Essential Economics
Essential Economics
Essential Economics
3104. NEGOTIABLE INSTRUMENT. (a) Except as provided in subsections (c) and (d), "negotiable instrument" means an
unconditional promise or order to pay a fixed amount of money, with or without interest or other charges described in the promise or
order, if it: (1) is payable to bearer or to order at the time it is issued or first comes into possession of a holder; (2) is payable on
demand or at a definite time; and (3) does not state any other undertaking or instruction by the person promising or ordering
payment to do any act in addition to the payment of money, but the promise or order may contain (i) an undertaking or power to give,
maintain, or protect collateral to secure payment, (ii) an authorization or power to the holder to confess judgment or realize on or
dispose of collateral, or (iii) a waiver of the benefit of any law intended for the advantage or protection of an obligor. (b) "Instrument"
means a negotiable instrument. (c) An order that meets all of the requirements of subsection (a), except paragraph (1), and otherwise
falls within the definition of "check" in subsection (f) is a negotiable instrument and a check.
(d) A promise or order other than a check is not an instrument if, at the time it is issued or first comes into possession of a holder, it
contains a conspicuous statement, however expressed, to the effect that the promise or order is not negotiable or is not an instrument
governed by this Article.
Thus, for a writing to be a negotiable instrument under Article 3, the following requirements must be met:
1. 1. The promise or order to pay must be unconditional;
2. The payment must be a specific sum of money, although interest may be added to the sum;
3. 3. The payment must be made on demand or at a definite time;
4. 4. The instrument must not require the person promising payment to perform any act other than paying the money
specified;
5. 5. The instrument must be payable to bearer or to order.
The latter requirement is referred to as the "words of negotiability": a writing which does not contain the words "to
the order of" (within the four corners of the instrument or in endorsement on the note or in allonge) or indicate that it
is payable to the individual holding the contract document (analogous to the holder in due course) is not a negotiable
instrument and is not governed by Article 3, even if it appears to have all of the other features of negotiability. The
only exception is that if an instrument meets the definition of a cheque (a bill of exchange payable on demand and
drawn on a bank) and is not payable to order (i.e. if it just reads "pay John Doe") then it is treated as a negotiable
instrument.
UCC Article 3 does not apply to money, to payment orders governed by Article 4A, or to securities governed by
Article 8.
Negotiation and endorsement
Persons other than the original obligor and obligee can become parties to a negotiable instrument. The most common
manner in which this is done is by placing one's signature on the instrument (endorsement): if the person who signs
does so with the intention of obtaining payment of the instrument or acquiring or transferring rights to the
instrument, the signature is called an endorsement. There are five types of endorsements contemplated by the Code,
covered in UCC Article 3, Sections 204206
[4]
:
An endorsement which purports to transfer the instrument to a specified person is a special endorsement for
example, "Pay to the order of Amy";
An endorsement by the payee or holder which does not contain any additional notation (thus purporting to make
the instrument payable to bearer) is an endorsement in blank or blank endorsement;
An endorsement which purports to require that the funds be applied in a certain manner (e.g. "for deposit only",
"for collection") is a restrictive endorsement; and,
Negotiable instrument
27
An endorsement purporting to disclaim retroactive liability is called a qualified endorsement (through the
inscription of the words "without recourse" as part of the endorsement on the instrument or in allonge to the
instrument).
An endorsement purporting to add terms and conditions is called a conditional endorsement for example, "Pay
to the order of Amy, if she rakes my lawn next Thursday November 11th, 2007". The UCC states that these
conditions may be disregarded.
If a note or draft is negotiated to a person who acquires the instrument
1. in good faith;
2. for value;
3. without notice of any defenses to payment,
the transferee is a holder in due course and can enforce the instrument without being subject to defenses which the
maker of the instrument would be able to assert against the original payee, except for certain real defenses. These
real defenses include (1) forgery of the instrument; (2) fraud as to the nature of the instrument being signed; (3)
alteration of the instrument; (4) incapacity of the signer to contract; (5) infancy of the signer; (6) duress; (7)
discharge in bankruptcy; and, (8) the running of a statute of limitations as to the validity of the instrument. The
holder-in-due-course rule is a rebuttable presumption that makes the free transfer of negotiable instruments feasible
in the modern economy. A person or entity purchasing an instrument in the ordinary course of business can
reasonably expect that it will be paid when presented to, and not subject to dishonor by, the maker, without involving
itself in a dispute between the maker and the person to whom the instrument was first issued (this can be contrasted
to the lesser rights and obligations accruing to mere holders). Article 3 of the Uniform Commercial Code as enacted
in a particular State's law contemplate real defenses available to purported holders in due course. The foregoing is
the theory and application presuming compliance with the relevant law. Practically, the obligor-payor on an
instrument who feels he has been defrauded or otherwise unfairly dealt with by the payee may nonetheless refuse to
pay even a holder in due course, requiring the latter to resort to litigation to recover on the instrument.
Usage
While bearer instruments are rarely created as such, a holder of commercial paper with the holder designated as
payee can change the instrument to a bearer instrument by an endorsement. The proper holder simply signs the back
of the instrument and the instrument becomes bearer paper, although in recent years, third party checks are not being
honored by most banks unless the original payee has signed a notarized document stating such. Alternatively, an
individual or company may write a check payable to "Cash" or "Bearer" and create a bearer instrument. Great care
should be taken with the security of the instrument, as it is legally almost as good as cash.
Exceptions
Under the Code, the following are not negotiable instruments, although the law governing obligations with respect to
such items may be similar to or derived from the law applicable to negotiable instruments:
Bills of lading and other documents of title, which are governed by Article 7 of the Code. However, under
admiralty law, a bill of lading may either be a negotiable or 'order' bill of lading or a nonnegotiable or 'straight'
bill of lading.
Deeds and other documents conveying interests in real estate, although a mortgage may secure a promissory note
which is governed by Article 3
IOUs
Letters of credit, which are governed by Article 5 of the Code
Negotiable instrument
28
Modern relevance
Although often considered foundational in business law, the modern relevance of negotiability has been
questioned.
[5]
Negotiability can be traced back to the 1700s and Lord Mansfield, when money and liquidity was
relatively scarce. The holder in due course rule has been limited by various statutes. Concerns have also been raised
that the holder in due course rule does not align the incentives of the mortgage originators and the assignees
efficiently.
[]
References
[1] [1] Chisholm 1911.
[2] Rabinowitz JJ. (1956). The Origin of the Negotiable Promissory Note (http:/ / www. jstor. org/ stable/ 3310431). University of Pennsylvania
Law Review.
[3] [3] CONFUSING
[4] http:/ / www. law.cornell. edu/ ucc/ 3/ article3.htm#s3-204
[5] Mann RJ (1996). Searching for Negotiability in Payment and Credit Systems (http:/ / www. columbia. edu/ ~mr2651/ Data/
SearchforNegotiability.pdf). UCLA Law Review.
External links
Wikimedia Commons has media related to Bills of Exchange.
Bill of Exchange FAQ on TheBenche.com (https:/ / www. thebenche. com/ faq. php?faq=exchang1#faq_bill1)
Letter of credit
After a contract is concluded between a buyer and
a seller, the buyer's bank supplies a letter of credit
to the seller.
A letter of credit is a document issued by a financial institution, or a
similar party, assuring payment to a seller of goods or services
provided certain documents have been presented to the bank.
[1]
"Letters of Credit" are documents that prove the seller has performed
the duties specified by an underlying contract (e.g., the sale of goods
contract) and the goods/services have been supplied as agreed. In
return for these documents, the beneficiary receives payment from the
financial institution that issued the letter. The letter of credit serves as a
guarantee to the seller that it will be paid regardless of whether the
buyer ultimately fails to pay. In this way, the risk that the buyer will
fail to pay is transferred from the seller to the letter's issuer. The letter
can also be used to ensure that all agreed standards are met by the
supplier, provided that these requirements are reflected in the
documents described in the letter of credit.
Letters of credit are used primarily in international trade for transactions between a supplier in one country and a
purchaser in another. Most letters of credit are governed by rules promulgated by the International Chamber of
Commerce known as Uniform Customs and Practice for Documentary Credits (latest version: UCP 600). They
Letter of credit
29
Seller consigns the goods to a carrier in exchange
for a bill of lading.
Seller provides bill of lading to bank in exchange
for payment. Seller's bank exchanges bill of
lading for payment from buyer's bank. Buyer's
bank exchanges bill of lading for payment from
the buyer.
Buyer provides bill of lading to carrier and takes
delivery of goods.
are also used in land development to ensure that approved public
facilities (streets, sidewalks, storm water ponds, etc.) will be built. The
parties to a letter of credit are the supplier, usually called the
"beneficiary", "the issuing bank", of whom the buyer is a client, and
sometimes an advising bank, of whom the beneficiary is a client.
Almost all letters of credit are irrevocable, i.e., cannot be amended or
canceled without mutual consent of all parties. In executing a
transaction, letters of credit incorporate functions common to giros and
travelers' cheques.
Terminology
Origin
The name "letter of credit" derives from the French word
"accrditation", a power to do something, which derives from the Latin
"accreditivus", meaning trust. Wikipedia:Citation needed
Related terms
A Sight LC cause payment to be made immediately to the
beneficiary/seller/exporter upon presentation of the correct
documents. A time or date LC specifies when payment is to be
made at a future date and upon presentation of the required
documents.Wikipedia:Citation needed
Negotiation means the giving of value for draft(s) or document(s)
by the bank authorized to negotiate, with the nominated bank. Mere
examination of the documents and forwarding the same to the LC
issuing bank for reimbursement, without giving of value / agreed to
give, does not constitute a negotiation.Wikipedia:Please clarify
Advising Bankadvises the Beneficiary at the request of the
Issuing Bank.
Applicantthe party on whose request the issuing bank issues a
credit .
Banking dayThe day on which a bank is regularly open at the
place at which an act to be performed.
Beneficiarythe party who is to receive the benefit (payment) of
the LC. The consignee of an LC and the beneficiary may not be the
same. The credit is issued in the Beneficiary's favor.
Presentationeither delivery of documents against an LC or the
document itself.
Complying presentation when the presentation of documents is in
accordance with:
the terms and conditions of the credit
the applicable provisions of UCP
Letter of credit
30
international standard banking practice
Confirmationa definite undertaking from the confirming bank to honor or negotiate a complying presentation in
addition to that of the issuing bank.
Confirming bankadds confirmation to an LC. It does so at the request of the issuing bank and taking
authorization from the issuing bank.
Letter of Credit/Creditan irrevocable commitment of the issuing bank to honor a complying presentation.
Honourto act according to commitment of the LC. Presentations are honored in different ways depending on
the type of credit:
Making payment at sight for sight LC
Incurring a deferred payment undertaking and paying at maturity deferred payment LC.
Accepting a Draft drawn by the beneficiary and paying at maturity for Deferred Acceptance LC.
Issuing bankissues the LC.
Nominated Bankthe bank with which credit is available. If no bank is mentioned in the credit as nominated
bank, all banks are "nominated".
NegotiationA Nominated Bank is said to negotiate a document if it purchases a draft or documents under a
complying presentation either by making an advance or agreeing to advance funds to the Beneficiary on or before
the date on which reimbursement is due to the nominated bank . A draft drawn on a nominated bank cannot be
purchased separately.
