Bits and coins

Bitcoins – a new way to get rich! They are going up! up! up! Excitement is spreading. Tiny island of Alderney wants to become the first jurisdiction to mint Bitcoins in partnership with UK’s Royal Mint (FT article¹). It seems Bitcoins are going mainstream now.  Is it all for real?

I am not so sure. I think it is a bubbling bubble. As Greenspan remarked (Sydney Morning Herald article²), there is no intrinsic value to the currency or credit of the issuing entity backing it. Then holding a Bitcoin does not give a right of being paid any money by anyone.  In a recent report³ Citibank raises the issue of competition from other virtual currencies also.

However, the brand seems to have a deeper appeal to the faithful. Its anti-establishment nature is one. Ability to go around government restrictions is another. A South China Morning Post story⁴ talks of Bitcoin popularity in China, partly for its ability to avoid capital controls. It also makes transactions more convenient and cheaper in the new e-conomy. A story in The Hindu⁵ talks about small tea gardens in India exploring Bitcoins usage to lower transaction fees.

So what do regulators think? Governments don’t like things they can’t control. They have some genuine concerns too. Ease of money laundering and illicit fund flow is one. Regulators might also worry about virtual currencies creating an alternate financial system in extreme scenario, thereby increasing financial volatility. On Friday, People’s bank of China (PBoC) banned financial institutions from dealing in Bitcoins (Bloomberg⁶). Thailand has already declared Bitcoins illegal. However, most regulators are as yet undecided.

A likely future scenario is of regulations gradually increasing around Bitcoin usage. However, virtual currencies won’t go away until & unless alternative arrangements evolve to fill the voids that they fill today.

References:

1. ‘Alderney looks to cash in on virtual Bitcoins with Royal Mint reality’ – Financial Times
2. ‘Bitcoin a bubble, not a currency says former Fed chief Alan Greenspan’- The Sydney Morning Herald
3. ‘More on Bitcoin as a currency’ – Citi research
4. ‘Chinese Yuan dominates global Bitcoin trade’- South China Morning Post
5. ‘Tea growers explore Bitcoin option to expand global biz’ – The Hindu
6. ‘China bans financial companies from Bitcoin transactions’- Bloomberg