Bitcoin seems to be everywhere these days. What was once anesoteric topic discussed only by mathematicians, cryptographers,end-of-the-world doomsday predictors, and the occasional conspiracytheorist has grabbed front-page headlines around the world andbecome a leading topic presented at financial services industryevents. Regulators, journalists, bankers, consultants, and venturecapitalists have poured time, money, and energy into understandingwhat a bitcoin is and trying to determine how the virtual currencyfits into the global payments landscape.

The bitcoin payment mechanism emerged in 2008 under extremelymysterious circumstances. The term “bitcoin” was supposedly coinedby someone named Satoshi Nakamoto, who wrote a paper titled“Bitcoin: APeer-to-Peer Electronic Cash System.” As of this writing, noknown individual, organization, agency, or government has evermaintained that it created the bitcoin infrastructure or technologyplatform. Various theories have been floated, and a few mainstreampublications—including The New York Times and FastCompany—have launched serious investigations, but so far noone really knows how bitcoin payments got their start.

The bitcoin currency is entirely digital. Although publicationssometimes use photo montages of gold-embossed coins to accompanyarticles about bitcoins, these are purely mock-ups. Bitcoins do notexist in the physical world; the best way to think of a bitcoin isas a long sequence of data. Individuals who want to makebitcoin-denominated purchases can buy the currency through one ofseveral exchanges, including Bitstamp; Kraken; CampBX; and Mt. Gox, which is the most prominentand popular. Bitcoins' value fluctuates vis-à-vis the U.S. dollarand other traditional currencies. Users can track exchange rates atsites such as bitcoinexchangerate.org andpreev.com. Through most of 2013, theprice of a bitcoin has hovered in the $100 to $140 range, but itfluctuated from a low of US$20 in January to around US$220 inApril, and it's back up to just over US$240 today.

Owners of bitcoins transact using an open-source, peer-to-peerfile-sharing technology that is similar in many ways to themusic-sharing Napster technology from the late 1990s. Each bitcointransaction utilizes cryptography—the mathematical science thatgoes into keeping communications secure from unwanted thirdparties—to protect the identity of its owners while ensuring thetransaction's integrity. Each transaction is time-stamped and ispermanently recorded in a public ledger called the“blockchain.”

A secondary market for bitcoins is beginning to appear, but itdoes not yet represent a strong and viable platform forspeculation. For people who are technologically challenged, twooptions for bitcoin investments are the SecondMarketBitcoin Investment Trust and the Winklevoss BitcoinTrust—launched this summer by the famous Winklevoss twins, who wereinvolved in the lawsuit against Mark Zuckerberg enshrined in the2010 film “The Social Network.” These vehicles enable investors toput money into bitcoins without actually directly trading in thecurrency, in much the same way that an investor might elect to funda REIT mutual fund rather than buy a piece of real estatedirectly.

Bitcoins Gain Purchase in the Public Eye

Payments experts tend to think that bitcoin-denominated paymentsappeal primarily to three groups of people. First are people whobelieve the virtual currency is a good mechanism for speculation,and that the bitcoin will soon be a highly valuable commodity.Second are people who inherently distrust authority. Theseindividuals find the notion of anonymity appealing and considerbitcoin transactions to be less traceable than deals made intraditional currencies, since bitcoin has no central bank orcentral banker. Finally, the bitcoin platform appeals to criminalswho are trying to cover their tracks—money launderers, terrorists,and the like. In theory, they can avoid scrutiny by any governmentif they use bitcoin payments to move funds, compensate employees,and initiate other types of transactions. ZDNet has referred to the bitcoin platform as “the world'slargest floating black market.”

In early 2012, the mainstream media and investors began paying agreat deal of attention to the potential inherent in bitcoin-basedbusinesses. Venture capital funds in California started fundingstartups that manage, trade, track, and process bitcoin-denominatedpayments. With names like Coinbase, Vaurum, Coinsetter, Tradehill, CoinLab, BitInstant, Gliph, Alydian, BitPay, and TruCoin, these various startupsremain at the vanguard of the emerging payments mechanism.

At the same time that funding began flowing into the communityof bitcoin-related startups, the platform was involved in a numberof very public incidents that demonstrated its ability to capturethe attention of the mainstream media and the public. Severalhigh-profile renegades began accepting donations from theirsupporters via bitcoin exchanges. Julian Assange's WikiLeaksorganization has reportedly received nearly $500,000 in bitcoindonations since the late-2010 blockage of donations to WikiLeaks byBank of America, Visa, MasterCard, PayPal, and Western Union. Morerecently, the legal fund for Edward Snowden, the alleged U.S.National Security Agency (NSA) leaker, supposedly received $13,000in bitcoin-based contributions within the first two weeks of itslaunch.

Then, in September 2013, the U.S. FBI shut down the drug marketwebsite called “Silk Road.” In doing so, the agency specified thevolume of bitcoin currency that it had seized. This was one of thefirst investigations to mention bitcoin so explicitly, and the ideaof bitcoins as a viable currency for legitimate businesses suffereda bit as a result of the publicity.

It remains to be seen whether virtual currencies will gainwidespread acceptance among typical consumers and businesses.However, regulatory bodies in numerous countries are studying themand weighing in on their legitimacy, which indicates that manypeople believe virtual currencies will remain with us in some formin the future.