Documents that can be presented for payment
To receive payment, an exporter or shipper must present the documents required by the LC. Typically, the payee
presents a document proving the goods were sent instead of showing the actual goods. The Original bill of lading
(BOL) is normally the document accepted by banks as proof that goods have been shipped. However, the list and
form of documents is open to negotiation and might contain requirements to present documents issued by a neutral
third party evidencing the quality of the goods shipped, or their place of origin or place. Typical types of documents
in such contracts include:Wikipedia:Citation needed
Financial DocumentsBill of Exchange, Co-accepted Draft
Commercial DocumentsInvoice, Packing list
Shipping DocumentsTransport Document, Insurance Certificate, Commercial, Official or Legal Documents
Official DocumentsLicense, Embassy legalization, Origin Certificate, Inspection Certificate, Phytosanitary
certificate
Transport DocumentsBill of lading (ocean or multi-modal or Charter party), Airway bill, Lorry/truck receipt,
railway receipt, CMC Other than Mate Receipt, Forwarder Cargo Receipt, Deliver Challan...etc.
Insurance documentsInsurance policy, or Certificate but not a cover note.
Legal principles governing documentary credits
One of the primary peculiarities of the documentary credit is that the payment obligation is independent from the
underlying contract of sale or any other contract in the transaction. Thus the banks obligation is defined by the terms
of the LC alone, and the sale contract is irrelevant. The defenses available to the buyer arising out of the sale contract
do not concern the bank and in no way affect its liability.
[2]
Article 4(a) of the UCP states this principle clearly.
Article 5 of the UCP further states that banks deal with documents only, they are not concerned with the goods
(facts). Accordingly, if the documents tendered by the beneficiary, or his or her agent, are in order, then in general
the bank is obliged to pay without further qualifications.
Letter of credit
31
The policies behind adopting the abstraction principle are purely commercial and reflect a partys expectations: first,
if the responsibility for the validity of documents was thrown onto banks, they would be burdened with investigating
the underlying facts of each transaction, and less inclined to issue documentary credits because of the risk and
inconvenience. Second, documents required under the LC could in certain circumstances be different from those
required under the sale transaction. This would place banks in a dilemma in deciding which terms to follow if
required to look behind the credit agreement. Third, the fact that the basic function of the credit is to provide a seller
with the certainty of payment for documentary duties suggests that banks should honor their obligation
notwithstanding allegations of buyer misfeasance.
[3]
Courts have emphasized that buyers always have a remedy for
an action upon the contract of sale and that it would be a calamity for the business world if a bank had to investigate
every breach of contract.
The principle of strict compliance also aims to make the banks duty of effecting payment against documents easy,
efficient and quick. Hence, if the documents tendered under the credit deviate from the language of the credit the
bank is entitled to withhold payment, even if the deviation is purely terminological.
[4]
The general legal maxim de
minimis non curat lex has no place in the field.
Types
Import/exportThe same credit can be termed an import or export LC depending on whose perspective is
considered. For the importer it is termed an Import LC and for the Exporter of goods, an Export LC.
RevocableThe buyer and the bank that established the LC are able to manipulate the LC or make corrections
without informing or getting permissions from the seller. According to UCP 600, all LCs are Irrevocable, hence
this type of LC is obsolete.
IrrevocableAny changes (amendment) or cancellation of the LC (except it is expired) is done by the Applicant
through the issuing Bank. It must be authenticated and approved by the Beneficiary.
ConfirmedAn LC is said to be confirmed when a second bank adds its confirmation (or guarantee) to honor a
complying presentation at the request or authorization of the issuing bank.
UnconfirmedThis type does not acquire the other bank's confirmation.
TransferrableThe exporter has the right to make the credit available to one or more subsequent beneficiaries.
Credits are made transferable when the original beneficiary is a middleman and does not supply the merchandise,
but procures goods from suppliers and arranges them to be sent to the buyer and does not want the buyer and
supplier know each other.
The middleman is entitled to substitute his own invoice for the supplier's and acquire the difference as profit.
A letter of credit can be transferred to the second beneficiary at the request of the first beneficiary only if it
expressly states that the letter of credit is "transferable". A bank is not obligated to transfer a credit.
A transferable letter of credit can be transferred to more than one alternate beneficiary as long as it allows
partial shipments.
The terms and conditions of the original credit must be replicated exactly in the transferred credit. However, to
keep the workability of the transferable letter of credit, some figures can be reduced or curtailed.
Amount
Unit price of the merchandise (if stated)
Expiry date
Presentation period
Latest shipment date or given period for shipment.
The first beneficiary may demand from the transferring bank to substitute for the applicant. However, if a
document other than the invoice must be issued in a way to show the applicant's name, in such a case that
Letter of credit
32
requirement must indicate that in the transferred credit it will be free.
Transferred credit cannot be transferred again to a third beneficiary at the request of the second beneficiary.
UntransferableA credit that seller cannot assign all or part of to another party. In international commerce, all
credits are untransferable.
Deferred / UsanceA credit that is not paid/assigned immediately after presentation, but after an indicated period
that is accepted by both buyer and seller. Typically, seller allows buyer to pay the required money after taking the
related goods and selling them.
At SightA credit that the announcer bank immediately pays after inspecting the carriage documents from the
seller.
Red ClauseBefore sending the products, seller can take the pre-paid part of the money from the bank. The first
part of the credit is to attract the attention of the accepting bank. The first time the credit is established by the
assigner bank, is to gain the attention of the offered bank. The terms and conditions were typically written in red
ink, thus the name.
Back to BackA pair of LCs in which one is to the benefit of a seller who is not able to provide the
corresponding goods for unspecified reasons. In that event, a second credit is opened for another seller to provide
the desired goods. Back-to-back is issued to facilitate intermediary trade. Intermediate companies such as trading
houses are sometimes required to open LCs for a supplier and receive Export LCs from buyer.
Pricing
Issuance charges, covering negotiation, reimbursements and other charges are paid by the applicant or as per the
terms and conditions of the LC. If the LC does not specify charges, they are paid by the Applicant. Charge-related
terms are indicated in field 71B.Wikipedia:Citation needed
Legal basis
Legal writers have failed to satisfactorily reconcile the banks undertaking with any contractual
analysis.Wikipedia:Please clarify The theories include: the implied promise, assignment theory, the novation theory,
reliance theory, agency theories, estoppels and trust theories, anticipatory theory and the guarantee theory.
Although documentary credits are enforceable once communicated to the beneficiary, it is difficult to show any
consideration given by the beneficiary to the banker prior to the tender of documents. In such transactions the
undertaking by the beneficiary to deliver the goods to the applicant is not sufficient consideration for the banks
promise because the contract of sale is made before the issuance of the credit, thus consideration in these
circumstances is past. However, the performance of an existing duty under a contract may be a valid consideration
for a new promise made by the bank, provided that there is some practical benefit to the bank
[5]
A promise to
perform owed to a third party may also constitute a valid consideration.
[6]
Another theory asserts that it is feasible to typify letter of credit as a Collateral Contract for a Third-Party
Beneficiary because three different entities participate in the transaction: the seller, the buyer, and the banker.
Because letters of credit are prompted by the buyers necessity and in application of the theory of Jean Domat the
cause of a LC is to release the buyer of his obligation to pay directly to the seller. Therefore, a LC theoretically fits
as a collateral contract accepted by conduct or in other words, an Implied-in-fact contract under the framework for
third party beneficiary where the buyer participates as the third party beneficiary with the bank acting as the
stipulator and the seller as the promisor. The term Beneficiary is not used properly in the scheme of an LC because a
Beneficiary (also, in trust law, cestui que use) in the broadest sense is a natural person or other legal entity who
receives money or other benefits from a benefactor. Note that under the scheme of letters of credit, banks are neither
benefactors of sellers nor benefactors of buyers and the seller receives no money in gratuity mode. Thus is possible
that a letter of credit was one of those contracts that needed to be masked to disguise the consideration or Privity
Letter of credit
33
requirement. As a result this kind of arrangement, would make letter of credit to be enforceable under the action
assumpsit because of its promissory connotation.
A few countries, including the United States (Article 5 of the Uniform Commercial Code) have created statutes in
relation to letters of credit. These statutes are designed to work with the rules of practice including UCP and ISP98.
These rules of practice are incorporated into the transaction by agreement of the parties. The latest version of the
UCP is the UCP600 effective July 1, 2007.
[7]
Since the UCP are not laws, parties have to include them into their
arrangements as normal contractual provisions. .
International Trade Payment methods
International Trade Payment method can be done in the following ways.
Advance payment (most secure for seller)The buyer parts with money first and waits for the seller to forward
the goods.
Documentary Credit (more secure for seller as well as buyer)Subject to ICC's UCP 600, the bank gives an
undertaking (on behalf of buyer and at the request of applicant) to pay the Beneficiary the value of the goods
shipped if acceptable documents are submitted and if the stipulated terms and conditions are strictly complied
with. The buyer can be confident that the goods he is expecting only will be received since it will be evidenced in
the form of certain documents called for meeting the specified terms and conditions while the supplier can be
confident that if he meets the stipulations his payment for the shipment is guaranteed by bank, who is independent
of the parties to the contract.
Documentary collection (more secure for buyer and to a certain extent to seller)Also called "Cash Against
Documents". Subject to ICC's URC 525, sight and usance, for delivery of shipping documents against payment or
acceptances of draft, where shipment happens first, then the title documents are sent to the buyer's bank by seller's
bank, for delivering documents against collection of payment/acceptance
Direct payment (most secure for buyer)The supplier ships the goods and waits for the buyer to remit the bill, on
open account terms.
Risk situations
Fraud Risks
The payment will be obtained for nonexistent or worthless merchandise against presentation by the beneficiary of
forged or falsified documents.
Credit itself may be funded.
Sovereign and Regulatory Risks
Performance of the Documentary Credit may be prevented by government action outside the control of the
parties.
Legal Risks
Possibility that performance of a Documentary Credit may be disturbed by legal action relating directly to the
parties and their rights and obligations under the Documentary Credit
Force Majeure and Frustration of Contract
Performance of a contract including an obligation under a Documentary Credit relationship is prevented by
external factors such as natural disasters or armed conflicts
Applicant
Non-delivery of Goods
Short shipment
Letter of credit
34
Inferior Quality
Early /Late Shipment
Damaged in transit
Foreign exchange
Failure of Bank viz Issuing bank / Collecting Bank
Issuing Bank
Insolvency of the Applicant
Fraud Risk, Sovereign and Regulatory Risk and Legal Risks
Reimbursing Bank
no obligation to reimburse the Claiming Bank unless it has issued a reimbursement undertaking.
Beneficiary
Failure to Comply with Credit Conditions
Failure of, or Delays in Payment from, the Issuing Bank
References
[1] Letter of Credit explained What is a letter of credit? (http:/ / www. loanuniverse. com/ letters. html)
[2] Ficom S.A. v. Socialized Cadex [1980] 2 Lloyds Rep. 118.
