Virtual Currency

Virtual currencies, especially digital cryptocurrencies such as Bitcoin, will continue to provide challenges for cybersecurity professionals as the use of these currencies becomes more common.

Bitcoin authority Andrew Wagner notes that any money "based in 1's and 0's" meets the definition of digital currency (Wagner, 2014), although some users' first encounter with virtual currency comes with visits to virtual reality worlds and internet gaming sites. For example, Linden dollars are used in Second Life, an online virtual world (Second Life, n.d.). Linden Labs, the creator of Second Life, controls the supply of Linden dollars (Wagner, 2014).

Tokens that can be purchased with real money are used for the online gaming site World of Warcraft and other gaming sites (Osborn, 2017), but those sites and their currencies are controlled by the game developers (Wagner, 2014).

However, virtual currencies such as Bitcoin produced by open-source peer-to-peer software are used outside the virtual fantasy world. More importantly, they are not controlled by any one entity, but by the math-based cryptography itself. Some Bitcoin users are interested in the currency as a financial investment, but others are using Bitcoins for direct financial transactions.

Bitcoins are accepted by "brick and mortar" companies such as Dell as well as online providers (Chokun, 2016). Users make payments in Bitcoin from a virtual wallet application (Bitcoin FAQ, n.d.). However, the currency itself is not anonymous and transactions are public, stored in the Bitcoin network (Bitcoin FAQ, n.d.). There is no bank or third-party involved; transactions are made directly from buyers to sellers. The cryptographic code prevents double spending, something that a bank would ordinarily guard against (Davis, 2011).

As of 2020, other cryptocurrencies include Ethereum, Litecoin, Dash, Ripple, Monero, and Zcash. New ones are continually being developed while some fall out of favor.

The origin of Bitcoin is documented, but the creator remains murky. A man named "Satoshi Nakamoto" published the original paper on Bitcoin and released the software, but whether Nakamoto is a real name or a real person is in question. At one point, Australian entrepreneur Craig Wright claimed to be Nakamoto and offered proof to Bitcoin insiders, but on an Internet post in 2016, he said he did not "have the courage" to continue to pursue his claim (Dreyfuss, 2016). That claim has been refuted by other experts, some who believe that "Nakamoto" had to actually have been a group of programmers to create the sophisticated programming (Wallace, 2011).

The Department of the Treasury's Financial Crimes Enforcement Network (FinCEN) has issued guidelines for anyone involved with "convertible" virtual currencies, defined either as having an equivalent value in real currency or as substitutes for real currency (FinCEN, 2013). That means that anyone who accepts or transmits these currencies as an administrator falls under federal regulations such as the Bank Secrecy Act and is subject to FinCEN's regulations. Users, however, are not defined as a "money service business" by FinCEN and are not subject to registration, reporting, and recordkeeping regulations (FinCEN, 2013).

References

Bitcoin. (n.d.). Frequently asked questions. https://bitcoin.org/en/faq#how-difficult-is-it-to-make-a-bitcoin-payment

Chokun, J. (2016, June 19). Who accepts Bitcoins as payment? https://99bitcoins.com/who-accepts-bitcoins-payment-companies-stores-take-bitcoins/

Davis, J. (2011, October 10). The crypto-currency. The New Yorker. http://www.newyorker.com/magazine/2011/10/10/the-crypto-currency

Dreyfuss, E. (2016, May 5). Craig Wright ends his attempt to prove he created Bitcoin: 'I'm sorry.'  https://www.wired.com/2016/05/craig-wright-ends-attempt-prove-created-bitcoin-im-sorry/

Financial Crimes Enforcement Network (FinCEN). (2013, March 18). Guidance: Application of FinCEN's regulations to persons administering, exchanging, or using virtual currencies. https://web.archive.org/web/20130319213642/http://fincen.gov/statutes_regs/guidance/html/FIN-2013-G001.html

Osborn, A. (2017, February 7). World of Warfare currency can now be spent in other Blizzard games. http://www.ign.com/articles/2017/02/07/world-of-warcraft-currency-can-now-be-spent-in-other-blizzard-games

Second Life. (n.d.).  https://community.secondlife.com/

Wallace, B. (2011, November 11). The rise and fall of Bitcoin. https://www.wired.com/2011/11/mf_bitcoin/all/

WoW Token Info. (n.d.). https://wowtoken.info/

Check Your Knowledge

Choose the best answer to each question:

Question 1
True or false? The difference between a convertible (or open) virtual currency and a nonconvertible (or closed) virtual currency is that a convertible currency can be exchanged back-and-forth for real currency (e.g., Bitcoin) and a nonconvertible currency is intended to be specific to a particular virtual domain or world (e.g., World of Warcraft Gold).
True
False
Question 2
True or false? The term "cryptocurrency" refers to a math-based, decentralized convertible virtual currency that is protected by cryptography. This cryptocurrency relies on public and private keys to transfer value from one person (individual or entity) to another.
True
False
Question 3
True or false? The security of cryptocurrency ledgers is ensured by a network of mutually honest parties (in Bitcoin, referred to as miners) who protect the network in exchange for the opportunity to obtain a randomly distributed fee (in Bitcoin, a small number of newly created Bitcoins, called the "block reward" and in some cases, also transaction fees paid by users as an incentive for miners to include their transactions in the next block).
True
False
Question 4
True or false? A wallet provider is an entity that provides a virtual currency wallet that holds the user's private keys, allowing the user to spend virtual currency allocated to the virtual currency address in the blockchain.
True
False
Question 5
True or false? A wallet provider cannot allow users, exchangers, and merchants to more easily conduct the virtual currency transactions by providing storage and transaction security through encryption.
True
False
Question 6
True or false? In September 2013, the US Department of Justice filed a criminal complaint against the alleged owner and operator of Silk Road, a hidden website that enabled users to buy and sell illegal drugs, weapons, and stolen identity information.
True
False
Question 7
True or false? The success of Silk Road was based on its anonymity by operating on the hidden Tor network and accepting only Bitcoins for payment.
True
False
Question 8
Which of the following is the best response to the definition of a virtual currency? It is _________
relatively unregulated, unsecured, and susceptible to cyberattacks.
volatile, and investments may be unsuitable for most investors.
accepted by many businesses that are unregulated, increasing the risk of fraud and theft.
unregulated, volatile, accepted by many businesses that are unregulated, and possibly susceptible to attacks, which increase the risk of fraud and theft.
Question 9
True or false? If you want to send someone your virtual currency, for example as payment, you must use the private keys to unlock your digital wallet.
True
False
Question 10
True or false? Your private keys are your virtual currency; however, you cannot store them yourself or entrust them to a company called a wallet provider.
True
False