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Ohio Securities Bulletin OHIO SECURITIES BULLETIN John R. Kasich Andre T. Porter Andrea Seidt Governor of Ohio Director of Commerce Commissioner of Securities A PRIMER ON BITCOINS “Those who cannot remember the past are condemned to repeat it.” (George Santayana, Reason in Common Sense Vol. 1: The Life of Reason, 1906) When Europeans arrived in North America, Native Americans used clam shells for currency. Those clam shells had no value themselves, except as made into jewelry with the beads (wampum), and could be Division of Securities obtained by picking them up on a beach. The value of the shells increased as a factor of how hard it was to produce the beads made from the shells and the geographic distance the shells traveled from Investor Protection Hotline 1 1-877-N-VEST-411 their original location. 1-877-683-7841 TTY/TDD - 1-800-750-0750 One thousand years ago, in the Maldive Islands, cowry shells were http://www.com.ohio.gov/secu easily obtained and Arab traders would purchase shells, transport them to Africa and resell or trade them at 1000 per cent profit. But by the mid-1800’s, the supply produced an inflationary spiral, costing more to transport than they were worth, resulting in it being Ohio Securities Bulletin 2 unprofitable to trade in the shells. Issue 2014: 2 Table of Contents What is Bitcoin? Bitcoin is a both a digital currency and a transfer system. A “transfer system” refers to the ability to move the bitcoin value from one person to another. A “digital currency” is one that is electronically created and stored, as opposed to physical currencies. There have been other open-source, A Primer on Bitcoins ..................... 1,3-4 peer-to-peer, digital currencies; before and after Bitcoin.3 The popularity of Comments from Commissioner Bitcoin as a digital currency is because it was the first completely decentralized Andrea Seidt ....................................... 2 “cryptocurrency”.4 Bitcoin, introduced in January, 2009, was the first virtual Social Media and Securities currency that dealt with issues relating to record-keeping and transferability Regulation ........................................ 4-7 (the “double-spending” problem, discussed below).5 From Bitcoin a number 6 Do I Need A License? ....................... 7-9 of other cryptocurrencies were created, including Litecoin and Peercoin. The lower-case “bitcoins” is usually used to refer to the virtual currency; whereas Enforcement Section Reports ........ 10 “Bitcoin” is used to refer to the system that creates bitcoins.7 2014 Securities Conference ...............11 What makes Bitcoin such a hot item? For starters, it is an intriguing concept for those of a technical predilection. It also comes with a certain amount of anonymity and ease of transference, making it attractive to a criminal element. For those not attracted to the anarchical or technical nature of a cryptocurrency, some are drawn to the investment: the reported value a bitcoin increased from nothing in January 2009, to over $1000 in November 2013. Most of that increase in value occurred in 2013 - $13 to $1076 per bitcoin – and came with significant price fluctuations. Today the value of a bitcoin is in the $500 OHIO range, and the volatility has caused many to dismiss the validity of bitcoins as a currency.8 DEPARTMENT OF COMMERCE continued page 3 DIVISION OF SECURITIES REGISTRATION CLOSES OCTOBER 15, 2014 2014 SECURITIES CONFERENCE INFORMATION ON PAGE 13 1 Ohio SecuritiesOhio Securities Bulletin Bulletin 2014: 200 23:4 The Ohio Department of Commerce is an equal opportunity employer and service provider. Comments from Commissioner Andrea Seidt Fall greetings, readers of the Ohio Securities Bulletin. It has been another busy quarter for the staff and I as we conclude our responsibilities at the North American Securities Administrators (NASAA) Fall Conference and make the final preparations for our biggest event of the year – the 2014 Ohio Securities Conference. We have moved the Ohio Conference back to downtown Columbus, utilizing the beautiful space of the Renaissance Hotel for your conference and meeting needs. There is a great lineup of speakers to inform and inspire you on this All Hallows’ Eve and still plenty of room for you and your colleagues to attend. Please get your registrations in as soon as possible. I want to say a quick thank you to the folks who traveled to Indianapolis, Indiana for the NASAA Fall Conference as I passed the gavel to incoming NASAA President, Bill Beatty, of Washington. I was incredibly honored to receive NASAA’s “Blue Sky Cube” in the company of my staff and colleagues. It was a challenging but great year and I could not have been more pleased to end my term by launching two initiatives that are important to the association and my home state of Ohio. NASAA has convened two new working groups to tackle fee disclosures and the issues facing senior and vulnerable investors in