[3] [3] United City Merchants (Investments) Ltd v Royal Bank of Canada (The American Accord) [1983] 1.A.C.168 at 183
[4] J. H. Rayner & Co., Ltd., and the Oil seeds Trading Company, Ltd. v.Ham bros Bank Limited [1942] 73 Ll. L. Rep. 32
[5] William v Roffey Brothers & Nicholls (contractors) Ltd
[6] [6] Scotson v Pegg
[7] Dominique Doise, The 2007 Revision of the Uniform Customs and Practice for Documentary Credits (UCP 600) (http:/ / www.
alerionavocats. com/ fr/ expertise/ publications/
la-revision-2007-des-regles-et-usances-uniformes-relatives-aux-credits-documentaires-ruu-600/ )
External links
Letter of Credit Information, Procedure and Videos. (http:/ / www. bwtradefinance. com/ letter-of-credit-lc/ )
Anatomy of a Letter of Credit, showing an actual negotiated letter of credit (http:/ / www. vulcanhammer. info/
china/ letter-of-credit. php)
Letters of Credit and How They Work (http:/ / www. lancasterpollard. com/ newsdetail/
tci-fall-2007-fe-letters-of-credit)
(in Persian) (http:/ / banki. ir/ danestaniha/ 214-general/ 2468-lc)
Letter of Credit, its Relation with Stipulation for the Benefit of a Third Party (http:/ / papers. ssrn. com/ sol3/
papers. cfm?abstract_id=2019474)
Commercial paper
35
Commercial paper
Financial markets
Public market
Exchange
Securities
Bond market
Bond valuation
Corporate bond
Fixed income
Government bond
High-yield debt
Municipal bond
Securitization
Stock market
Common stock
Preferred stock
Registered share
Stock
Stock certificate
Stock exchange
Voting share
Derivatives market
Credit derivative
Futures exchange
Hybrid security
Over-the-counter
Forwards
Options
Spot market
Swaps
Foreign exchange
Currency
Exchange rate
Other markets
Commodity market
Money market
Reinsurance market
Real estate market
Practical trading
Commercial paper
36
Clearing house
Financial market participants
Financial regulation
Finance series
Banks and banking
Corporate finance
Personal finance
Public finance
v
t
e
[1]
Commercial paper, in the global financial market, is an unsecured promissory note with a fixed maturity of no
more than 270 days.
Commercial paper is a money-market security issued (sold) by large corporations to obtain funds to meet short-term
debt obligations (for example, payroll), and is backed only by an issuing bank or corporation's promise to pay the
face amount on the maturity date specified on the note. Since it is not backed by collateral, only firms with excellent
credit ratings from a recognized credit rating agency will be able to sell their commercial paper at a reasonable price.
Commercial paper is usually sold at a discount from face value, and carries higher interest repayment rates than
bonds. Typically, the longer the maturity on a note, the higher the interest rate the issuing institution pays. Interest
rates fluctuate with market conditions, but are typically lower than banks' rates.
Commercial paper though a short-term obligation is issued as part of a continuous rolling program, which is
either a number of years long (as in Europe), or open-ended (as in the U.S.).
Overview
The use of commercial paper has been adopted by every state in the United States except Louisiana.
[2]
At the end of 2009, more than 1,700 companies in the United States issued commercial paper. As of October 31,
2008, the U.S. Federal Reserve reported seasonally adjusted figures for the end of 2007: there was $1.7807 trillion
(short-scale, or 1,780,700,000,000) in total outstanding commercial paper; $801.3 billion was "asset backed" and
$979.4 billion was not; $162.7 billion of the latter was issued by non-financial corporations, and $816.7 billion was
issued by financial corporations.
Outside of the United States the international Euro-Commercial Paper Market has over $500 billion in outstandings,
made up of instruments denominated predominately in euros, dollars and sterling.
[3]
Commercial paper
37
History
Commercial credit, in the form of promissory notes issued by corporations, has existed since at least the 19th
century. For instance, Marcus Goldman, founder of Goldman Sachs got his start trading commercial paper in New
York in 1869.
[4]
Issuance
U.S. Commercial Paper types outstanding at end
of each year 2001 to 2007
Total U.S. CP outstanding e
Commercial paper though a short-term obligation is issued as part
of a continuous significantly longer rolling program, which is either a
number of years long (as in Europe), or open-ended (as in the U.S.).
Because the continuous commercial paper program is much longer
than the individual commercial paper in the program (which cannot be
longer than 270 days), as commercial paper matures and is paid down
the proceeds from the pay-down are used to buy new commercial paper
in the same program the process is referred to as "rolling" the
commercial paper. Because the program is a continuous rolling one
that runs for many years, it can be viewed as a source for long-term
funds for issuers, even though composed of shorter-term obligations.
By having the constituent parts of the Program be no longer than 270
days, the issuer avoids the cost, delays, and complications of being
required to file a registrations statement.
There are two methods of issuing credit. The issuer can market the
securities directly to a buy and hold investor such as most money
market funds. Alternatively, it can sell the paper to a dealer, who then
sells the paper in the market. The dealer market for commercial paper
involves large securities firms and subsidiaries of bank holding
companies. Most of these firms also are dealers in US Treasury
securities. Direct issuers of commercial paper usually are financial
companies that have frequent and sizable borrowing needs and find it
more economical to sell paper without the use of an intermediary. In the United States, direct issuers save a dealer
fee of approximately 5 basis points, or 0.05% annualized, which translates to $50,000 on every $100 million
outstanding. This saving compensates for the cost of maintaining a permanent sales staff to market the paper. Dealer
fees tend to be lower outside the United States.
Line of credit
Commercial paper is a lower-cost alternative to a line of credit with a bank. Once a business becomes established,
and builds a high credit rating, it is often cheaper to draw on a commercial paper than on a bank line of credit.
Nevertheless, many companies still maintain bank lines of credit as a "backup". Banks often charge fees for the
amount of the line of the credit that does not have a balance. While these fees may seem like pure profit for banks, in
some cases companies in serious trouble may not be able to repay the loan resulting in a loss for the banks.
Advantage of commercial paper:
High credit ratings fetch a lower cost of capital.
Wide range of maturity provide more flexibility.
It does not create any lien on asset of the company.
Tradability of Commercial Paper provides investors with exit options.
Commercial paper
38
Disadvantages of commercial paper:
Its usage is limited to only blue chip companies.
Issuances of commercial paper bring down the bank credit limits.
A high degree of control is exercised on issue of Commercial Paper.
Stand-by credit may become necessary
Commercial paper yields
Like treasury bills, yields on commercial paper are quoted on a discount basisthe discount return to commercial
paper holders is the annualized percentage difference between the price paid for the paper and the par value using a
360-day year. Specifically:
i
cp
(dy) = [
P
f
P
0
P
f]
360
h
and when converted to a bond equivalent yield:
i
cp
(bey) = [
P
f
P
0
P
0]
365
h
Defaults
Defaults on high quality commercial paper are rare, and cause concern when they occur. Notable examples include:
On June 21, 1970, Penn Central filed for bankruptcy under Chapter 77 of the U.S. Bankruptcy Code and defaulted
on approximately $77.1 million of commercial paper. This sparked a runoff in the commercial paper market of
approximately $3 billion, causing the Federal Reserve to intervene by permitting commercial banks to borrow at
the discount window.
[5]
This placed a substantial burden on clients of the issuing dealer for Penn Centrals
commercial paper, Goldman Sachs.
[6]
On January 31, 1997, Mercury Finance, a major automotive lender, defaulted on a debt of $17 million, rising to
$315 million. Effects were small, partly because default occurred during a robust economy.
On September 15, 2008, Lehman Brothers caused two money funds to break the buck, and led to Fed intervention
in money market funds.
References
[1] http:/ / en. wikipedia. org/ w/ index. php?title=Template:Financial_markets& action=edit
[2] Ontario Securities Commission National Instrument 45106 (http:/ / www. osc. gov. on. ca/ Regulation/ Rulemaking/ Current/ Part4/
rule_20050708_45-106_ni-registration-exempt. pdf) (Section 2.35) Accessed January 30, 2007
[3] http:/ / www. cmdportal. com/ Public/ Data. aspx
[4] Uhtermyer Urges Money Bill Changes; Approves Measure, but Wants Commercial Paper Defined in Its Strict Meaning (http:/ / query.
nytimes.com/ gst/ abstract. html?res=9F07EFD7123FE633A25750C2A96F9C946296D6CF) in The New York Times of September 23, 1913
Commercial Paper Should Be Changed; Gardin Thinks Three Years Sufficient for Transition to European Practice (http:/ / query. nytimes.
com/ gst/ abstract. html?res=9B01E0DC1E39E633A25752C0A9659C946596D6CF) in The New York Times of March 1, 1914
[5] [5] U.S. Securities and Exchange Commission, The Financial Collapse of the Penn Central Company, Staff Report of the Securities and
Exchange Commission to the Special Subcommittee on Investigations, U.S. Government Printing Office Washington DC 1972, page 272.
[6] [6] Ellis, Charles D. The Partnership: The Making of Goldman Sachs. Rev. ed. London: Penguin, 2009. 98. Print.
Commercial paper
39
External links
Look up commercial paper in Wiktionary, the free dictionary.
Federal Reserve System release on commercial papers (http:/ / www. federalreserve. gov/ Releases/ cp/ about.
htm)
An article from The Times on commercial paper and credit market vernacular (http:/ / business. timesonline. co.
uk/ tol/ business/ industry_sectors/ banking_and_finance/ article2302997. ece)
Fed Bank of Richmond, VA (http:/ / www. richmondfed. org/ publications/ economic_research/
instruments_of_the_money_market/ ch09. cfm) History of origin, and special regulations governing issue of
commercial paper. Thomas K Hahn, Federal Reserve Bank of Richmond
The Week America's Economy Almost Died (http:/ / www. npr. org/ templates/ story/ story.
php?storyId=95099470) National Public Radio broadcast September 26, 2008.
Traveler's cheque
A US$100 travelers cheque issued by American
Express
Obverse and reverse side of traveler's cheque of
National Bank of Poland (nomnal value: 1000
Polish zoty); sold in April 1989 in Budapest
(Hungary), for use during travel to Poland only,
never used.
A traveler's cheque (also traveller's cheque, travellers cheque,
traveller's check or traveler's check) is a preprinted, fixed-amount
cheque designed to allow the person signing it to make an
unconditional payment to someone else as a result of having paid the
issuer for that privilege.
They were generally used by people on vacation instead of cash, as
many businesses used to accept traveler's cheques as currency.
Merchants and other parties would accept them as if they were
currency because, as long as the original signature (which the buyer is
supposed to place on the check in ink as soon he or she receives the
cheque) and the signature made at the time the check is used is the
same, the traveler's check issuer will unconditionally guarantee
payment of the face amount even if the check is fraudulently issued,
was stolen or lost. In short, a traveler's check can never 'bounce' unless
the issuer goes bankrupt and out of business. If a traveler's cheque were
lost or stolen, it could be replaced by the issuing financial institution.
Their use has been in decline since the 1990s as alternatives, such as
credit cards, debit cards, and automated teller machines became more
widely available and were easier and more convenient for travelers.
Travelers cheques are no longer widely accepted and cannot easily be
cashed, even at the banks that issue the cheques.
Terminology
Legal terms for the parties to a traveler's cheque are the obligor or
issuer, the organization that produces it; the agent, the bank or other place that sells it; the purchaser, the natural
person who buys it, and the payee, the entity to whom the purchaser writes the cheque for goods and/or services. For
purposes of clearance, the obligor is both maker and drawee.
Traveler's cheque
40
History
Traveler's cheques were first issued on 1 January 1772 by the London Credit Exchange Company for use in ninety
European cities,
[1]
and in 1874, Thomas Cook was issuing 'circular notes' that operated in the manner of traveler's
cheques.
American Express was the first company to develop a large-scale traveller's cheque system in 1891,
[2]
and is still the
largest issuer of traveler's cheques today by volume. American Express's introduction of traveler's cheques is
traditionally attributed to employee Marcellus Flemming Berry, after company president J.C. Fargo had problems in
smaller European cities obtaining funds with a letter of credit.
Between the 1950s and the 1990s, travelers cheques became one of the main ways that people took money on
vacation for use in foreign countries without the risks associated with carrying large amounts of cash.
Several brands of travelers cheques have been marketed; the most familiar of those were Thomas Cook Group, Bank
of America and American Express.
