A new frontier: understanding and reporting bitcoin.

• Author: Galyan, Ani
• Position: Regulatoryupdate

Bitcoin. Virtual currency. Blockchain. These terms of the new frontier are often misunderstood, if not ignored in the financial reporting world.

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Bitcoin was created in 2009 as a cryptocurrency to allow for a peer-to-peer electronic cash system that allows for encrypted transactions between two users within a short period of time. The transactions are verified and recorded in a distributed ledger, a blockchain, which is available to all users of the system.

Each transaction between two users is verified and recorded by a miner in the blockchain associated with the currency. This activity is referred to as "mining," and miners compete to verify and record the transaction--and are rewarded with additional bitcoins.

The Bitcoin algorithm only allows for 21 million bitcoins to ever be mined.

A simple transaction is as follows: Individual A opens an account with an exchange (ex. Coinbase) and wires $10,000 to fund an account and purchase 100 bitcoins, which sit in the person's virtual wallet/address. To initiate a transaction, such as purchasing goods, Individual A will request the receiver of the bitcoin to issue its public key (an account number/wallet ID/bitcoin address).

Once received, Individual A can approve the transaction and issue the funds to the designated address associated with the public key. When the funds are issued, a miner will compete to verify that the information is correct and the funds exist to be transferred. A miner also will record the transaction in the blockchain/ledger once confirmed.

At the completion of the transaction, the receiver will have the bitcoins added to their virtual wallet. The public can access the blockchain to view current transactions and the historical tracing of the particular bitcoin used in the transaction.

Because of the way it operates, this peer-to-peer electronic cash system has its skeptics, who wonder what bitcoin/virtual currency really is. There are numerous forms of virtual currencies on the market, with the most popular being bitcoin. There are also numerous exchange platforms on the market that will enable the purchase of virtual currency. Bitcoin is one example of convertible virtual currency, because it can be traded between users, as well as purchased for, or exchanged into, U.S. dollars, Euros, and other real or virtual currency.

The use of bitcoin to purchase goods and services in everyday life has picked up traction, and online retailers like Overstock, com will accept payment by bitcoin.

Department of Justice and IRS Criminal Investigation

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