Timothy McDonald reported this story on Thursday, June 9, 2011 18:50:00

BRENDAN TREMBATH: It's an online currency that's not backed by any central bank or government.



The creators of Bitcoin say it's safe though because it doesn't require the disclosure of sensitive financial information.



But critics say the anonymity that comes with Bitcoins is allowing people to get away with buying illegal drugs online.



Timothy McDonald reports.



TIMOTHY MCDONALD: The people behind the Bitcoin project speak of it in almost poetic terms.



Gavin Andresen is the lead developer.



GAVIN ADRESEN: Bitcoin is really a pure money. It's a store of value and a means of exchange and that's all it is. It's almost a plutonic ideal of what money is, in that there is nothing backing it beyond the fact that it's useful as a money. So its value is determined by whatever somebody will pay you for it.



TIMOTHY MCDONALD: It's possible to buy Bitcoins on a number of exchanges, and it's also possible to generate them on a computer.



The latter option can be tricky.



To make Bitcoins, users download a program that requires their computer to solve a problem before it generates a new Bitcoin.



As more Bitcoins are created, the problem gets increasingly difficult.



Gavin Andresen says at one point, an average desktop computer could generate ten within an hour, but it's much more difficult now.



GAVIN ANDRESEN: I checked today and I believe it's 500,000 times harder.



TIMOTHY MCDONALD: He says the process is aimed at ensuring that Bitcoins are generated in a predictable fashion, and that they don't suddenly lose their value.



The process has given rise to a cottage industry in what's known as Bitcoin mining.



GAVIN ANDRESEN: There are people who (laughs) fill up their housing with what are called Bitcoin mining rigs, so these computers with a specialised graphics cards in them, use up loads of electricity to generate Bitcoins profitably.



TIMOTHY MCDONALD: At the moment there aren't many vendors who accept Bitcoins, and much of the interest so far has come from speculators.



But Gavin Andresen says an increasing number of companies are willing to accept the currency, and he's confident that more will see the advantages.



He says the recent theft of data from Sony shows why added anonymity is desirable in an online environment.



GAVIN ANDRESEN: Having a third party that knows a lot about you and especially knows about your financial details, that's a huge risk, not only for us consumers but also for the companies. And so I see Bitcoins as a much better way of making those transactions because if Sony had been taking Bitcoin payments, Sony right now wouldn't be worried about hackers stealing money from users' bank accounts.



TIMOTHY MCDONALD: Of course, added anonymity can have other effects as well.



One place Bitcoins are accepted is on a website called the Silk Road, which is a market that allows the trade of illegal drugs.



Users need anonymising software to access the site, they pay in Bitcoins, and the drugs are sent through the mail to their homes.



The site has drawn the ire of a number of US Senator Chuck Schumer and Joe Manchin who have written to the Attorney General, asking for it to be shut down.



They didn't go so far as to ask for Bitcoins to be shutdown, but in a recent news conference, Chuck Schumer made his reservations about the currency very clear.



CHUCK SCHUMER: Using real money users purchase these Bitcoins, which can be traded at roughly $9 to one Bitcoin and use them as proxy for real money when they buy things on Silk Road. It's an online form of money laundering used to disguise the source of the money and disguise who's both selling and buying the drug.



TIMOTHY MCDONALD: Gavin Andresen says drug dealers were able to ply their trade long before Bitcoins came along.



And what's more, he warns that Bitcoins may not be as anonymous as some people seem to think.



GAVIN ANDRESEN: It's actually pretty hard to be completely untraceable, because every time you make a Bitcoin transaction, the transaction itself is broadcast over the network. The only person who knows who is doing the transaction are the people involved in the transaction.



But every time you make a transaction you are leaking a little bit of information about your identity potentially because the person on the other end of the transaction probably knows who you are.



TIMOTHY MCDONALD: He admits Bitcoin speculators do risk the possibility that governments may step in at some point an attempt to shut down the project.



But he says that would be an over-reaction, and the disadvantages of Bitcoins need to be weighed against its clear benefits.



BRENDAN TREMBATH: Timothy McDonald.