Declining use
The wider acceptance and better security of the alternatives such as credit and debit cards has meant a significant
decline in the use of travelers cheques since the 1990s. In addition, the security issues for retailers accepting travelers
cheques has meant that many businesses no longer accept them, making them less attractive to travelers. This has led
to complaints about the difficulty that holders have in using them. In much of Europe and Asia, the cheques are no
longer widely accepted and can not easily be cashed, even at the banks that issue the cheques.
Usage
Purchasing cheques for later use
Travelers cheques are sold by banks and financial specialist to customers for use at a later time. Upon obtaining
custody of a purchased supply of traveler's cheques, the purchaser should immediately write his or her signature once
upon each cheque, usually on the cheque's upper portion. This helps protect them if they are stolen. The purchaser
will also have received a receipt and some other documentation that should be kept in a safe place other than where
he or she carries the cheques. Traveler's cheques can usually be replaced if lost or stolen (if the owner still has the
receipt issued with the purchase of the cheques showing the serial numbers allocated).
Cashing cheques
When wanting to cash a traveler's cheque while making a purchase, the purchaser should, in the presence of the
payee, date and countersign the cheque in the indicated space, usually on the cheque's lower portion (if at a
restaurant, it may be helpful to ask the waiter to watch and wait for this to be done).
Denomination and change
Applicable change for a purchase transaction should be given in local currency as if the cheque were banknotes.
Traveler's cheques are available in several currencies such as U.S. dollars, Canadian dollars, Pounds sterling,
Japanese yen, Chinese Yuan and Euro; denominations usually being 20, 50, or 100 (x100 for Yen) of whatever
currency, and are usually sold in pads of five or ten cheques, e.g., 5 x 20 for 100. Traveler's cheques do not
expire, so unused cheques can be kept by the purchaser to spend at any time in the future. The purchaser of a supply
of traveler's cheques effectively gives an interest-free loan to the issuer, which is why it is common for banks to sell
them "commission free" to their customers. The commission, where it is charged, is usually 1-2% of the total face
value sold.
Traveler's cheque
41
Deposit and settlement
A payee receiving a traveler's cheque should follow its normal procedures for depositing cheques into its bank
account: usually, endorsement by stamp or signature and listing of the cheque and its amount on the deposit slip. The
bank account will be credited with the amount of the cheque as with any other negotiable item submitted for
clearance.
In the United States, if the payee is equipped to process cheques electronically at point of sale (see: Check 21 Act),
he or she should still take custody of the cheque and submit it to a financial institution, particularly to avoid any
confusion on the part of the purchaser.
Security issues
One of the main advantages travellers cheques provide is the replacement if lost or stolen.
However, this feature has also created a black market where fraudsters buy travellers cheques, sell them at 50% of
their value to other people (such as travellers) and falsely report their travellers cheque stolen with the company from
which the cheque was obtained. As such, they get back the value of the travellers cheque and make 50% of the value
as profit.
[3]
The widespread problem of counterfeit travellers cheques has caused a number of businesses to no longer accept
them or to impose stringent checks when they are used. It is a reasonable security procedure for the payee to ask to
inspect the purchaser's picture ID; a driver's license or passport should suffice, and doing so would most usefully be
towards the end of comparing the purchaser's signature on the ID with those on the cheque. The best first step,
however, that can be taken by any payee who has concerns about the validity of any traveler's cheque, is to contact
the issuer directly; a negative finding by a third-party cheque verification service based on an ID check may merely
indicate that the service has no record about the purchaser (to be expected, practically by definition, of many
travelers), or at worst that he or she has been deemed incompetent to manage a personal chequing account (which
would have no bearing on the validity of a traveller's cheque).
Some purchasers have found the process of filing a claim for lost or stolen cheques is cumbersome, and have been
left without recourse after their cheques were lost or stolen.
Alternatives
The widespread acceptance of credit cards and debit cards around the world starting in the 1980s and 1990s
significantly replaced the use of travelers cheques for paying for things on vacation.
In 2005, American Express released the American Express Travelers Cheque Card, a stored-value card that serves
the same purposes as a traveler's cheque, but can be used in stores like a credit card. It discontinued the card in
October 2007. A number of other financial companies went on to issue stored-value or pre-paid debit cards
containing several currencies that could be used like credit or debit cards at shops and at ATMs, mimicking the
traveler's cheque in electronic form. One of the major examples is the Visa TravelMoney card.
Traveler's cheque
42
References
[1] On this day - January 3 (http:/ / archive.thisislancashire. co. uk/ 2005/ 1/ 3/ 452155. html)
[2] Host With The Most (http:/ / www. time. com/ time/ magazine/ article/ 0,9171,866900-7,00. html), Time Magazine, 9 April 1956 issue
[3] [3] Handboek voor de Wereldreiziger by Frans Timmerhuis
External links
American Express Traveler's Cheques merchant site (http:/ / www10. americanexpress. com/ sif/ cda/ page/
0,1641,18540,00. asp?)
Visa Travelers Cheques (http:/ / usa. visa. com/ personal/ using_visa/ visa_travelers_cheques. html)
Visa Interpayment Travellers Cheques (http:/ / www. travelex. co. uk/ uk/ personal/ TC_visamcard. aspx)
Thomas Cook Mastercard Travellers Cheques (http:/ / www. travelex. co. uk/ uk/ personal/ TC_visamcard. aspx)
Travelex Travellers Cheques (http:/ / www. travelex. co. uk/ uk/ personal/ TC_visamcard. aspx)
Bitcoin
43
Bitcoin
Bitcoin
A common logo from the bitcoin reference client
Date of introduction 3January 2009
User(s) Worldwide
Production 25 bitcoins per block (approximately every ten minutes) until mid 2016, and then afterwards 12.5 bitcoins per block for 4
years until next halving. This halving continues until 2110-2140 when 21 million bitcoins have been issued.
Source
Number of bitcoins in circulation
[1]
Method Increase in the supply
Subunit
10
8 satoshi
10
6 bit or BTC
10
3 mBTC
Symbol BTC, XBT,
Bitcoin is a software-based online payment system described by Satoshi Nakamoto
[2]
in 2008 and introduced as
open-source software in 2009. Payments are recorded in a public ledger using its own unit of account, which is also
called bitcoin.
[3]
The WSJ and The Chronicle of Higher Education advocate use of lowercase bitcoin in all cases,
however.
[4]
This article follows the latter convention.</ref> Payments work peer-to-peer without a central repository
or single administrator, which has led the US Treasury to call bitcoin a decentralized virtual currency. Although its
status as a currency is disputed, media reports often refer to bitcoin as a cryptocurrency or digital currency.
Bitcoins are created as a virtual product in reward for payment processing work, in which users offer their computing
power to verify and record payments into a public ledger. Called mining, individuals or companies engage in this
activity in exchange for transaction fees and newly created bitcoins. Besides mining, bitcoins can be obtained in
exchange for fiat money, products, and services. Users can send and receive bitcoins electronically for an optional
transaction fee using wallet software on a personal computer, mobile device, or a web application.
Bitcoin as a form of payment for products and services has seen growth, and merchants have an incentive to accept
the digital currency because fees are lower than the 23% typically imposed by credit card processors. The European
Banking Authority has warned that bitcoin lacks consumer protections. Unlike credit cards, any fees are paid by the
purchaser not the vendor. Bitcoins can be stolen and chargebacks are impossible.
[5]
Commercial use of bitcoin is
currently small compared to its use by speculators, which has fueled price volatility.
Bitcoin has been a subject of scrutiny amid concerns that it can be used for illegal activities. In October 2013 the US
FBI shut down the Silk Road online black market and seized 144,000 bitcoins worth US$28.5 million at the time.
The US is considered bitcoin-friendly compared to other governments. In China, buying bitcoins with yuan is subject
to restrictions, and bitcoin exchanges are not allowed to hold bank accounts.
Bitcoin
44
Overview
The most important part of the bitcoin system is a public ledger that records financial transactions in bitcoins. This is
accomplished without the intermediation of any single, central authority, as long as mining is decentralized. Instead,
multiple intermediaries exist in the form of computer servers running bitcoin software. By connecting over the
Internet, these servers form a network that anyone can join. Transactions of the form payer X wants to send Y
bitcoins to payee Z are broadcast to this network using readily available software applications. Bitcoin servers can
validate these transactions, add them to their copy of the ledger, and then broadcast these ledger additions to other
servers.
The block chain ledger
All bitcoin transfers are recorded in a computer file that acts as a public ledger called the block chain, which
everyone can examine. Where a conventional ledger records the transfer of actual bills or promissory notes that exist
apart from it, bitcoins are simply entries in the block chain and do not exist outside of it.
Mining
Obsolete bitcoin mining hardware common in
mid and late 2013. Called USB Block Erupter,
each can calculate ~333 megahashes per second.
Maintaining the block chain is called mining, and those who do are
rewarded with newly created bitcoins and transaction fees. Miners may
be located anywhere in the world; they process payments by verifying
each transaction as valid and adding it to the block chain. As of
2014[6], payment processing is rewarded with 25 newly created
bitcoins per block added to the block chain. To claim the reward, a
special transaction called a coinbase is included with the processed
payments. All bitcoins in circulation can be traced back to such
coinbase transactions. The bitcoin protocol specifies that the reward for
adding a block will be halved approximately every four years.
Eventually, the reward will be removed entirely when an arbitrary limit
of 21 million bitcoins is reached c. 2140, and transaction processing
will then be rewarded by transaction fees solely. Paying a transaction fee is optional, but may speed up confirmation
of the transaction. Payers have an incentive to include such fees because doing so means their transaction will likely
be added to the block chain sooner; miners can choose which transactions to process and prefer to include those that
pay fees.
As of 2013[6] mining had become quite competitive, has been compared to an arms race and ever more specialized
technology is utilized. The most efficient mining hardware makes use of custom designed application-specific
integrated circuits, which outperform general purpose CPUs and use less power as well. Without access to these
purpose built machines, a bitcoin miner is unlikely to earn enough to even cover the cost of the electricity used in his
or her efforts.
Mining pools
The individual odds of winning the reward for adding a block to the block chain decrease with an increasing number
of miners. Since the reward for each block can only go to a single bitcoin address, As of 2014[6], it has become
common for miners to join organized mining pools, which split work and reward among all participants and make
mining a less risky endeavor. Even for those who join pools, the cost of the electricity necessary to mine may
outweigh the bitcoin rewards from doing so.
Bitcoin
45
Anonymity
The public nature of bitcoin means that, while those who use it are not identified by name, transactions can be linked
to individuals and companies. All transactions are recorded into a public ledger, the block chain, and are viewable by
everyone. Additionally, many jurisdictions require exchanges, where people can buy and sell bitcoins for cash, to
collect personal information. The privacy concerns of some who use bitcoins are sufficient to cause them to take
additional steps to cover their tracks. In order to obfuscate the link between individual and transaction, a different
bitcoin address for each transaction can be used, and others rely on so-called mixing services that allow users to
trade bitcoins whose transaction history implicates them for coins with different transaction histories.
[7]
It has been suggested that bitcoin payments should not be considered more anonymous than credit card payments.
Buying and selling
Bitcoins can be bought and sold with many different currencies from individuals and companies. Bitcoins may be
purchased in person or at a bitcoin ATM in exchange for cash currency.
[8]
Participants in online exchanges offer
bitcoin buy and sell bids. Using an online exchange to obtain bitcoins entails some risk, and according to one study,
45% of exchanges fail and take client bitcoins with them. Since bitcoin transactions are irreversible, sellers of
bitcoins must take extra measures to ensure they have received traditional funds from the buyer.
