Following on from a previous article about Bitcoin: The New Currency, today we look a little further into the subject.
Bitcoin is an inevitable consequence of the Internet, a virtual currency that can be used to buy anything from cars to file-sharing, and clothes to solar panels. Since its launch in 2009, despite some fluctuations in value compared to more traditional tender, Bitcoin’s popularity has soared and for anyone who doubts its spread, know that in mid-2013 there were approximately US$1.2bn worth of Bitcoins in circulation.
Popularity is never universal and Bitcoin’s very existence has put one or two noses out of joint. Some of the displeasure can be written off as negative commentary or even bad-tempered sniping. For instance, in 2012, US legal drama The Good Wife had a well-known financial pundit state that Bitcoin wasn’t a real currency because, “There’s no central bank to regulate it; it’s digital and functions completely peer to peer.” Well, it depends on how your define currency, if people are successfully and repeatedly buying things with it, that seems like a pretty good definition.
A more reasoned criticism comes from the law enforcement perspective. Silk Road* – the untraceable online market that deals in drugs and other illegal goods – only accepts Bitcoin in payment. The use of Bitcoin guarantees the anonymity of the buyer, which is great news for the purchaser of LSD but not so great for those tasked with cracking down on the drugs trade. Up to you which side you come down on.
A traditional currency is a national affair, effectively owned and managed by a government (even if that government’s ability to control it often resembles that of a drunk cowboy at a rodeo). Two countries so far have taken a policy stance on Bitcoin. In July 2013, Thailand declared it to be lacking any legal framework, which pretty much banned Bitcoin from use there. At the opposite end of the spectrum, the following month, Germany acknowledged Bitcoin as a legal currency. On the face of it, this might sound like a step forward and in a sense it is; a significant economy on the world stage has said, Hey, Bitcoin, welcome! However, the consequence is that German citizens’ Bitcoin holdings are now classified as taxable wealth – by offering Bitcoin some mainstream acceptance, the German government has taken away one of its ‘underground’ benefits.
A similar acknowledgment has come from the US government, which has issued regulatory guidelines for “decentralized virtual currencies” (Bitcoin has spawned some imitators) that implicitly accept that such currencies exist. This means that American sites generating and selling Bitcoins are now classified as Money Service Businesses and are subject to registration and various other legal requirements. This is no toothless gesture. Mt. Gox – the world’s largest Bitcoin exchange – has had its accounts seized by US authorities for failing to register.
What’s more, now the judiciary are taking note. In a case of hedge fund fraud (the fund in question was based on Bitcoins) a Texas federal judge has now ruled that Bitcoin is indeed a currency, thus allowing the investigation and trial to proceed. What wider impact this ruling will have can only be imagined.
It would seem that Bitcoin’s original utopian dream of a non-national currency, untainted by the interference of banks or other financial players, dependent purely on the value attributed to it by the people using it is under serious threat. Whether it’s prohibition, smiling acceptance or legal rulings, Bitcoin is being brought out into the light; the very acknowledgment of its existence is bound to change its nature but in what way only time will tell.
*[Update: following the FBI shutdown of the Silk Road website on October 2, 2013, and the confiscation of around US$3.6m worth of Bitcoin, there is now some hope/concern that buyers and sellers will be identified through their Bitcoin transactions… maybe not so anonymous, after all. Other than an initial brief dip, the impact on the value of the currency itself remains to be seen.]