2015 was a banner year for bitcoin. It brought some key developments for the digital currency’s acceptance, particularly by the financial sector. But like every year since its 2008 debut, bitcoin’s progress came with challenges.
Bitcoin has not been embraced by enough consumers, businesses and government to be called a mainstream currency or commodity. But 2015 brought more signs that it is on the right path, and its naysayers have never been more discredited.
There is no question that 2015 has brought a change in tone of the conversation surrounding bitcoin.
Bitcoin’s price, as measured by the exchange rate versus the U.S. dollar (BTC/USD) spent most of the year relatively stable. The price began the year at $313.92, then slid below $200 early in January before recovering. It stayed in a $200-to-$300 range until surging at the end of October.
By Nov. 3, the price surpassed the $400 ceiling to $408.74 on Nov. 4 before falling to $3.12.58 on Nov. 11. It then began on an upward trend, hitting $463.58 on Dec. 18.
A Respectable Fluctuation
A range that represents 50 percent fluctuation is not generally viewed as stable for a currency, but following a couple of years when ranges were in the hundreds of percentage points, that range can be seen as fairly stable, according to financial advisor Martin Tillier, writing in a NASDAQ analysis. In addition, it must be kept in mind that bitcoin is still a new currency. Emerging market currencies experienced the same amount of volatility in 2015.
The price stability was also noteworthy in that it happened in a year in which bitcoin continued to experience negative publicity. In June, the government sentenced Silk Road founder Ross Ulbricht to life in prison, bringing attention to the “dark side” of cryptocurrencies. There was also the revelation that Islamic State and other terror groups use bitcoin to facilitate the movement of money.
Nor was 2015 without its share of excitement. The end of the year brought the news that Satoshi Nakomoto, the mysterious creator of bitcoin, had been identified as 44-year-old Australian entrepreneur Craig Wright. The quiet that has followed that excitement, however, along with the fact that similar stories have run in the past and faded, suggested it to be just another false alarm.
The Real Bitcoin News
The real news in 2015 was neither bitcoin’s price nor the more sensational stories surrounding it.
It was the growing recognition of the benefits of blockchain technology. The blockchain can record, regulate and enable transactions in ways that alleviate some of the tasks currently required for transactions. This recognition took the form of numerous trial projects by big, mainstream Wall Street firms in 2015.
A global consortium of major banks and financial institutions began looking to tap into blockchain technology, headed by New York-based technology firm R3. The consortiaum had a total of 30 global banks in late November.
“(I’m) a passionate believer in the transformative power of technology,” Jenkins said in late November. “It is an unstoppable force, which often has a hugely positive impact in the way we live and work.”
“What got much of the bitcoin community and even the mainstream media aerated was the increasing use of ‘blockchain technology’ in trial projects sponsored by large, mainstream Wall Street firms,” NASDAQ’s Tillier wrote.
One international banking researcher went as far as to say the blockchain could potentially upend the existing post-trade infrastructure and make financial companies redundant. Johann Palychata, a research analyst at BNP Paribas Security Services, made this observation in an issue of bank’s publication. This article marked the first time a major bank acknowledged bitcoin’s disruptive potential of the existing post-trade infrastructure, according to financial observers.
Meanwhile, IBM announced an open source project called the “Open Ledger Project” overseen by the Linux Foundation and includes technology and banking giants. The Open Ledger Project seeks the creation of a “pseudo-private” but open-source ledger that would have applications beyond its participants. The group views the project as a way to create a public network of interoperable custom blockchain applications to be developed by businesses.
In late December, CCN reported JPMorgan plans to invest $9 billion in technology like the blockchain and robotics. The report cited a memo claiming a major JPMorgan priority is to pursue innovative technologies in which the company has been investing. The company also invested in Prosper, a peer-to-peer lender, Square, a payment startup, and others.
The memo was consistent with comments JPMorgan CEO Jamie Dimon, made in his annual letter to shareholders in April. Dimon noted that “Silicon Valley is coming” and banks need to catch up or be taken over by tech companies. He said there were hundreds of startups working on traditional banking alternatives.
Bitcoin’s Profile Rises
Wall Street’s interest in bitcoin earned it high-profile stories in The Economist and Bloomberg Business Week in 2015.
The Economist ran an article titled “The magic of mining,” which said bitcoin mining has become a big, ruthlessly competitive business.
Bitcoins, The Economist said, have three useful qualities in a currency: they are hard to earn, limited in supply and easy to verify. The article did not sugarcoat bitcoin, noting that stability has been a challenge for the currency.