Wallets
See also: Digital wallet and Online wallet
Example of Casascius physical bitcoins
A paper wallet with QR codes
While wallets are often described as being a place to hold or store bitcoins,
[9]
due to the nature of the system,
bitcoins are inseparable from the block chain transaction ledger. Perhaps a better way to define a wallet is something
"that stores the digital credentials for your bitcoin holdings" and allows you to access (and spend) them. Bitcoin uses
public-key cryptography, in which two cryptographic keys, one public and one private, are generated. The public key
can be thought of as an account number or name and the private key, ownership credentials. At its most basic, a
wallet is a collection of these keys. Most bitcoin software also includes the ability to make transactions, however.
Perhaps better termed physical wallets, physical bitcoins are ubiquitous in media coverage and combine a novelty
coin with a private key printed on paper, metal, wood, or plastic. Physical bitcoins aren't widely seen outside of
pictures in news articleWikipedia:Citation needed, but for those serious about security, storing private keys on paper
printouts or in offline data storage devices is the best option.
Software
Main article: Bitcoin network
Bitcoin
46
Electrum sample bitcoin client
Bitcoin client software called a bitcoin wallet allows a user to transact
bitcoins. A wallet program generates and stores private keys, and
communicates with peers on the bitcoin network. The first wallet
program called Bitcoin-Qt was released in 2009 by Satoshi Nakamoto
as open source code. It can be used as a desktop wallet for payments or
as a server utility for merchants and other payment services.
Bitcoin-Qt, also called Satoshi client, is sometimes referred to as the
reference client because it serves to define the bitcoin protocol and acts
as a standard for other implementations. As of version 0.9, Bitcoin-Qt
has been renamed Bitcoin Core to more accurately describe its role in the network.
[10]
When making a purchase with
a mobile device, QR codes are used ubiquitously to simplify transactions. Several server software implementations
of the bitcoin protocol exist. So-called full nodes on the network validate transactions and blocks they receive, and
relay them to connected peers.
Ownership
The ownership of bitcoins associated with a certain bitcoin address can be demonstrated with knowledge of the
private key belonging to the address. For the owner, it is important to protect the private key from loss or theft. If a
private key is lost, the user cannot prove ownership by other means. The coins are then lost and cannot be recovered.
Because anyone with knowledge of the private key can take ownership of any associated bitcoins, theft can occur
when a private key is revealed or stolen.
Security, theft, and loss
Integral to bitcoin security is the prevention of unauthorized transactions from an individual's wallet. A bitcoin
transaction permanently transfers ownership to a new address, a string having the form of random letters and
numbers derived from public keys by application of a hash function and encoding scheme. The corresponding
private keys act as a safeguard for the owner; a valid payment message from an address must contain the associated
public key and a digital signature proving possession of the associated private key. Because anyone with a private
key can spend all of the bitcoins associated with the corresponding address, protection of private keys is quite
important. Loss of a private key may result in theft, which has occurred on numerous occasions. The practical
day-to-day security of bitcoin wallets is an ongoing concern. Risk of theft can be reduced by generating keys offline
on an uncompromised computer and saving them on external storage or paper printouts.
Bitcoins can be lost. In 2013 one user said he lost 7,500 bitcoins, worth $7.5m at the time, when he discarded a hard
drive containing his private key. Bitcoins can also be found. In March 2014, former bitcoin exchange Mt. Gox
reported it found an "old wallet, which was used before June 2011 [that] held about 200,000 bitcoins".
History
Main article: History of Bitcoin
Bitcoin was first mentioned in a 2008 research paper published under the name Satoshi Nakamoto. It is unknown
who Satoshi Nakamoto is. In 2009, an exploit in an early bitcoin client was found that allowed large numbers of
bitcoins to be created.
In March 2013, a technical glitch caused a fork in the block chain, with one half of the network adding blocks to one
version of the chain and the other half adding to another. For six hours two bitcoin networks operated at the same
time, each with its own version of the transaction history. The core developers called for a temporary halt to
transactions, sparking a sharp sell-off. Normal operation was restored when the majority of the network downgraded
to version 0.7 of the bitcoin software.
Some mainstream websites began accepting bitcoins c. 2013. WordPress started in November 2012 followed by
OKCupid in April 2013, Atomic Mall in November 2013, TigerDirect and Overstock.com in January 2014, Expedia
Bitcoin
47
in June 2014, and Newegg in July 2014. Certain non-profit or advocacy groups such as the Electronic Frontier
Foundation allow bitcoin donations. (Although this organization stopped accepting bitcoins in 2011 and began again
in 2013.
[11]
)
The first law enforcement events occurred in May 2013. Assets belonging to the Mt. Gox exchange were seized by
Department of Homeland Security, and the Silk Road drug market website was shut down by the FBI.
In October 2013, Chinese internet giant Baidu had allowed clients of website security services to pay with bitcoins.
During November 2013, the China-based bitcoin exchange BTC China overtook the Japan-based Mt. Gox and the
Europe-based Bitstamp to become the largest bitcoin trading exchange by trade volume. On 19 November 2013, the
value of a bitcoin on the Mt. Gox exchange soared to a peak of US$900 after a United States Senate committee
hearing was told that virtual currencies were a legitimate financial service. On the same day, one bitcoin traded for
over RMB6780 (US$1100) in China. On 5 December 2013, the People's Bank of China prohibited Chinese
financial institutions from using bitcoins. After the announcement, the value of bitcoins dropped and Baidu no longer
accepted bitcoins for certain services. Buying real-world goods with any virtual currency had been illegal in China
since at least 2009.
The first bitcoin ATM was installed in October 2013 in Vancouver, British Columbia, Canada.
With roughly 12 million existing bitcoins As of November 2013[6], the new price increased the market cap for
bitcoin to at least US$7.2 billion. By 23 November 2013, the total market capitalization of bitcoin exceeded US$10
billion for the first time.
In the US two men were arrested in January 2014 on charges of money-laundering using bitcoins including Charlie
Shrem, the head of defunct bitcoin exchange BitInstant and a vice chairman of the Bitcoin Foundation. Shrem
allegedly allowed the other arrested party to purchase large quantities of bitcoins for use on black-market websites.
In early February 2014, one of the largest bitcoin exchanges, Mt. Gox, suspended withdrawals citing technical
issues.
[12]
By the end of the month, Mt. Gox had filed for bankruptcy protection in Japan amid reports that 744,000
bitcoins had been stolen. Originally a site for trading Magic: The Gathering cards, Mt. Gox once was the dominant
bitcoin exchange although prior to the collapse its popularity had waned.
[13]
Economics
Classification
Bitcoin is commonly referred to as digital currency, digital cash, virtual currency, electronic currency, or
cryptocurrency. Some media outlets do make a distinction between "real" money and bitcoins, however. According
to the director of the Institute for Money, Technology and Financial Inclusion at the University of California-Irvine
there is "an unsettled debate about whether bitcoin is a currency or payment protocol".
Economists defining money as a store of value, a medium of exchange, and a unit of account agree that bitcoin has
some way to go to meet all these criteria. It does best as a medium of exchange. (About 1,000 bricks and mortar
businesses were willing to accept payment in bitcoins as of November 2013 in addition to more than 35,000 online
merchants.
[14]
) The bitcoin market currently suffers from volatility, limiting the ability of bitcoins to act as a stable
store of value, and, although bitcoin is the unit of account for the block chain, bitcoin does not see use as a unit of
account outside of it. Where people are allowed to buy with bitcoins, prices are not denominated in bitcoins.
The People's Bank of China has stated that bitcoin "is fundamentally not a currency".
Bitcoin
48
Price and volatility
To improve access to price information and increase transparency, on 30 April 2014 Bloomberg LP announced plans
to list prices from bitcoin companies Kraken and Coinbase on its 320.000 subscription financial data terminals.
According to Mark T. Williams of Boston University, the volatility of bitcoin is over seven times that of gold and
over eight times that of the S&P 500. The Bitcoin Foundation contends that high volatility is due to insufficient
liquidity while a Forbes journalist claims that it is related to the uncertainty of its long-term value. As of 2014,
pro-bitcoin venture capitalists argue the greatly increased trading volume that planned high-frequency trading
exchanges are hoped to bring will decrease price volatility. Volatility has little effect on the utility of bitcoin as a
payment processing system.
The price of bitcoins has gone through various cycles of appreciation and depreciation referred to by some as
bubbles and busts. In 2011, the value of one bitcoin rapidly rose from about US$0.30 to US$32 before returning to
US$2. In the latter half of 2012 and during the 2012-2013 Cypriot Financial Crisis, the bitcoin price began to rise,
reaching a peak of US$266 on 10 April 2013, before crashing to around US$50. At the end of 2013, the cost of one
bitcoin rose to the all-round peak of US$1135, but fell to the price of US$693 three days later.WP:NOTRS In 2014
the price fell sharply, and in April remained depressed at little more than half that of 2013.
Alternative to national currencies
Bitcoins are accepted in this caf in the Netherlands as
of 2013
Bitcoins are used by some Argentinians as an alternative to the
official currency,
[15]
which is stymied by inflation and strict
capital controls, to protect their savings against inflation or the
possibility that governments could confiscate savings accounts. It's
been suggested that during the 20122013 Cypriot financial crisis
bitcoin purchases rose due to fears that savings accounts would be
confiscated or taxed.
Speculative bubble
Bitcoin has been labelled a speculative bubble by many including
Former Federal Reserve Chairman Alan Greenspan and economist
John Quiggin. Two lead software developers of bitcoin, Gavin
Andresen and Mike Hearn, have warned that bubbles may occur.
[16]
Nobel Laureate Robert Shiller said that bitcoin
"exhibited many of the characteristics of a speculative bubble." Others reject the label and see bitcoin's quick rise in
price as nothing more than normal economic forces at work.
As investment
One way of investing in bitcoins is to buy and hold them as a long-term, high-risk investment. FINRA, a United
States self-regulatory organization, warns that investing in bitcoins carries significant risks. The European Banking
Authority warns that the risks of investment go beyond a potential fall in the value of bitcoins. Bitcoins may be of
limited value to unsophisticated investors. Risk hasn't deterred some such as the Winklevoss twins, who made a
US$1.5 million personal investment and attempted to launch a bitcoin ETF. The first regulated bitcoin fund was
established in Jersey in July 2014, with the approval of the Jersey Financial Services Commission. Other investors,
like Peter Thiel's Founders Fund, which invested US$3 million, don't purchase bitcoins themselves instead funding
bitcoin infrastructure like companies that provide payment systems to merchants, exchanges, and wallet services, etc.
Investors also invest in bitcoin mining.
Bitcoin
49
Supply
Growth of the bitcoin supply is predefined by the bitcoin protocol. Currently there are over twelve million bitcoins in
circulation with an approximate creation rate of 25 every ten minutes. The total supply is capped at an arbitrary limit
of 21 million, and every four years the creation rate is halved. This means new bitcoins will continue to be released
for more than a hundred years.
Value forecasts
Financial journalists and analysts, economists, and investors have attempted to predict the possible future value of
bitcoin. Economist John Quiggin stated, "bitcoins will attain their true value of zero sooner or later, but it is
impossible to say when." In 2013, Bank of America FX and Rate Strategist David Woo forecast a maximum fair
value per bitcoin of $1,300. Bitcoin investor Cameron Winklevoss stated in 2013 that the "[s]mall bull case scenario
for bitcoin is... 40,000 USD a coin". In late 2013, finance professor Mark Williams forecast a bitcoin would be worth
less than ten US dollars by July 2014. Since then bitcoin have exchanged as low as $344 (April 2014) and during
July 2014 the bitcoin low has been $609.
On its political economy
The Nation suggested in May 2014, that it was "difficult to see what problem Bitcoin solves for people with
left-wing politics.".
