Posted on 06 Jan 2014
This January, bitcoin celebrates its fifth birthday. This flagship of digital currencies, has truly come of age in the last year, achieving unprecedented attention and legitimacy. Germany recognized bitcoin as a unit of account; The US held its first Senate hearing on virtual currencies; Canada opened the first bitcoin ATM, conducting more than $1million in transactions in its first month; the FBI seized $34.5 million worth of bitcoins as it closed down the darkweb site The Silk Road; and the virtual currency has prompted frantic speculation, as its value has increased from $13 at the start of the year, to a high of over $1200 in November.
The future of bitcoin, as well as other digital currencies which are attempting to gain traction (including ripple, litecoin and others) is likely to depend very much on actions taken in 2014. State authorities are coming up with vastly different configurations: Thailand has cast bitcoin as an illegal rival currency, whereas Finland, France, the US, the UK and others have deemed it a perfectly legal monetary instrument. The currency had great traction in China, and Chinese investors were largely responsible for driving the price up so significantly in 2013, but it was also China that sent it crashing downwards, when the People’s Bank of China stated in December that it would not recognize bitcoin as legal tender.
Bitcoin is different thing to different people: for the purists, it is a functional, free market addendum to an increasingly virtual lifestyle; for others it is merely the opportunity to get rich quick on a currency unassociated with governments and completely unregulated; and for others, the ability to conduct almost completely anonymous financial transactions allows a liberation – to launder money and conduct illicit transactions, such as for drugs, weapons or pornography and online sexual services. Or as a recent FAQ on the bitcoin summarized it: “a gigantic goddam mess of idiocy, greed and bad decisions.”
But bitcoin need not be just an instrument for illicit behavior. Bitcoin is often seen to hold greatest value for those developing countries where currency and capital controls are censorious. Some of the more idealistic of supporters also hope that the digital economy can bring social inclusion to those without access to the mainstream financial sector.
Thus, the major focus in the coming year will be on regulation: how currencies will be licensed and taxed. Regulation has become a pressing issue, both to control the exchanges used to trade bitcoins, but also to prevent the currency being used as a criminal haven. As States experiment with different regulations that will decrease the level of anonymity, control the creation of markets and standardize the way that bitcoins can be transferred into the legitimate economy will be critical to understanding the future of virtual currency. Too strict requirements will undermine the value of the currency as distinct from existing financial transaction methods; too lax regulations or insufficient capacity for effective monitoring will increase the risk that bitcoin becomes a favoured currency for transnational organized crime group seeking to launder funds.
Ultimately, however, the requirement will be to create a consistent global regulatory framework, and one which provides for a legal prosecution of criminal acts both using and enabled by virtual currencies.