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What's a Corporate Treasurer to Do?

Despite the brouhaha that's arisen when people like theWinklevoss twins have become involved in the market, bitcoins arecurrently an impractical means of payment for mostbusiness-to-business and business-to-consumer transactions. Of theapproximately 10 million to 11 million merchants in the UnitedStates, the number of legitimate businesses accepting bitcoins forpayment remains very small—although it does run the gamut fromtourism agencies and restaurants to technology and otherbusiness-services firms. Sites such as spendbitcoins.com, bitcoinlocator.com, and usebitcoins.info provide visual mapsthat show people where they can spend their bitcoins. QugelmaticBooks, Gadgets Direct, and Alpaca Socks all acceptbitcoin-denominated payments, as do WordPress, WikiLeaks, KhanAcademy, and diasporafoundation.org (the Facebook competitorfocused on privacy).

Only time will tell whetherbitcoin payments will become ubiquitous in day-to-day transactionsaround the exchange of legitimate goods and services. It isreasonable to assume that most companies won't be transacting invirtual currencies for at least another 12 to 18 months. However,as bitcoins grow in popularity (and notoriety), corporate treasuryprofessionals need to keep an eye on the crypto-currency. Having agrasp of the technology, approach, and attitudes of the appropriateregulatory authorities will enable treasurers to perform their jobsmore cogently.

Corporate treasurers who think their organization might make orreceive bitcoin-denominated payments at some point in the futureneed, first and foremost, to track what regulators in thejurisdictions in which their company operates are saying aboutvirtual currencies. Around the world, there appears to be verylittle regulatory consistency. For instance, Thailand and Germanyhave responded in almost opposite manners.

Thailand has issued guidance that bitcoins should not be used inThailand, nor in exchange for the Thai baht, until the Bank ofThailand has an opportunity to consult with other relevantregulators and ministries in the Thai government. Tangibly, whatthis means is that Thai-based bitcoin operators who apply forlicenses to serve as exchanges must discontinue their operationsuntil final rules are confirmed. In contrast, the Finance Ministryin Germany opted to formally recognize the bitcoin as what it callsa “unit of account” appropriate for private transactions. Thisruling also provides the German tax authorities with the right totax such accounts for sales on purchases and capital gains oninvestments; of course, this right to tax assumes that theanonymity issues involved in owning bitcoins can be resolved, whichis questionable.

In the United States, the Department of Treasury's FinancialCrimes Enforcement Network (FinCEN) issued a document in March 2013titled “Applicationof FinCEN's Regulations to Persons Administering, Exchanging, orUsing Virtual Currencies,” which states that bitcoin operatorsmust register as money services businesses (MSBs) and comply withtraditional anti-money laundering regulations. Some states withinthe U.S. have developed their own bitcoin-related policies orindependently undertaken enforcement actions. For example, in May2013, California's Department of Financial Institutions sent acease-and-desist order to the Bitcoin Foundation. Then in August2013, New York State's Department of Financial Services subpoenaed22 companies that deal in bitcoin payments in order to learn moreabout how that market operates.

In 2004, Eric M. Jackson wrote an excellent book titled ThePayPal Wars: Battles with eBay, the Media, the Mafia, and the Restof Planet Earth. It details the rise—and the manyalmost-falls—of PayPal in its early days. A few sections describePayPal's interactions with specific state regulators. The talesseem almost prescient when it comes to the current bitcoindebates.

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Where Will Bitcoins Go From Here?

It's reasonable to expect bitcoins to remain a fairly marginalfinancial services instrument for the foreseeable future.

Corporate treasurers who are asked to weigh in on whether theirorganization should accept virtual currencies such as bitcoinswould be wise to take a wait-and-see approach. In the absence ofstrong market demand, it may not make sense to accept bitcoinsand/or bitcoin-denominated transactions until the various legalissues are resolved by both FinCEN and the New York StateDepartment of Financial Services. Treasurers whose organization ismoving forward with making or receiving bitcoin-denominatedpayments need to ensure that their colleagues in risk managementand compliance have put in place appropriate controls that willprevent them from getting into trouble with regulatory and lawenforcement officials.

Only when regulators have become comfortable with the idea of avirtual currency, and when the public at large is ready to beginmaking bitcoin payments widely and proudly, will the averagecorporate treasury team be forced to start engaging inbitcoin-denominated transactions. By then, bitcoin may even havecompetition. Although bitcoins are currently the most well-knownand widely used virtual currency, alternative crypto-currenciessuch as litecoin and Peercoin are slowly gaining a footholdas well.

Despite the uncertainty, the concept of a virtual currency isintriguing, and it will be fascinating to watch the bitcoin taleunwind over the next few years.

Joram Borenstein is vicepresident for NICE Actimize. He is a recognized expert in financialcrime, anti-fraud, payments protection, consumer identityprotection, risk management, IT audit, and compliance who hasinstructed regulators from the U.S. FDIC, the Office of theComptroller of the Currency (OCC), the Office of Thrift Supervision(OTS), the Federal Reserve, and the National Credit UnionAdministration (NCUA).