Vasilis Kostakis and Michel Bauwens claim that bitcoin is a currency that reflects a new type of capitalism, named
distributed capitalism. and that this new capitalism conforms to characteristics of the network era and utilizes the
peer-to-peer infrastructures to achieve capital accumulation. According to Vasilis Kostakis it might appear as though
it exists outside the financial system, but by promoting scarcity and competition this project aggravates the
over-accumulation of capital and exacerbates the social inequalities that it is supposed to combatWikipedia:Disputed
statement According to Vasilis Kostakis bitcoin should be viewed like a new technology, not just a currency: It has
paved the way for new types of currencies that utilize new technological infrastructures and whose dynamics should
not be ignored.
Reception
Some economists have responded positively to bitcoin, including Franois R. Velde, Senior Economist at the
Chicago Fed, who described it as "an elegant solution to the problem of creating a digital currency." Paul Krugman
and Brad DeLong have found fault with bitcoin questioning why it should act as a reasonably stable store of value or
whether there is a floor on their value. Economist John Quiggin has criticized bitcoin as "the final refutation of the
efficient-market hypothesis".
David Andolfatto, a Vice President at the Federal Reserve Bank of St. Louis, stated that bitcoin is a threat to the
establishment, which he argues is a good thing for the Federal Reserve System and other central banks because it
prompts these institutions to operate sound policies.
Free software movement activist Richard Stallman has criticized the lack of anonymity and called for reformed
development. PayPal President David A. Marcus calls bitcoin a "great place to put assets" but claims it will not be a
currency until price volatility is reduced. As bitcoins proved popular, they have been increasingly covered by comics
around the world.
Bitcoin
50
Acceptance by merchants
Established firms that accept bitcoins include Atomic Mall, Clearly Canadian, Dish Network, Overstock.com, the
Sacramento Kings, TigerDirect, Virgin Galactic, Zynga,Newegg., Expedia, and Dell.
In late 2013 the University of Nicosia became the first university in the world to accept it.
Financial institutions
As of 2014, bitcoin companies have had difficulty opening traditional bank accounts because lenders have been leery
of bitcoin's links to illicit activity. According to a co-founder of one such company, BitPay, "banks are scared to deal
with bitcoin companies, even if they really want to". Yet, some financial institutions have been bullish on bitcoin. In
a 2013 report, Bank of America Merrill Lynch stated that "we believe bitcoin can become a major means of payment
for e-commerce and may emerge as a serious competitor to traditional money-transfer providers. As a medium of
exchange, bitcoin has clear potential for growth and that in a long-term fair-value analysis maximum market
capitalization for bitcoins could be $15 billion." In June 2014, the first bank that converts deposits in currencies
instantly to bitcoin without any fees, for further transactions, was opened in Boston.
Concurrent with Bloomberg LP, 33% owned by Merrill Lynch launching pricing information is the development of
high-frequency trading firms by Atlas ATS in New York and Hong Kong and one from London-based Coinfloor,
claiming to be the first auditable bitcoin exchange, and a SecondMarket project of an exchange for institutional
investors.
A US government auction of almost 30,000 bitcoins seized in October 2013 from the Silk Road on 30 June 2014 by
the US Marshals Service was said to increase legitimacy of the currency. The 45 registered bidders, each of whom
put down a deposit of $200,000 made 63 bids.
[17]
Legal and journalistic opinions
Bitcoins have been evaluated and treated in various ways around the world. Magistrate Judge Amos Maazant of a
Texas court classified bitcoins as currency. A German court found bitcoin to be a unit of account. The Finnish
Government judged it to be a commodity. The People's Bank of China has stated that bitcoin "is fundamentally not a
currency".
A WSJ journalist declared bitcoins a commodity in December 2013. A Forbes journalist referred to bitcoins as
digital collectible. Two University of Amsterdam computer scientists proposed the term 'money-like informational
commodity' in order "to allow for a systematic discussion of its development through all stages including an initial
stage and a possible demise without being constrained by the implications of it being a money or a near-money".
Wired magazine summarized the reception of bitcoin, saying "many leading economists [believe] bitcoin is a fatally
flawed idea shaped by people who dont really understand how money works".
Legal status and regulation
Main article: Legal status of Bitcoin
Few governments have moved to regulate bitcoin and similar private currencies. According to the European Central
Bank, traditional financial sector regulation is not applicable because bitcoin does not involve traditional financial
actors. On the other hand, the Bitcoin Foundation Canadas report: Bitcoin and the law: An analytical report on
Bitcoins legal and regulatory framework in Canada dispels the myth that Bitcoin is not regulated in Canada.
[18]
Under other regimes, existing rules have been extended to include bitcoin and bitcoin companies. Steven Strauss, a
Harvard public policy professor, suggested in April 2013 governments could outlaw bitcoin, a possibility that was
mentioned in a 2013 SEC filing made by a bitcoin investment vehicle. A detailed survey of forty foreign
jurisdictions and the European Union is maintained by the US Library of Congress.
Bitcoin
51
Bolivia
Bitcoin is banned by the Bolivian central bank.
[19]
Canada
The Canadian government announced in February 2014 that it was going to regulate bitcoin under existing
anti-money laundering and counter-terrorist financing legislation.
[20]
In Quebec, The Financial Markets Authority
stated in regards to bitcoin ATMs, that it would prosecute any violation of the Securities Act, the Derivatives Act, or
the Money Services Business Act.
[21]
China
China restricted bitcoin exchange for local currency in December 2013. On 10 April 2014 the Peoples Bank of
China ordered banks and all third-party payment services to stop dealing with anyone in the bitcoin business. The
ruling de-funds all Chinese bitcoin trading websites, as they will no longer have bank accounts in China.
Cyprus
The use of bitcoins is not regulated in Cyprus. On 11 December 2013, the Central Bank of Cyprus issued a statement
on bitcoins, stating that "it considers the use of any kind of virtual money as particularly dangerous, given that it is
not under any regulatory system and its operation is unchecked."
Ecuador
On the 24th of July 2014, Ecuador effectively banned bitcoin, along with all other decentralized digital currencies,
approving a monetary reform allowing the government to create its own centralized digital currency. This new
reform comes as a severe blow to the bitcoin industry in Ecuador, since it demands that they shut down their
operations immediately. Those who defy the ban will face prosecution, and all bitcoins circulated and assets in
bitcoin trades face confiscation.
Europe
In July 2014 the European Banking Authority advised European banks not to deal in virtual currencies such as
bitcoin until a regulatory regime was in place.
Hong Kong
Pre-existing Hong Kong law covers acts of fraud and money laundering involving virtual commodities.
India
Digital or virtual currencies such as bitcoin have gained widespread acceptance in India despite a natural skepticism
to assets not backed by tangible entities such as land. After the RBI warning in December 2013, a number of bitcoin
operators shut shop.Wikipedia:Citation needed The actions of the ED (enforcement directorate) and the I-T
(income-tax) department have sent tremors throughout the mainstream bitcoin community in India, if only for the
reason that there is still no official regulation on how companies involved in dealing with digital currencies should
comply with anti-money laundering and financial transaction laws.
Indonesia
A spokesman for Bank Indonesia reportedly issued a statement on bitcoin in December 2013, saying that "bitcoin is
a potential payment method, but its different than ordinary currency... It is not regulated by the central bank so there
are risks... At the moment, were studying bitcoin and we have no plan to issue a regulation on it."
Japan
No laws in Japan regulate the use of bitcoins. Haruhiko Kuroda, governor of the Bank of Japan (BOJ), stated in
December, 2013, that BOJ was "researching issues of bitcoins, but I have nothing to say regarding bitcoins at the
moment."
[22]
As of July 2014, Japans new Bitcoin business advocacy group, The Japan Authority of Digital Asset,
has launched with the governments explicit support, aiming to help establish standards and codes of conduct for its
member organizations.
[23]
Bitcoin
52
Jersey
The first regulated bitcoin fund was established in Jersey in July 2014, with the approval of the Jersey Financial
Services Commission, after island leaders expressed a desire for Jersey to become a global center for digital
currencies. At the time of the establishment of the fund, bitcoin was already being accepted by some local
businesses.
Russian Federation
On 27 January 2014, the Central Bank of the Russian Federation issued a statement entitled "On Using Virtual
Currencies, Specifically Bitcoin, in Transactions." According to the statement, the Central Bank views the services
of Russian legal entities aimed at assisting in the exchange of bitcoins for goods, services, or currencies as a
"dubious activity" associated with money laundering and terrorism financing, and recommends that Russian
individuals and legal entities refrain from transactions involving bitcoins.
Singapore
The Monetary Authority of Singapore may require bitcoin intermediaries to collect personal details of their
customers and report suspicious activity similar to what it requires from money changers.
USA
In the US the first step of regulation occurred in July 2011, when the US Department of Treasury's Financial Crimes
Enforcement Network added "other value that substitutes for currency" to its definition of Money services
businesses. In 2013 the Treasury issued new rules regarding virtual currencies, whereby exchanges (but not users)
are considered money transmitters and must comply with rules to prevent money laundering and terrorist financing.
Besides obtaining personal details of clients, bitcoin exchanges must verify that their customers are not on the Office
of Foreign Asset Controls Specially Designated Nationals list. In April 2014, the Treasury confirmed that bitcoin
cloud mining and escrow services are not classified as money transmitters.
The US Government Accountability Office reviewed virtual currencies upon the request of the Senate Finance
Committee and in May 2013 recommended that the IRS formulate tax guidance for bitcoin businesses. On 25 March
2014, in time for 2013 tax filing, the IRS issued a guidance that virtual currency is treated as property for US federal
tax purposes and that "an individual who 'mines' virtual currency as a trade or business [is] subject to
self-employment tax."
The US Commodity Futures Trading Commission stated in March 2014 it was considering regulation of digital
currencies.
In January 2014, the US Securities and Exchange Commission (SEC) was very focused on whether
bitcoin-denominated stock exchanges were illegal, per its enforcement administrator, and inquired into the gambling
site SatoshiDice listing shares on bitcoin exchange MPEx. In May it warned investors that "both fraudsters and
promoters of high-risk investment schemes may target Bitcoin users." The SEC charged and settled with the former
owner of SatoshiDice in June 2014 for selling securities without registering with the SEC.
The IRS classified bitcoins as a capital asset end of March 2014 and subject to taxes on capital gains.
On 8 May 2014, the US Federal Election Commission issued draft guidance to US politicians who want to receive
bitcoin donations. The Commission declined to declare bitcoins currency, opting to deem them items "of value."
In May 2014, Brett Stapper, co-founder of Falcon Global Capital, registered to lobby members of Congress and
federal agencies on issues related to bitcoin.
As of July 2014[6], there are no rules at the US state level yet; In March, the New York State Department of
Financial Services had officially invited bitcoin exchanges to apply with them. On 17 July it published draft
regulations for businesses that receive, exchange, transmit or store virtual currency. Businesses would have to
provide transaction receipts, disclosures about risks, policies to handle customer complaints, maintain a
cybersecurity program, hire a compliance officer and verify details about their customers to follow
Bitcoin
53
anti-money-laundering rules, per FinCEN.
California Assemblyman Roger Dickinson (D-Sacramento) drafted legislation (Assembly Bill 129)drafted legislation
(Assembly Bill 129)
[24]
to legalize bitcoin and all other alternative and digital currency, such as Litecoin, Dogecoin,
Starbucks Stars, and Amazon Coins. However, Dickinson "thinks the federal government should regulate the
cryptocurrency" and said "I saw this legislation as a ways of cleaning up the code in California to conform to
reality".
