Published: 01/12/2017

The story of bitcoin is a captivating one. Born shortly after the global financial crisis, the model presents some clever components – specifically, the public ledger system known as ‘blockchain’ – which have captured the interest of regulators and institutions around the world. Conversely, it has also fuelled debate on a number of topics including its environmental footprint.

Bitcoin was initially designed as a digital currency to pay for goods and services online without having to go through a financial institution. These bitcoins can be bought through an online exchange or earned through a process known as ‘mining’. This involves helping to verify transactions that take place over the bitcoin network, which in a traditional system would have been undertaken by banks.

The verification process involves decoding complex cryptography codes, with miners competing to solve these codes. The first to succeed is then rewarded with new bitcoins. As more and more bitcoins are issued, the code becomes more complex, therefore taking a longer time to crack. With so many computers competing to verify one transaction, this process has been scrutinised as inefficient and a waste of energy.

A recent report estimated that bitcoin mining uses around 30 terawatt-hours a year, comparable to the total electricity usage of New Zealand. China, which currently mines close to 60% of bitcoins, still has most of its electricity powered by coal, while the central bank of China is now pushing for regulators to reduce the power usage of bitcoin miners and relieve demand on power.

Meanwhile, the issue of anonymity between the buyers and sellers is another point of concern, with parties currently identified only through an electronic address. This has made bitcoin an ideal conduit for illicit goods and services, as seen in the case of Silk Road, a dark website that allowed users to trade items like drugs and fake identification. Another example is the Wannacry ransomware attack which infected nearly 100 countries around the world and demanded the ransom be paid with bitcoin.

The U.S. and U.K. Treasury Department have now imposed anti-money laundering rules on digital currencies where traders have to disclose their identities and report any suspicious activity, while Australia is rumoured to follow suit. However, this will not be an easy task, given digital currencies typically run on decentralized structures, meaning there is no one central body that can be held accountable.

A few countries, such as Morocco and India, have outright banned the use of digital currencies as an accepted form of payment, citing it as "a hidden payment system that is not backed by any financial institution", with the bans intended to help protect people from being “financially harmed”.

Pursue your values, build your wealth and help make the world a better place.