MULTINATIONAL CORP-EVOL & CUR ISSUE - Essay Example

Bitcoin: The Underlying Pitfalls The launch of Bitcoin by Satoshi Nakamoto heralded a new development in the virtual currency system. Bitcoin was an open source software-based payment system that employed a unique business model. The system is fundamentally a peer-to-peer payment systems where there is no central depository or controlling body to manage and track the transactions. This has led to the definition of Bitcoin as a digital currency of cryptocurrency. Bitcoin has proven over the years to a useful financial instrument.

This is because, the Bitcoin platform charges individual users very little to execute transactions, regardless of size of destination of the transaction. This is in huge contrast with the systems employed by banks as they usually charge high rates to complete transactions, varying in size and destination. There are numerous underlying pitfalls in the use of Bitcoin. This paper will critically analyze these issues. Vulnerability to Theft Bitcoin is structured in a manner that an individual’s Bitcoin wallet is by default unencrypted.

This makes new wallets, particularly for new user vulnerable to theft. There have been newer version of Bitcoin that allow for encryption of an individual’s wallet, however, this is not by default, and the user has to specifically opt-in. Transaction Malleability A huge weaknesses within the Bitcoin system was revealed on February 10th 2014 when one of the biggest and oldest Bitcoin exchangers, Mt. Gox froze transactions within their system. While the initial statement from management attributed the shut down to a system bug, the real problem was with the company’s highly customized wallet systems.

Their system was highly prone to transaction malleability. Transaction malleability is the ability of a user to alter their transaction ID, otherwise referred to as TXID. This procedure can only take place within a small time period after the transaction has been executed. This function was initially meant to help multiple users execute a large transaction under one ID as in cases where crowd funding is required (Combs and Mitsoff). This means that the transaction IDs were never meant to be used as a way to track transaction.

However, large Bitcoin exchangers such as Mt. Gox, BTCe and Bitstamp used the TXIDs as a tracking tool and this allowed users to claim not having received funds from transactions that had a mutated TXID. These companies started paying out claims to the point where their funds could not cover deposits. Leading to the shutdown. This points out a huge flaw within the exchangers using the Bitcoin system. Bad System Actors and Black Markets Bitcoin was quickly adopted by many businesses around the globe owing to the fact that it’s resolved the issue of double spending that is synonymous with most virtual payment systems.

However, the very framework of Bitcoin allows for fraudulent actors to utilize the system. The system is generally accepted owing to the anonymity that it provides, creating a potential hub for cybercriminals. According to statistics, in 2012, about 5% to 9% of all Bitcoin transactions were for the trade of drugs online. The online drug business has thrived upon the anonymity that Bitcoin offers users (Mullan). Furthermore, other black market niches are cropping up online as a result of the anonymity that Bitcoin offers.

This includes the illegal arms market and illegal online gambling. Unreliable Financial Instrument The value of Bitcoin has recently been seen to be fluctuating in a rapid and vigorous manner. This can be seen in the fact that as of December 2013, one Bitcoin was valued at $1,200. Just before the Mt. Gox incident in February 2014, one Bitcoin was valued at $790. After the incident, it was valued at $619 (Mullan). The value of a Bitcoin have a tendency to fluctuate rapidly creating rapid increases and mostly increases in the value of the financial instrument.

This means that users have to contend with a cheaper payment system that may lead to value of their assets reduce drastically, even by 20%. Opinion and Recommendations Bitcoin Tracking The situation at Mt. Gox revealed the underlying problem with using transaction ID’s to track individual transactions. The mutability of the TXID makes it unreliable and misleading. There is need for Bitcoin exchangers to develop a system that tracks three crucial elements; (1) transaction size, (2) transaction time, and (3) recipient data.

These three elements determine the accuracy of a given transaction claim by a user as funds received and disbursed are tracked. Regulations There is need for regulation of the virtual currency market. This is because regulations that impose minimal capital and disclosure requirements are accompanies by rules and regulations that protect both the consumer and the marketplace to allow fair play in trading and exchange. In conclusion, there is general need for the Bitcoin platform to be regulated on all levels.

The system in itself has to be upgraded with security features that protects users against malicious attacks. Furthermore, there is need for regulation of user information owing to the fact that the system, in its current state, provides the right conditions for the growth of black markets. Works Cited Combs, Brett and Tom Mitsoff. Bitcoin decoded. New York: Propellerhead Marketing Group, 2014. Print. Mullan, Carl P. Digital currency challenge: Shaping Online Payment Systems through US Financial Regulations.

New York: Palgrave Point, 2014. Print. Yermack, David L. Is Bitcoin a real currency? Cambridge: National Bureau of Economic Research, 2013. Print.