More than just a Bitcoin on the side?

16 January 2014

In the darkest days of the recent recession it was a mainstream view that the euro - the currency with the largest cash circulation in the world - might completely collapse and that the franc, deutsche mark and other abandoned currencies might re-emerge in its stead.


Everyone is well aware of the dominance of the US dollar as the world's undisputed reserve currency; however could it be possible for a 'non-traditional' currency to ever challenge the likes of the dollar, euro or sterling?

Bitcoin is a virtual currency that until recently was only on the radar of technology experts and hackers, but which has now come into the mainstream and features regularly as a topic in the traditional and financial press. Created in 2009, Bitcoins can be traded by individuals, exchanged for goods and services (much like a regular currency) or 'mined'. Mining is a process whereby individuals are rewarded with 25 Bitcoins if, using specific software, they successfully solve complicated mathematical problems which are designed to certify the trading of Bitcoins across the network.

Bitcoin is particularly notable as it is not controlled by any particular person, organisation, body or central clearing house - and especially not by any government (as a regular currency would be). Instead the currency is essentially controlled by all its users, with an automated and encoded public ledger detailing every transaction that has ever been made on the network. There is a finite number of Bitcoins, the maximum number that can be mined is 25 every 10 minutes. The idea of 'mining' therefore is to both maintain the public ledger, by rewarding safe facilitation of transactions worldwide, and expand the supply of the currency.

So could it be possible that what might appear to be a niche virtual currency, could enter the 'real' world and be a credible alternative to traditional currencies? Some companies already use it, for example Reddit and WordPress, as well as the Pembury Tavern in Hackney which is the first pub in the UK to accept the currency. This week, Zynga, the provider of online games, announced that it would be accepting Bitcoin, which saw the currency's value rise to around US$950 per Bitcoin.  Further, the world's first Bitcoin ATM is located in Vancouver and another one is due to be installed in Hong Kong in the near future.

However, there have been concerns about the more widespread use of Bitcoin. The online anonymous marketplace Silk Road has been criticised for allowing users to buy often illegal products using the Bitcoin payment network. This led the FBI to clamp down on the network, seizing US$28.5m worth of Bitcoin from Ross Ulbricht, the alleged owner of the Silk Road.  This sum shows that Bitcoin is big business and its value has soared since its creation only a few years ago, although it remains extremely volatile. But now that the value of the currency and the number of transactions being processed has increased to such a level, authorities are understandably keen to ensure that the currency is not used for illegal purposes, such as money laundering.

The association with criminal use and security issues (it is not uncommon for Bitcoin users to see their account 'hacked' and Bitcoins stolen) are likely to put off Bitcoin emerging into the business mainstream for the time being. However there are benefits to using the currency. By way of example, Bitcoin has been used in countries such as Argentina as a hedge against rising inflation (currently at around 20% a year) and the increasingly weakened Argentinian peso. Also, Bitcoin's minimal transaction costs (there is a small charge to facilitate each transaction) mean that international transfers of the currency are straightforward and cost effective.

You would hardly expect the risk averse legal industry to be the first in the queue to sign up to use Bitcoin (conflict checks on clients would be somewhat more difficult in an anonymous online marketplace); however the use of Bitcoin is growing and its value soaring, so it may be something that the wider business world may have to stand up and take notice of in the near future, particularly if volatility stabilises.

Simon Brown

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