Could Bitcoin, the digital currency agiley disrupting traditional financial systems, be an Aussie innovation? What is Bitcoin anyway? This Crikey Clarifier should help.

What is Bitcoin?

Bitcoin is a decentralised cryptocurrency that is convertible to existing currencies such as the US dollar. That means that people are able to transfer bitcoins between each other online without needing to rely on a bank or another trusted third party for the transaction. Transactions are all transparent, with a “block chain” working as a distributed public ledger to keep a record of transactions of bitcoins. This is done to ensure that all transactions are valid, and a person can’t double-spend a bitcoin, while also removing the need for a central authority to oversee all transactions.

Bitcoin “miners” earn bitcoins by gathering blocks of these transactions on the peer-to-peer network and verifying them in exchange for newly created bitcoins — in other words, they facilitate bitcoin transactions and take a fee for doing so. Payment is received once a valid hash key, determined by individual users’ hardware connected to the network, has been added to the block chain.

A user holds bitcoins in a virtual wallet with a public address that is used to receive bitcoins from other users, with a private key for each wallet used to make payments from that wallet.

According to Bitcoin Charts, 14.9 million bitcoins have been mined, with 220,481 transactions in the past 24 hours. There are 387,561 blocks, with around seven blocks per hour. There is a cap on the number of bitcoins that can be created at 21 million.

What is it worth?

For those who do not have the ability to mine bitcoins, there are currency exchanges online people can use to exchange traditional currency for bitcoins. Currently one bitcoin is worth $576.75 Australian dollars, according to CoinDesk. In 2010, one bitcoin was worth just 7 cents, but in mid-2013, this shot up to almost $1000 per bitcoin before slowly dropping down to its current level. Given the varying value, a single bitcoin can be divided down and transferred as a fraction of a bitcoin. The fluctuation in currency in 2013 led to a number of stories around early bitcoin miners suddenly discovering their thousands of bitcoin were now worth millions of dollars.

Are there any alternatives?

Bitcoin is the biggest, but other variations of cryptocurrency include Dogecoin, Litecoin, Darkcoin, and Mastercoin.

Is it a government-accepted currency?

In August 2014, the Australian Taxation Office ruled that a Bitcoin-based transaction is “akin to a barter arrangement”, and not money, or foreign currency, but would be considered an asset for capital gains tax purposes. When someone disposes of their bitcoins, the transaction would be subject to capital gains tax. Businesses that profit from buying, selling, or mining bitcoins will pay income tax on the profits.

Australia’s central banking authority, the Reserve Bank of Australia, is, for the moment, not too concerned about the rise of digital currencies and their impact on Australia’s financial system, stating in April this year that there was very limited use of digital currencies in Australia.

Is it safe?

There had been a price volatility in bitcoins over the past two years, but experts are noticing a downward trend on the volatility due to the increased number of exchanges opening up around the world.

Although the public key used for transactions in bitcoins keeps a log of all transactions using that public key, the Australian Federal Police remains concerned that because Bitcoin operates outside of regulated financial systems it is harder to trace. The AFP told a Senate committee investigating digital currencies this year that it had investigated the alleged theft of bitcoins via hacking, the use of bitcoins to import drugs from the now-defunct online marketplace known as Silk Road, and for money laundering.

Despite the AFP’s concerns, the Attorney-General’s Department has stated that there is little evidence that Bitcoin is being used to fund terrorism.

Hacking exchanges or pools of bitcoins can be a concern. The largest currency exchange Mt Gox shut down in early 2014 after an undetected theft, with 750,000 of its customers’ bitcoins stolen and 100,000 of its own bitcoins stolen.

Is Bitcoin an Australian innovation?

Bitcoin was created in 2009 by someone under the pseudonym of Satoshi Nakamoto. Not much has been known about Nakamoto outside of what he or she has written about Bitcoin, but Nakamoto’s identity has been the subject of widespread speculation, with many potential Spartacus-style Nakamotos being named in the media over the past few years. This week both Wired and Gizmodo have alleged that Nakamoto is in fact Dr Craig Steven Wright, a Sydney-based 44-year-old Australian IT security expert with a long history in Bitcoin. At last report he was said to be CEO for DeMorgan, a Sydney-based company involved in supercomputing, banking, security and Bitcoin. Wright had been planning to launch a Bitcoin bank.

Wright was asked at a Bitcoin conference when he became involved in Bitcoin and said he had been involved with it “for a long time” but did not claim to be the inventor of Bitcoin: “I keep my head down.”

Wired has alleged that several blog posts predating the release of Bitcoin, along with leaked emails and tweets from his now-deleted account, confirm Wright’s involvement in the early development of Bitcoin.

Gizmodo obtained emails and documents it has claimed were hacked from Wright’s email account. One email claims to show Wright emailing colleagues from an email address used by Nakamoto regarding how to lobby now-cabinet secretary Arthur Sinodinos. The documents also allege to show a transcript of a meeting with the ATO attempting to convince the ATO to treat his Bitcoin holdings as currency to avoid it being taxed as an asset. In that document, Wright said he did his best to “try and hide the fact that I’ve been running Bitcoin since 2009” but “by the end of this, I think half the world is going to bloody know.”

Wright has not commented on either story since they were published, and some, including WikiLeaks, doubt that Wright is Nakamoto.

Why is the ATO interested in the alleged ‘founder’?

The Australian Federal Police yesterday searched Wright’s home in Sydney on behalf of the ATO. A spokesperson for the ATO declined to comment about the search, citing confidentiality reasons.

While the documents, unable to be verified by the ATO due to confidentiality reasons, point to Wright being concerned about how his Bitcoin might be taxed, Business Insider has stated the search could be related to a disputed tax return and millions claimed in tax credits for Wright’s other company, Hotwire.