“The price collapse and the exchanges’ woes do not tell the whole story, though: increasing numbers of businesses are accepting payment in bitcoin, including Time Inc. and Microsoft; and whatever the fate of bitcoin, the technology may spawn a range of alternative crypto-currencies and provide the basis for other businesses involving such things as the transfer of assets,” The Economist wrote.
The October cover of Bloomberg Business Week carried a photo of Blythe Masters, who left JPMorgan to become CEO of Digital Asset Holdings, a New York startup that is designing software to enable investors, banks, and other market players to use the blockchain to change the way they trade bonds, loans, and other assets.
In November, the U.S. TV show “60 Minutes” described how the M-Pesa mobile payment system has become a significant tool for everyday Kenyans, most of whom don’t even have bank accounts. Mobile payments have provided access to necessities to this third world country. Rural Kenyan households that adopted M-Pesa saw incomes increase by 5% to 30%. The segment described Kenya as a giant laboratory for defining the future of money.
Support Blockchain, Ditch Bitcoin?
While the financial community seemed to embrace the blockchain in 2015, many of these firms went out of the way to point out they did not see a future for bitcoin.
“Separate currency from blockchain,” Dimon of JPMorgan, one of the first banks to join the R3 consortium, said at the Fortune Global Forum in June. “My belief is that there’s not going to be virtual currencies. They may be small,” he added, noting that governments will not “put up” with it.
Some bitcoin observers characterized the financial community’s embrace of the blockchain as an attempt to purchase bitcoin’s underlying technology, the blockchain. They viewed this as a sign of big business resorting to buying a technology that it cannot stop with lawsuits or logic.
These observers expressed concern that Wall Street wanted to co-opt the blockchain while ditching bitcoin. But as others have pointed out, there are reasons this is not likely to happen.
Rupert Hackett, the community manager of Australia-based buyabitcoin.com.au, noted in Venture Beat the reason banks have become interested in blockchain technology is they see it as a way to respond to a competitive threat that bitcoin poses to traditional money.
While many institutions currently claim to be interested in block chain technology but not bitcoin, they ignore the fact that you need a cryptocurrency to make a blockchain. Hackett views hyping the blockchain while demeaning bitcoin is an effort to blunt bitcoin’s challenge to traditional currency.
“The statement ‘I’m big on blockchain but not Bitcoin’ really means you want the innovative technology without its decentralization, a separation that has yet to be proven possible,” Hackett wrote.
It is far more likely that the added legitimacy will drive interest in bitcoin and, as a result, boost transactions.
Meanwhile, controversy continued to characterize bitcoin in 2015. The conviction and sentencing of Ross Ulbricht in 2015 following his 2013 arrest ranks with the early 2014 Mt. Gox shutdown was one of the most dramatic bitcoin stories to date.
A court convicted Ulbricht in February of seven felony charges including drug trafficking, conspiracy to commit money laundering, conspiracy to commit computer hacking and a kingpin charge. The court accused him of being “Dread Pirate Roberts,” the creator and operator of the online black marketplace, Silk Road. In May, he was sentenced to life in prison in Federal District Court in Manhattan.
A 90-minute, EPIX documentary, “Deep Web,” premiered on EPIXHD.com exploring the World Wide Web, a secretive alternate Internet. The cyberspace has served as an outlet for anonymous communication and was home to Silk Road, the black market known for drug trafficking, the documentary noted. Silk Road combined the anonymity of cryptocurrency with the security of the Deep Web.
The documentary also focused on the Deep Web’s architects, including anarchistic cryptographers who developed tools for the military in the early 1990s. The film examined the dissident whistleblowers and journalists who sought refuge in this seemingly secure environment.
Other criminal activity connected to Silk Road came to light in 2015.
Former federal agents Carl Mark Force IV, who worked for the Drug Enforcement Administration, and Shaun Bridges, who worked for the Secret Service, faced charges for wire fraud, money laundering and, in Force’s case, stealing government property. Force was sentenced to 78 months in prison while Bridges received 71 months.
Federal law enforcement officials in New York also announced charges against Roger Thomas Clark, a senior Ulbricht adviser who went by the online names of “Variety Jones,” “Cimon,” “VJ,” and “Plural of Mongoose.” He allegedly advised Ulbricht on all aspects of Silk Road operations. Clark, arrested on Dec. 3, 2015 in Thailand, was pending extradition to the U.S. in July.
Adding to the drama was a cadre of Ulbricht supporters. One of the best known was Russell Brand, an actor, activist and comedian.
Russell Brand Defends Ulbricht
“He saw a new market and he went for it,” Brand said of Ulbricht. “Is that any different than the genesis of Coca-Cola or General Motors or Philip Morris? GM kills their customers, Philip Morris kills their customers, Coca-Cola kills their customers and workers. This guy is just an entrepreneur.”