our securities markets. I am confident that, working together, regulators and industry will find the proper path in these areas. Before I close, I would like to introduce you all to the new Co-Editors- in-Chief of the Ohio Securities Bulletin – Corporation Finance Counsel Andrew Howard and Enforcement Attorney Kyle Evans. They bring renewed energy and enthusiasm to the work of this great publication. One of their goals is to increase the “Ohio focus” in future issues to ensure the content is relevant and useful to the Ohio securities practitioner. I NASAA’s ‘Blue Sky Cube” Award understand they will be soliciting articles from our subscribers so if you have an idea for an article or a piece that you think would be appropriate for inclusion in the Ohio Securities Bulletin, please reach out to Drew or Kyle. They can be reached at [email protected] and [email protected] respectively. I look forward to seeing and hearing from many of you at the Ohio Securities Conference on October 31 – I promise we are only offering treats, no tricks. See you there. The Ohio Securities Bulletin is a quarterly publication of the Ohio Department of Commerce, Division of Securities. The Division encourages members of the securities community to submit for publication articles on timely or timeless issues pertaining to securities law and regulation in Ohio. If you are interested in submitting an article, contact Andrew Howard (Andrew.Howard@ com.state.oh.us) or Kyle Evans ([email protected]) for editorial guidelines and publication deadlines.The Division reserves the right to edit articles submitted for publication. Portions of the Ohio Securities Bulletin may be reproduced without permission if proper acknowledgement is given. Ohio Division of Securities 77 South High Street, 22nd Floor Columbus, Ohio 43215-6131 http://www.com.ohio.gov/secu 2 Ohio SecuritiesOhio Securities Bulletin Bulletin 2014: 200 23:4 Bitcoins are created by a process called “mining,” a also possible to simply print out the secret codes and transaction-clearing process. Thousands of computers store the piece of paper in a secure location.12 Since around the world, with special hardware and extra the person who possesses the encryption keys own the capacity, work on the Internet, frequently in groups, bitcoins, a hacking attack, a lost or crashed device, or a to process Bitcoin transactions. These computers are lost piece of paper can mean that the bitcoins are lost. termed “miners.” At regular intervals (on average, 10 Unlike federally insured deposits, there is no protection minutes) one of these Bitcoin miners completes the if bitcoins go missing.16 computation necessary to finish the “block” of the blockchain ahead of its rivals and receives a reward Although the majority of transactions occurring up to of a certain number of bitcoins, making mining highly this point appear to have been speculators,17 leading to competitive. Originally, miners earned 50 bitcoins for attendant volatility, bitcoins were created to provide an each successful equation-solving mining operation, but alternative, non-centralized, payment system (an anti- the program was set up to reduce the reward by half every Federal Reserve).13 When using bitcoins in a purchase 4 years to limit the supply of bitcoins in circulation. As transaction, the payment –transferring to a different a result, the maximum number of bitcoins to be created wallet – signals that there has been a transaction to the will not exceed 21 million.9 Bitcoin network. This message is a digitally signed instruction transferring the ownership of the bitcoins Bitcoins may be obtained by mining, which involves from the owner’s Bitcoin address to a different address. a large capital outlay and an investment of time, or The transfer is then recorded in a public ledger, or they may be purchased with conventional (sovereign) spreadsheet, called the Blockchain, located on the currency. Exchanges exist that will facilitate this web.14 Every transaction that has ever been made using purchase, or trade, of cash for bitcoins; and now bitcoins is recorded in this one location as part of an exchanges reportedly accept credit cards, although with attempt to resolve the “double-spending” problem that the associated risks of scammers. There were over 70 plagued earlier digital currencies. “Double-spending” such exchanges at the beginning of 2014, located all refers to a flaw which allows the currency to be spent over the world.10 Sellers of bitcoins will sometimes a second time before the person in the first transaction deal individually, but there are also a growing number can claim ownership.15 Maintaining the blockchain, by of Bitcoin ATMs that will allow instant purchases of the processing of transactions, is what is referred to bitcoins with currency. when bitcoins are “mined.” In order to “hold” or store the bitcoins, a “wallet” Bitcoin has been synonymous with anonymity.
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