypass bitcoin’s economic restrictions and create an indefinite amount of bitcoins.[27][28]

On 15 August, the major vulnerability was exploited. Over 184 billion bitcoins were generated in a transaction, and sent to two addresses on the network. Within hours, the transaction was spotted and erased from the transaction log after the bug was fixed and the network forked to an updated version of the bitcoin protocol.

Obviously, the same people who erased the 184 billion phony Bitcoins could erase the 8 million “real” ones. Money always involves trust, and in the case of Bitcoins, you don’t even know whom you are trusting.

Given all of the hair on the Bitcoin dog, what accounts for all of the interest in Bitcoins? Actually, we have seen this phenomenon before.

During the 1970s, as inflation rose and public anxiety rose with it, ads advocating “investment” in “collectibles” started to appear. Financial advisors began recommending that people keep 10% of their net worth in “alternative investments,” including not only precious metals like gold, but “luxury valuables and collectibles.”

An unstable dollar is deeply frightening to people. Fear of inflation (and the societal breakdown that it can bring) motivates citizens to do things that, from the standpoint of the economy as a whole, are really dumb. One such dumb thing is to devote real resources to producing and squirreling away “collectibles.”

One company that was prominent in the collectibles business during the 1970s was the Franklin Mint. Near the peak of the inflation bubble in 1980, Warner Communications (now part of Time Warner) bought the Franklin Mint for about $225 million. Six years later, after Ronald Reagan and Paul Volcker had crushed the inflation, Warner sold the company for $167.5 million. “Collectibles” turned out to be not such a hot investment after all.

Bitcoins are nothing more than digital collectibles. They are bought by speculators to hedge against inflation. Stabilize the U.S. dollar and all interest in Bitcoins will vanish.

Digital 'bitcoin' currency surpasses 20 national currencies in value

An illustration of the "bitcoin," a virtual currency currently selling for more than $90 U.S. Dollars.

More than $1 billion dollars worth of a digital currency known as "bitcoins" now circulate on the web – an amount that exceeds the value of the entire currency stock of small countries like Liberia (which uses “Liberian dollars”), Bhutan (which uses the “Ngultrum”), and 18 other countries.

So what is a “bitcoin,” and why would anyone use it?

Unlike traditional currency, bitcoins are not issued by a government or even a private company. Instead, the currency is run by computer code that distributes new bitcoins at a set rate to people who devote web servers to keep the code running. The bitcoins are then bought and sold for regular U.S. dollars online.

'They buy gold, they put it under the mattress, or they buy bitcoin.'

- Tony Gallippi, the CEO “BitPay.com,

Bitcoin is in high demand right now -- each bitcoin currently sells for more than $90 U.S. dollars -- which bitcoin insiders say is because of world events that have shaken confidence in government-issued currencies.

“Because of what's going on in Cyprus and Europe, people are trying to pull their money out of banks there,” Tony Gallippi, the CEO “BitPay.com,” which enables businesses to easily accept bitcoins as payment, told FoxNews.com.

In Cyprus, the government is considering taking a percentage of all citizens’ bank accounts to solve its fiscal woes. That has led Cypriots -- and other Europeans worried about the same thing happening to them -- to take their money out of banks.

“So they buy gold, they put it under the mattress, or they buy bitcoin,” Gallippi said.

Bitcoin demand has also increased, Gallippi says, because last week U.S. regulators issued the first official guidelines for private digital currencies. Prior to the regulations, the legal status of the currencies was in doubt.

“Now people can see that it's not illegal, that it's not banned,” Gallippi said.

Bitcoin is controversial because the currency can be exchanged anonymously online -- it is in a sense the digital equivalent of using hard cash -- and so some have criticized it for facilitating online drug markets. On the site known as "the Silk Road," for instance, users pay bitcoins for illegal drugs and other forbidden items.

Bitcoin Targeted by Cyberattack

Just as Bitcoin explodes beyond the $1 billion mark thanks to Europe’s debt crisis, the emerging virtual currency was dealt a setback this week after a key exchange was hit by a powerful cyber attack that caused delays.

In a 2011 letter to the Attorney General, Senators Charles Schumer (D-NY) and Joe Manchin (D-W.Va.) argued for strict enforcement .

“After purchasing bitcoins through an exchange, a user can create an account on Silk Road and start purchasing illegal drugs from individuals around the world and have them delivered to their homes within days,” the Senators wrote. “We urge you to take immediate action and shut down the Silk Road network.”

But the Silk Road is still running, and a recent study estimates that $23 million dollars of illicit items are sold for bitcoins on the site every year.

The regulatory guidelines issued last week by the government agency known as the Financial Crimes Enforcement Network (FinCEN), however, will not stop that.

The regulations say that digital currencies like bitcoin are to be treated essentially as foreign currencies. Companies that exchange digital bitcoins for real money will have to comply with the same regulations as traditional currency exchangers -- namely, they must verify the identity of anyone exchanging money for bitcoins and report large transactions to the government.

Using bitcoins to purchase goods, however, is specifically exempted.

“A user who obtains convertible virtual currency and uses it to purchase real or virtual goods or services is not… under FinCEN’s regulations,” the guidance reads.

Some bitcoin defenders say the use of bitcoins to buy illegal items shouldn’t obscure the legal uses.

“With any technology… Criminals are going to use it for something, and regular people are going to use it for something,” Gallippi said. “You can't ban cell phones just because criminals are using them to do drug deals. You can't ban e-mail just because people are using them to do phishing scams in Nigeria. You have to start just prosecuting people who are committing crimes -- you can't just completely wipe out the new technology.”

Gallippi says one reason to use bitcoins for legal transactions is a lower risk of identity theft.

“If you are buying something online and you have the choice of paying with a credit card or bitcoins – think about what you have to do to use a credit card. You have to fill out this whole long form, name, address, account number, sometimes more. coincidentally, that’s all the info a thief would need to steal to pretend to be you.”

Between that, bitcoin’s anonymity, and worries about conventional currency, bitcoin demand is as high as ever, according to Alan Safahi, who runs “Zip Zap” – a company that facilitates cash deposits at stores like CVS and Wal-Mart for transfer to a site that can convert the money to bitcoins.

“We’re processing millions of dollars a month. We’ve seen tremendous surge in activity,” he said.

Contact the author at maxim.lott@foxnews.com .