There were other high-profile bitcoin crime stories in 2015.
In January, The U.S. Securities and Exchange Commission (SEC) charged Homero Josh Garza, founder of GAW Miners and ZenMiner with conducting a Ponzi scheme and securities fraud. Garza allegedly carried out the fraud through his two companies GAW Miners and by falsely claiming to produce bitcoin hashing power that GAW did not own.
In November, Japanese prosecutors charged Mt. Gox CEO Mark Karpeles with embezzlement over the loss of hundreds of millions of dollars’ worth in bitcoins. Karpeles was taken into custody in Tokyo in October over the disappearance of Mt. Gox funds. Authorities later re-arrested him for stealing 321 million yen (HK$20 million) worth of bitcoin, providing authorities another three weeks to press charges.
Bitcoin Regulation Moves Forward
2015 was certainly a big year for bitcoin regulation, for better or for worse, depending on one’s point of view.
HM Treasury, the U.K. government’s economic and finance ministry, in March announced plans to apply anti-money laundering regulation to digital currency exchanges in the U.K. as part of a plan to promote its legitimate use. The goal, according to a 28-page document, is to support innovation and prevent criminal use.
This measure was in response to a public call for input published in November on developing digital currency regulations. That call generated 120 responses from digital currency developers, businesses providing digital currency-related services, banks, payment scheme providers, academics, consultants, and other government agencies.
Nowhere was there more regulatory initiative than in the U.S., the most active bitcoin market.
In January, California became the first U.S. state to officially approve the use of bitcoin when passing a bill, AB 129, that repealed Section 107 of the California Corporations Code. This prohibited any corporation, association or individual from putting in circulation as money, anything but the lawful money of the U.S. The new law, therefore, paves the way for, and pre-empts the possibility of anyone construing Section 107 as prohibiting the use of, bitcoin in the state of California. Gov. Jerry Brown signed AB 129 into law on June 28, 2014. It was filed with the California secretary of state the same day, but it was set to take effect in 2015.
New York’s BitLicense Arrives
In June, New York became the first U.S. state to issue a strict set of cryptocurrency regulations when its department of financial services released its “BitLicense.” The 44-page document provides a framework for “virtual currency” businesses to operate in the State of New York.
The BitLicense is important since New York is a global financial capital. It is home to Wall Street, which houses more money than many countries combined. In addition, U.S. states look to one other for guidance when deciding what to do in their own jurisdiction.
Other states are expected to look to the BitLicense as a model. In addition, some U.S. states’ regulatory agencies issued warnings about risks associated bitcoin as an investment and as a currency.
While the BitLicense caused some bitcoin companies to stop doing business in New York, it wasn’t clear what long-term impact the regulations will have.
On one hand, bitcoin companies looking to be compliant in all U.S. states may have to deal with separate regulations in each state. But if most of the states have by then decided to implement some similar or lesser version of the BitLicense, it will actually become easier for such companies to operate.
Bitcoin mining pool BTC Guild announced plans to close on June 30, partly due to BitLicense. The company was not based in New York but did business with New York residents.
Eobot, a cryptocurrency cloud mining company, said it would not serve customers in New York State as of July due to BitLicense.
U.S. Recognizes Bitcoin As Commodity
Also in September, the U.S. Commodity Futures Trading Commission (CFTC) for the first time acknowledged that bitcoin and other virtual currencies should be defined as commodities. The organization publicly stated it had settled with a bitcoin exchange for trading options contracts after an enforcement case against a bitcoin operator.
On the other side of the pond, the European Union took a different tack when the European Court of Justice ruled bitcoin should be exempt from value-added tax (VAT). The Swiss Tax Authority ruled earlier in the year there would be no VAT on bitcoin transactions. The news was welcomed by bitcoin users worldwide since Switzerland has a global reputation for financial security.
Calls for regulation intensified later in the year following the November terror attacks in Paris. Officials from the European Union organized a crisis meeting to plan a crackdown of anonymous payment method sand virtual currencies to curb terrorism funding.
Three France-based members of the European Parliament tabled a motion for a resolution calling “stricter controls over all virtual currency” such as bitcoin, seeking to prohibit virtual currency exchanges transactions altogether which. The motion was tabled in late November.
Problems Arise In Australia
Events turned sour in Australia after several Australian banks closed their bitcoin business bank accounts. The Australian Competition and Consumer Commission (ACCC) reported it was investigating why some Australian banks took this action, which some lawmakers said was anti-competitive. The Australian Financial Review previously reported that 17 bitcoin companies in Australia received letters from banks saying they planned to close their accounts.