International guidance
The 2013 G7's Financial Action Task Force published guidance for Internet-based payment services that defines
"exchangers buying or selling digital currency for cash (or other digital currencies) [...] as a virtual bureau de
change" and warns that "Internet-based payment services that allow third party funding from anonymous sources
may face an increased risk of [money laundering/terrorist financing]" concluding that this may "pose challenges to
countries in [anti-money laundering/counter terrorist financing] regulation and supervision."
Criminal activity
Bitcoins have been associated with online criminal behavior and so-called cybercriminals. Used to obfuscate online
transactions, bitcoins are seized when deep web black markets are shut by authorities.
[25]
Criminal activities have
stigmatized the currency and attracted the attention of financial regulators, legislative bodies, and law
enforcement.
[26]
CNN has referred to bitcoin as a "shady online currency [that is] starting to gain legitimacy in
certain parts of the world," and The Washington Post calls it "the currency of choice for seedy online activities." The
FBI stated in a 2012 report that "bitcoin will likely continue to attract cyber-criminals who view it as a means to
move or steal funds." Criminal activity involving bitcoin has largely centered around theft, money laundering, the
use of botnets for mining, and the use of bitcoins in exchange for illegal items or services. "Like cash, it can be used
for ill as well as for good." Certain nation states may feel that its use in circumventing capital controls is also
undesirable. Despite claims made by non-profit Bitcoin Foundation that "cryptography is the reason no one can steal
bitcoins," theft is widespread.
[27]
Black markets
In 2012, it was estimated that 4.5% to 9% of all transactions of all bitcoin exchanges in the world were for drug
trades on a single deep web drugs market, Silk Road. The bulk of bitcoin purchases during the time were speculative
in nature, so drugs must have constituted a greater percentage of the actual goods purchased with bitcoins c. 2012.
Silk Road was shut by US law enforcement in October 2013 leading to a short-term fall in the value of bitcoin.
[28]
Alternative sites were soon available, and in early 2014 the Australian Broadcasting Corporation reported that the
closure of the Silk Road had little impact on the number of Australians selling drugs online, which had actually
increased.
Several news outlets have asserted that the popularity of bitcoins hinges on the ability to use them to purchase illegal
goods. Non-drug transactions were thought to be far less than the number involved in the purchase of drugs, and
roughly one half of all transactions made using bitcoin c. 2013 were bets placed at a single online gambling website,
Satoshi Dice. One source stated online gun dealers use bitcoin to sell arms without background checks. The bitcoin
community branded one site, Sheep Marketplace, as a scam when it prevented withdrawals and shut down after an
alleged bitcoins theft. In a separate case, escrow accounts with bitcoins belonging to patrons of a different black
market were hacked in early 2014.
Bitcoin
54
Money laundering
Bitcoins may not be ideal for money laundering because all transactions are public. Authorities have expressed
concerns, however. The European Banking Authority and the FBI have both stated that bitcoin may be used for
money laundering.
[29]
In early 2014, an operator of a US bitcoin exchange was arrested for money laundering.
Ponzi scheme
Various journalists, US economist Nouriel Roubini, and the head of the Estonian central bank have voiced concerns
that bitcoin may be a Ponzi scheme.
[30]
Bitcoin supporters disagree. A 2012 report by the European Central Bank
states, "it [is not] easy to assess whether or not the bitcoin system actually works like a pyramid or Ponzi scheme."
In an alleged Ponzi scheme that utilized bitcoins, The Bitcoin Savings and Trust promised investors up to 7 percent
weekly interest, and raised at least 700,000 bitcoins from 2011 to 2012. The SEC charged the company and its
founder in 2013 "with defrauding investors in a Ponzi scheme involving bitcoin...".
Thefts
A theft is an unauthorized transfer from a bitcoin address using the private key to unlock the address. Because
transactions are irreversible and the identity of users difficult to unmask, it is rare that stolen bitcoins are recovered
and returned. Theft occurs on a regular basis despite claims made by the Bitcoin Foundation that theft is impossible.
Generating and storing keys offline mitigates the risk of theft. Most large-scale thefts occur at exchanges or online
wallet services that store the private keys of many users. The thief hacks an online wallet service by finding a bug in
its website or spreading malware to computers holding the private keys.
Many high-profile thefts have been reported. In late November 2013, an estimated $100 million in bitcoins were
stolen from the online illicit goods marketplace Sheep Marketplace, which immediately closed. Users tracked the
coins as they were processed and converted to cash, but no funds were recovered and no culprits identified. A
different black market, Silk Road 2, stated that during a February 2014 hack bitcoins valued at $2.7 million were
taken from escrow accounts. In late February 2014 Mt. Gox, one of the largest virtual currency exchanges, filed for
bankruptcy in Tokyo after its computer system was hacked and approximately $477 million in bitcoins were stolen.
Flexcoin, a bitcoin storage specialist based in Alberta, Canada, shut down on March 2014 after saying it discovered a
theft of about $650,000 in bitcoins. Poloniex, a digital currency exchange, reported on March 2014 that it lost
bitcoins valued at around $50,000.
Malware
Bitcoin-related malware includes software that steals bitcoins from users using a variety of techniques, software that
uses infected computers to mine bitcoins, and different types of ransomware, which disable computers or prevent
files from being accessed until some payment is made. Security company Dell SecureWorks said in February 2014
that it had identified 146 types of bitcoin malware; about half of it undetectable with standard antivirus scanners.
Unauthorized mining
In June 2011, Symantec warned about the possibility that botnets could mine covertly for bitcoins. Malware used the
parallel processing capabilities of GPUs built into many modern video cards. Although the average PC with an
integrated graphics processor is virtually useless for bitcoin mining, tens of thousands of PCs laden with mining
malware could produce some results.
Several reports of employees or students using university or research computers to mine bitcoins have been
published.
Bitcoin
55
Botnet cases
In mid-August 2011, bitcoin mining botnets were detected, and less than three months later, bitcoin mining trojans
had infected Mac OS X.
In April 2013, electronic sports organization E-Sports Entertainment was accused of hijacking 14,000 computers to
mine bitcoins; the company later settled the case with the State of New Jersey.
German police arrested two people in December 2013 who customized existing botnet software to perform bitcoin
mining, which police said had been used to mine at least $950,000 worth of bitcoins.
For four days in December 2013 and January 2014, Yahoo Europe hosted an ad containing bitcoin mining malware
that infected an estimated two million computers. The software, called Sefnit, was first detected in mid-2013 and has
been bundled with many software packages. Microsoft has been removing the malware through its Microsoft
Security Essentials and other security software since January 2014.
Malware stealing bitcoins
Some malware can steal private keys for bitcoin wallets allowing the bitcoins themselves to be stolen. The most
common type searches computers for cryptocurrency wallets to upload to a remote server where they can be cracked
and their coins stolen. Many of these also log keystrokes to record passwords, often avoiding the need to crack the
keys. A different approach detects when a bitcoin address is copied to a clipboard and quickly replaces it with a
different address, tricking people into sending bitcoins to the wrong address. This method is effective because
bitcoin transactions are irreversible.
Cases of theft
One virus, spread through the Pony botnet, was reported in February 2014 to have stolen up to $220,000 in
cryptocurrencies including 335 bitcoins from 85 wallets. Security company Trustwave, which tracked the malware,
reports that its latest version was able to steal 30 types of digital currency.
A type Mac malware active in August 2013, Bitvanity posed as a vanity wallet address generator and stole addresses
and private keys from other bitcoin client software. A different trojan for Mac OS X, called CoinThief was reported
in February 2014 to be responsible for multiple bitcoin thefts, including one user who lost 20 bitcoins. The software
was hidden in versions of some cryptocurrency apps on Download.com and MacUpdate.
Ransomware
Another type of bitcoin-related malware is ransomware. One program called Cryptolocker, typically spread through
legitimate-looking email attachments, encrypts the hard drive of an infected computer, then displays a countdown
timer and demands a ransom, usually two bitcoins, to decrypt it. Police in Massachusetts said they paid a 2 bitcoin
ransom in November 2013, worth more than $1,300 at the time, to decrypt one of their hard drives. Linkup, a
combination ransomware and bitcoin mining program that surfaced in February 2014, disables internet access and
demands credit card information to restore it, while secretly mining bitcoins.
Bitcoin
56
Security
Further information: Bitcoin network
There are two main ways the blockchain ledger can be corrupted to steal bitcoins: by fraudulently adding to or
modifying it. The bitcoin system protects the blockchain against both using a combination of digital signatures and
cryptographic hashes.
The Addition Attack and digital signatures
Payers and payees are identified in the blockchain by their public cryptographic keys: most bitcoin transfers are from
one public key to a different public key. (Actually, hashes of these keys are used in the blockchain, and are called
"bitcoin addresses".) In principle, an attacker Eve could steal money from Alice and Bob by simply adding
transactions to the blockchain ledger like Alice pays Eve 100 bitcoins, Bob pays Eve 100 bitcoins, and so on, using of
course these people's bitcoin addresses instead of their names. The bitcoin protocol prevents this kind of theft by
requiring every transfer to be digitally signed with the payer's private key; only signed transfers can be added to the
blockchain ledger. Since Eve cannot forge Alice's signature, Eve cannot defraud Alice by adding an entry to the
blockchain equivalent to Alice pays Eve 100 bitcoins. At the same time, anyone can verify Alice's signature using her
public key, and therefore that she has authorized any transaction in the blockchain where she is the payer.
The Modification Attack and mining
The other principal way to steal bitcoins would be to modify blockchain ledger entries. Eve could buy something
from Alice, like a sofa, by adding a signed entry to the blockchain ledger equivalent to Eve pays Alice 100 bitcoins.
Later, after receiving the sofa, Eve could modify that blockchain ledger entry to read instead: Eve pays Alice 1
bitcoin, or even delete the entry. Digital signatures cannot prevent this attack: Eve can simply sign her entry again
after modifying it.
To prevent modification attacks, the bitcoin system first requires entries be added to the blockchain not one at a time,
but in groups or blocks. More importantly, each block must be accompanied by a cryptographic hash of three things:
the hash of the previous block, the block itself, and a number called a nonce. A hash of only the first two items will,
like any cryptographic hash, always have a fixed number of bits (e.g. 256 for SHA-256). The nonce is a number
which, when included, yields a hash with a specified number of leading zero bits. Because cryptographic hashes are
essentially random, in the sense that their output cannot be predicted from their inputs, there is only one known way
to find the nonce: to try out integers one after the other, e.g. 1, then 2, then 3, and so on. This process is called
mining. The larger the number of leading zeros, the longer on average it will take to find a requisite nonce. The
bitcoin system constantly adjusts the number of leading zeros so that the average time to find a nonce is about ten
minutes. That way, as computer hardware gets faster over the years, the bitcoin protocol will simply require more
leading zero bits to make mining always last about ten minutes.
This system prevents modification attacks in part because an attacker has to recalculate all the hashes of the blocks
after the modified one. In the example above, if Eve wants to change 100 bitcoins to 1 bitcoin, she will not only have
to recompute the hash of the block that transaction is in, but of all the blocks that come after it; she will have to
recreate the chain of blocks. Although she could do this in principle, it would take her about ten minutes on average
per block. Concurrently, the network will continue to add blocks at a much faster rate than Eve alone can mine. Eve
would have to recalculate all the blocks before the network could add a new one, or at least catch up with or overtake
the network's miners. To achieve this would require roughly as much computing power as all existing bitcoin miners
combined which would be prohibitively expensive and, if the bitcoin network is large enough, essentially unfeasible.
Moreover, due to the financial incentives of mining new bitcoins, it would make more economic sense for Eve to
devote her resources to normal bitcoin mining instead. Thus the system protects against fraudulent blockchain
modifications by making them expensive and, if the attacker is rational, unappealing because they make less
financial sense than becoming a miner. The more miners there are, the more expensive and less feasible such attacks
Bitcoin
57
become, making the whole system even more secure.
