Despite its link to now-closed Silk Road, an anonymous Internet marketplace for illegal drugs like heroin and cocaine and criminal activities such as murder for hire, Bitcoin users think the controversy may help the internet currency grow into the mainstream.
Supporters say using Bitcoins offers benefits including lower fraud risk and increased privacy, though critics argue the anonymity it offers makes the currency a magnet for drug transactions, money-laundering and other illegal activities.
"The short answer of what is a Bitcoin is that it is the currency of the Internet. It's digital currency that people can use just like they use cash. Except they don't have to be right across the table from each other. They can be anywhere in the world. It's entirely borderless," explained Marco Santori, a business lawyer and Chairman of the Bitcoin Foundation's Regulatory Affairs Committee.
Santori said although Bitcoin transactions are private, they are not completely anonymous.
"People who really know the technology, they refer to it as 'pseudonymous'. So transactions are not anonymous. They can be private in that you might not know who you are transacting with on the other side of the world, but everybody in the world knows you made that transaction," said Santori.
On Wednesday (October 2), The Federal Bureau of Investigation (FBI) announced it shut down "Silk Road," and arrested its alleged owner, Ross William Ulbricht, 29, known online as "Dread Pirate Roberts," in San Francisco.
The site, which has operated since early 2011, also offered tutorials on hacking ATM machines, contact lists for black market connections and counterfeiters, and guns and hit men for sale, according to the charges.
More than 900,000 registered users of the site bought and sold drugs using the digital currency Bitcoin. In recent media reports about the growing popularity of Bitcoin, the Silk Road website has emerged as part of a darker side to the use of digital currencies.
Santori said it is a mistake to try to use Bitcoins to hide criminal activity.
"It's a terrible tool for money laundering. And it's a terrible tool for criminal activity either. Now that the Silk Road has been shut down, I think that people have really telegraphed their confidence in that statement. Without the Silk Road, people still want Bitcoins. Even without the Silk Road, it's more expensive now to get a bit coin then it was before. I think people saw Silk Road as real weight on the leg of Bitcoin moving toward mass adoption and now that's been released."
While Bitcoins, which are not backed by a government or central bank, have begun to gain a footing among some businesses and consumers, they have yet to become an accepted form of payment on the websites of major retailers such as Amazon.com.
And like paper money, Bitcoin is a regulated currency.
"Bitcoin is in fact heavily regulated. It is very heavily regulated. Those who exchange Bitcoins for other digital currencies or exchange Bitcoins for dollars are money transmitters under the Bank Secrecy Act. And so they have to register with the federal government, report suspicious activity, record, collect and verify and under some circumstances customer information, just like a bank does," said Santori.
Bitcoin fees are lower than most bank fees, which makes it attractive to many consumers.
Fees charged by Bitcoin firms are typically far less than those charged by banks, credit card companies or other online payment processors. Coinbase charges merchants a 1 percent fee to convert Bitcoin into local currencies, but is currently waiving it for the first $1 million (USD).
Atlanta-based BitPay charges a flat 0.99 percent fee. The firm, which has raised $2.7 million, said over 10,000 approved merchants in 164 countries use its platform to accept Bitcoin payments.
"Really, I see a future, not too far off, where people really have a meaningful choice in currency. They have a choice in the way that they transact. They don't have to have.. They don't always have to send dollars or some derivative of a dollar. They can send a Bitcoin," added Santori.
With the arrest of Ulbricht, the FBI is now the latest holder of Bitcoins.
According to the charges against Ulbricht, Silk Road generated sales of more than 9.5 million Bitcoins, roughly equivalent to $1.2 billion. There are currently about 11.8 million Bitcoins in circulation.
With Ulbricht's arrest, authorities said they seized $3.6 million worth of Bitcoins.