Japanese publications reported in August that under the new proposed rules, bitcoin exchanges and those dealing with virtual currencies in Japan must register to fall under a regulatory framework.
A Positive Regulatory Development
Globally speaking, the year ended on a positive note from a regulatory perspective. In November, the Society for Worldwide Interbank Financial Telecommunications (SWIFT), a Belgium-based facilitator of global bank transfers, launched a cross-border payments initiative to improve bank customer service by increasing transparency, speed, and predictability of payments using the blockchain. The project, called the Global Payments Innovation Initiative, focuses on business-to-business payments in early 2016.
The service is designed to help companies strengthen global supplier relationships and improve treasury efficiencies. Companies will be able to gain payments directly from banks along with features such as end-to-end payment tracking, same-day use of funds, fee transparency and predictability, and the transfer of more payment information.
Expand The Block Size?
There was no shortage of internal bitcoin controversy in 2015.
Gavin Andresen, a bitcoin developer, proposed a change to bitcoin’s code to enable the network to handle its growth. The change was to expand the size of the data blocks that upload to the blockchain.
“Block size is a sure and certain limitation on bitcoin’s capacity that awaits us down the road,” CCN writer Venzen Khaosan wrote in June. “Currently, bitcoin has adequate capacity to handle transactions reliably, but when block space starts running out transactions will get delayed, and some may never be processed at all.”
Not all developers agreed with the tactic of expanding the size of the blocks, and they began taking sides on the proposal.
In June, the Coinwallet exchange began to spam the bitcoin network with bogus transactions, slowing the traffic. The goal was to demonstrate the need for the network to handle more traffic. Other parties began spamming the network as well.
In August, Bitcoin XT released an implementation of a full bitcoin node that embraces bitcoin’s original vision of reliable, low-cost transactions based on the source code of Bitcoin Core. Bitcoin XT took the latest stable bitcoin core release, applied a series of patches, and then applied deterministic builds so anyone can check the downloads correspond to the source code.
If such changes were implemented, then bitcoin’s block size – the part of the code that controls the number of transactions that take place – would increase eight times, according to some. Some worried this could compromise bitcoin.
In mid-August, one observer claimed the Bitcoin XT announcement causedr a downward trend in the bitcoin price since it was creating uncertainty in the bitcoin ecosystem that could potentially damage bitcoin.
Despite the intensity of the debate, BitcoinXT did not gain a lot of traction.
The question remains as to how the bitcoin network will handle its growth.
From Commodity To Currency
One of the most important observations is that bitcoin is moving from an investment commodity to everyday use, according to Coupofy.com, a marketer of online coupons.
Venture capital investment in the last three years totaled $927 million, more than half of which took place in 2015.
The growth of the largest bitcoin exchanges ranged from 280% to 847% from October 2014 to October 2015.
And while most retailers do not yet accept bitcoin payment, several global merchants do accept it: Microsoft, Expedia, Dish, Dell, Tiger Direct, Intuit, and Overstock. One chart shows which year the major merchants began accepting bitcoin.
The activity of these merchants undoubtedly contributed to the growth in bitcoin transactions.
Daily bitcoin transactions in 2015 were $289 million, which is comparable to PayPal, $397 million, Square, $362 million, and Western Union, $216 million.
Portending continued growth is that transaction fees for bitcoin are low, 0.0001 BTC per 1,000 bytes, compared to other types of online payments. International transaction fees in 2015 were 2.7% to 2.9% for PayPal, $5 to $20 for Western Union, and $20 to $34 for MoneyGram (for a maximum $400).
U.S. Law Enforcement Takes Notice
Another sign of growth was an increase law enforcement actions by several U.S. government agencies. These actions demonstrate U.S. regulators’ interest in investigating fraud and other activities, according to Latham Watkins, a Los Angeles-based, U.S. law firm.
The law firm issued a report in December reviewing actions by the Securities Exchange Commission (SEC), The Department of Justice, the CFTC, the Federal Trade Commission (FTC) and the Financial Crimes Enforcement Network (FinCEN). Actions included securities and wire fraud, securities violations, Dodd-Frank Act violations, anti-money laundering (AML) and Bank Secrecy Act violations.
The attention of legal authorities at all levels of government points to a growing recognition that bitcoin is playing a more active role as a currency and a commodity. This recognition, in combination with price stabilization, more acceptance as a form of payment by major retailers and the acceptance of the underlying blockchain make 2015 a banner bitcoin year.
Featured image from Shutterstock. Chart from CoinMarketCap.