Double-spending
Bitcoin system is based on an innovative solution of a problem common to all digital currency and payment
schemes: that of so-called double-spending. With paper money or physical coins, when the payer transfers money to
the payee, the payer cannot keep a copy of that dollar bill or coin. With digital money, which is just a computer file,
this is not the case, and the payer could in principle spend the same money again and again, copying the file over and
over. With bitcoin, when Eve offers to pay Alice some bitcoins, Alice can always first check the blockchain ledger to
verify that Eve actually owns that many bitcoins. Of course, Eve could try to pay many people simultaneously; but
bitcoin can defend against that. If Eve offers to pay Alice some bitcoins in exchange for goods, Alice can stipulate
that she will not deliver the goods until Eve's payment to Alice appears in the blockchain, which typically involves
waiting about ten minutes.
Types of attacks
Race attack
If the transaction has no confirmations, shops and services which accept payment can be exposed to a so-called race
attack. For example, two transactions are created for the same funds to be sent to different shops/services. System
rules ensure that only one of those transactions can be added to the block chain.
Shops can take numerous precautions to reduce this type of attack. It is always good to consider whether you should
accept transactions without any confirmation.
Finney attack
Shops or services which accept transactions without any confirmation are affected. A Finney attack is an attack
which requires the participation of a miner to premine a block sending the money to be defrauded back to the
fraudster. The risk of such an attack cannot be reduced to nothing regardless of the preventative measures taken by
shops or services, but it does require the participation of a miner and an ideal combination of contributing factors. It
is no mean feat, the miner risks a potential loss of the block reward. Just as with the other type of attack, the shop or
service must seriously consider its policies concerning transactions without any confirmation.Wikipedia:Citation
needed
Vector76 attack
Also called an attack with confirmation, this is a combination of the 2 aforementioned attacks which gives the
perpetrator the ability to spend funds twice simply with a confirmation.Wikipedia:Citation needed
Brute force attack
This attack is possible even if the shop or service is expecting several transaction confirmations. It requires the
attacker to be in possession of relatively high-performance hardware (hash frequency).
The perpetrator sends a transaction to the shop paying for a product/service and at the same time continues looking
for a connection in the block chain (block chain fork) which recognizes this transaction. After a certain number of
confirmations, the shop sends the product. If the perpetrator has found more than n blocks at this point, he breaks his
block chain fork and regains his money, but if the perpetrator has not succeeded in doing this, the attack can be
deemed a failure and the funds are sent to the shop, as should be the case.
The success of this attack depends on the speed (hash frequency) of the attacker and the number of confirmations for
the shop/service. For example, if the attacker possesses 10% of the calculation power of the bitcoin network and the
shop expects 6 confirmations for a successful transaction, the probability of success of such an attack will be
0.1%.Wikipedia:Citation needed
Bitcoin
58
>50% attack
If the perpetrator controls more than 50% of the bitcoin network power, the probability of success of the
aforementioned attack will be 100%. By virtue of the fact that the perpetrator can generate blocks more often than
the other part of the network, he can create his own block chain until it becomes longer than the "integral" part of the
network.
In the media
A bitcoin documentary film called The Rise and Rise of Bitcoin made its debut at the Tribeca Film Festival in New
York on 23 April 2014, chronicling bitcoin's origins to its explosive growth in 2013.
[31]
In Fall 2014, undergraduate students at the Massachusetts Institute of Technology will receive $100 in bitcoins "to
better understand this emerging technology". A student had the idea of a Bitcoin Club and raised more than half a
million dollars from a high frequency trader.
Some US political candidates, including New York City Democratic Congressional candidate Jeff Kurzon have said
they would accept campaign donations in bitcoin.
Notes
[1] https:/ / blockchain. info/ charts/ total-bitcoins?timespan=all& showDataPoints=false& daysAverageString=1& show_header=true&
scale=0& address=
[2] [2] It is not known whether the name "Satoshi Nakamoto" is real or a pseudonym, or whether it represents one person or a group of people.
[3] There is no uniform convention for bitcoin capitalization. Some sources use Bitcoin, capitalized, to refer to the technology and network and
bitcoin, lowercase, to refer to the unit of account.<ref name="capitalization">
[4] [4] For WSJ, see
For Chronicle of Higher Ed, see
[5] [5] For theft, see
For lack of chargebacks, see
[6] http:/ / en. wikipedia. org/ w/ index. php?title=Bitcoin& action=edit
[7] [7] For use of different address for each transaction, see
For mixing services, see
[8] [8] For ATMs, see
For buying in person, see
[9] [9] For wallets holding bitcoins, see
For wallets storing bitcoins, see
[10] http:/ / www.coindesk. com/ bitcoin-version-0-9-0-brings-transaction-malleability-fixes-branding-change/ .
[11] [11] For 2011 stoppage, see
For EFF accepting bitcoins , see
[12] [12] For Mt. Gox being a large exchange, see
For suspended withdrawals, see
[13] [13] For Magic: The Gathering, see
For waning popularity, see
[14] [14] To obtain 35,000 figure, 16,000 merchants signed up with Bitcoin payment processor Coinbase are added to 20,000 merchants signed to
BitPay.
For 16,000 Coinbase merchants, see
For 20,000 BitPay merchants, see
[15] [15] .Blogs.ft.com (16 April 2013). Retrieved 20 April 2013.
[16] [16] For Andresen, see
For Hearn, see
[17] The Guardian newspaper: Silk Road's legacy 30,000 bitcoin sold at auction to mystery buyers, 1 July 2014 (http:/ / www. theguardian. com/
technology/ 2014/ jul/ 01/ silk-road-bitcoin-auction)
[18] CryptoCoinNews: Foundation Report Discourages BitLicense-Style Bitcoin Regulations in Canada (http:/ / www. cryptocoinsnews. com/
news/ foundation-report-discourages-bitlicense-style-bitcoin-regulations-canada/ 2014/ 07/ 26)
[19] Bloomberg (http:/ / www. bloomberg.com/ news/ 2014-07-10/ bitcoin-by-bitcoin-the-winklevii-etf-inches-closer-to-reality. html)
Bitcoin
59
[20] [20] Duhaime Law
[21] [21] Duhaime Law
[22] Summary of Bank of Japan Press Conference, at 10 (http:/ / www. boj. or. jp/ announcements/ press/ kaiken_2013/ kk1312c. pdf)
[23] Money & Tech: Japans new Bitcoin business advocacy group, The Japan Authority of Digital Asset, has launched with the governments
explicit support, aiming to help establish standards and codes of conduct for its member organizations. (http:/ / moneyandtech. com/
july-11-news-update/ )
[24] http:/ / leginfo. legislature. ca.gov/ faces/ billNavClient. xhtml?bill_id=201320140AB129& search_keywords=
[25] [25] For obfuscation of transactions and seizure of bitcoins from black market Utopia, see
For seizure of bitcoins from black market Silk Road, see
[26] [26] For Bitcoin enthusiasts worries that the currency may be stigmatized as "drug barter tokens", see Chen, Adrian (1 June 2011). . Gawker.
For attention by law enforcement and regulatory bodies, see
[27] [27] For claim, see
For widespread theft, see
[28] [28] For law enforcement action, see
For drop in value, see
[29] [29] For FBI, see
For EBA, see
[30] [30] For journalist, see
For economist, see and
For head of central bank, see
[31] http:/ / newsbtc.com/ 2014/ 03/ 17/ bitcoin-documentary-film-rise-rise-bitcoin-debut-tribeca-film-festival/
References
This article incorporates text from this source (http:/ / en. bitcoinwiki. org/ Double-spending), which is
licensed under CC-BY-SA 3.0 (http:/ / creativecommons. org/ licenses/ by-sa/ 3. 0/ ).
External links
Wikimedia Commons has media related to Bitcoin.
Look up bitcoin in Wiktionary, the free dictionary.
The Wikibook Professionalism has a page on the topic of: BitTorrent and BitCoin
The Wikibook Strategy for Information Markets has a page on the topic of: Micropayments
Bitcoin (http:/ / www. dmoz. org/ Science/ Social_Sciences/ Economics/ Financial_Economics/
Currency_and_Money/ Alternative_Monetary_Systems/ Bitcoin) at DMOZ
Regulation of Bitcoin in Selected Jurisdictions (http:/ / www. loc. gov/ law/ help/ bitcoin-survey/ 2014-010233
Compiled Report_. pdf?loclr=bloglaw) The Law Library of Congress
Bitcoin video series (https:/ / www. khanacademy. org/ economics-finance-domain/ core-finance/
money-and-banking/ bitcoin/ v/ bitcoin-what-is-it) at Khan Academy
Bitcoin: a cryptographic currency (http:/ / cert. inteco. es/ extfrontinteco/ img/ File/ intecocert/ EstudiosInformes/
int_bitcoin_en. pdf) INTECO
Promissory note
60
Promissory note
A 1926 Promissory Note from the Imperial Bank
of India, Rangoon, Burma for 20,000 Rupees plus
interest
A promissory note is a legal instrument (more particularly, a financial
instrument), in which one party (the maker or issuer) promises in
writing to pay a determinate sum of money to the other (the payee),
either at a fixed or determinable future time or on demand of the payee,
under specific terms. If the promissory note is unconditional and
readily salable, it is called a negotiable instrument.
[1]
Referred to as a note payable in accounting (as distinguished from
accounts payable), or commonly as just a "note", it is internationally
defined by the Convention providing a uniform law for bills of
exchange and promissory notes, although regional variations exist.
Bank note is frequently referred to as a promissory note: a promissory
note made by a bank and payable to bearer on demand. Mortgage notes are another prominent example.
Overview
The terms of a note usually include the principal amount, the interest rate if any, the parties, the date, the terms of
repayment (which could include interest) and the maturity date. Sometimes, provisions are included concerning the
payee's rights in the event of a default, which may include foreclosure of the maker's assets. Demand promissory
notes are notes that do not carry a specific maturity date, but are due on demand of the lender. Usually the lender
will only give the borrower a few days' notice before the payment is due. For loans between individuals, writing and
signing a promissory note are often instrumental for tax and record keeping. A promissory note alone is typically
unsecured,
[2]
but these may be used in combination with security agreements such as mortgage, in which case they
are called mortgage notes.
International law
Definition and usage of promissory notes are internationally established by the Convention providing a uniform law
for bills of exchange and promissory notes, signed in Geneva in 1930. Article 75 of the treaty stated that a
promissory note shall contain:
the term "promissory note" inserted in the body of the instrument and expressed in the language employed in
drawing up the instrument
an unconditional promise to pay a determinate sum of money;
a statement of the time of payment;
a statement of the place where payment is to be made;
the name of the person to whom or to whose order payment is to be made;
a statement of the date and of the place where the promissory note is issued;
the signature of the person who issues the instrument (maker).
Promissory note
61
United States law
A promissory note issued by the Second Bank of
the United States, December 15, 1840, for the
amount of $1,000
In the United States, a promissory note that meets certain conditions is
a negotiable instrument regulated by article 3 of the Uniform
Commercial Code. Negotiable promissory notes called mortgage notes
are used extensively in combination with mortgages in the financing of
real estate transactions. One prominent example is the Fannie Mae
model standard form contract Multistate Fixed-Rate Note 3200, which
is publicly available. Promissory notes, or commercial papers, are also
issued to provide capital to businesses. However, Promissory Notes act
as a source of Finance to the company's creditors.
The various State law enactments of the Uniform Commercial Code define what is and what is not a promissory
note, in section 3-104(d):