Bitcoins are called “the currency of the future” by virtual money enthusiasts who have embraced the online substitute for credit cards that is popping up at small retailers around the country.
The California Department of Financial Institutions (DFI) calls use of them an illegal money transaction and issued a cease and desist order to the Bitcoin Foundation. Citing California financial code, the department warned that, “No person shall engage in the business of money transmission in California without first obtaining a license from the Commissioner of Financial Institutions.”
Bitcoins aren’t real, in the sense that you can jangle them in your pocket, lose them under couch cushions or stash them in a bank. They are electronic creations, generated by a mathematical algorithm and traded on open exchanges that have been around since 2008. Beth Pinsker at Reuters says there are 11 million Bitcoins currently in circulation worth an estimated $1.2 billion.
Users who want to accumulate Bitcoins and spend them at participating merchants download open-source software that facilitates an online account, which functions as a “wallet.” Purchases are made at participating retailers through relatively anonymous peer-to-peer connections, outside the prying eyes of government and law enforcement.
The original user base was hackers and other technologically adventurous sorts who helped earn Bitcoins a reputation as a way to conduct nefarious business. It doesn’t help that Satoshi Nakamoto, credited with developing Bitcoins, is actually a pseudonym for an unknown person—or group—although The New York pegged a graduate student at Trinity College in Dublin and Fast Company pointed a finger at three people and their Bitcoin-like encryption patent application.
Bitcoins are bought and sold at variable prices on exchanges, presenting investment opportunities to those who like to gamble in markets. They got the public’s attention early in April when the price of Bitcoins—which had traded at $7.20 on January 12, 2012, doubled in six months, hit $49 in March of this year—skyrocketed to a high of $266 before diving to its present price of $100.
The subject of the state’s cease and desist order, Bitcoin Foundation, is more of a lobbying group than a facilitator of financial exchange, prompting some head scratching among observers. But it comes at a time when the federal government and other states, most prominently New York, are warning Bitcoin exchanges about adhering to regulations that apply to more conventional financial institutions.