Whether you believe bitcoin to be pure genius or a calamity, it has captured the minds of professionals and laymen alike. A cryptocurrency founded in 2009, bitcoin offers an online, decentralised, peer to peer payment system worldwide. Founded on a backdrop of optimism, bitcoin sought to revolutionise monetary exchanges. The decentralised system allows for anyone to access the currency with an internet connection. Statistics show that 2.2 billion users of the internet have difficultly accessing stable traditional exchange systems, (e.g. banks) due to factors such as hyperinflation, a lack of economic resources and corruption. Bitcoin provides an easy to use platform to quickly transfer money to others. However, the situation is all but black and white; while top CEO Elon Musk says “bitcoin is probably a good thing”, billionaire investors such as Warren Buffet “wouldn’t be surprised if it’s not around in 10 or 20 years”. While bitcoin economics alone is fascinating, bitcoin also crosses into the legal sphere. Bitcoin is illegal in Morocco, Bolivia, Ecuador, Kyrgyzstan, Bangladesh and Nepal. Furthermore, concerns over increases in black-market transactions have been raised. In order to understand the legal issues, it is fundamental to understand the socio-economic factors that have contoured the laws and regulations we see today.
Bitcoin’s value increased by $15,000 within the space of five months. Several factors contributed to this monumental rise. From April 1st 2017, Japan legalised bitcoins, generating a huge surge in demand for an ever decreasing supply of bitcoins. Furthermore, bitcoin’s media exposure has been increasingly tumultuous. Richard Branson, Bill Gates, the Winklevoss twins, and Jeremy Liew (the first investor in Snapchat) have all supported the cryptocurrency, leading to vast waves of layman investors buying bitcoin in the hope of large returns.
While the vast majority of countries have kept bitcoin legal, those who have not fear that bitcoin elicits illegal activity through, inter alia, black market trading and terrorist financing. A reasonable fear, given bitcoin’s distance from the intrusive eyes of regulators and its lack of capital controls. However, illegal activity is not the only problem. Bitcoin, if truly successful and unregulated, renders traditional banks almost entirely obsolete.
Bitcoins exist exclusively in the digital sphere, causing great difficulty in its regulation without the most up to date resources. Bitcoin transactions cannot be taxed as easily as banking transactions leading to potential losses in government revenue. Similarly, bitcoin’s volatility makes it difficult to ensure financial stability if it were to become a country’s dominant currency. Without regulation, bitcoin can arguably damage economies.
Nevertheless, in countries with greater regulatory resources, regulations have been suggested as the way forward rather than the outright prohibition of bitcoin. For example, the Internal Revenue Service in the US ruled that bitcoins are assets, which subsequently allowed for governmental taxation on bitcoin mining and transactions. The EU has also addressed fears over the ease of money laundering, theft and other illegal activity through bitcoin. With a plan to bolster anti-money laundering and counter-terrorist financial regulations; firms’ activities on cryptocurrencies will be overseen by national authorities.
However, the price is now decreasing, from its peak of $19,186.81 to $16,798.50 at the time of writing, it seems Sir Jon Cunliffe’s warning for investors to “do their homework” may have had some legitimate grounding. On the other hand, the Winklevoss twins have rightly pointed out that while bitcoin has had its fair share of price drops in the past, immediate price appreciations have always ensued.
The reason for the depreciation is not immediately clear. For some, this is simply a period of price stabilisation. Short-term investors are rapidly selling their bitcoin en masse for a safe profit. Meanwhile, long-term investors have refrained from ‘cashing out’ due to a strong collective belief in a future price rise. The world can only watch as bitcoin marches into an enigmatic future marbled with dubiety.
However, while public discourse on bitcoin is divided, the innovative technology behind it is not. Blockchain technology has received almost ubiquitous praise for its potential despite the difficulties it must overcome. Simply put, a blockchain is an online ledger of every single transaction made with bitcoin. The information is dispersed and tracked all over the web. Personal computers mining bitcoin verify every transaction made on the peer to peer system. Optimism stems from the huge save in costs block chain technology could bring. In 2014, banks charged its users a total of $1.7 trillion to process and verify payments and transactions. With the blockchain, these charges could be diminished.
Various other cryptocurrencies have arisen such as Litecoin, Zcash and perhaps most notably, Ethereum. Ethereum goes beyond bitcoin’s decentralised currency system. Rather, Ethereum uses a generalised blockchain with a built-in programming language. This allows the blockchain to be used for any type of decentralised application users wish to create. Subsequently, a wide array of assets such as money, property and stock can be exchanged.
As for the future, no one knows for certain. Litecoin and Zcash have experienced similar price trends to bitcoin, while Ethereum is still on the rise. For some, cryptocurrency will become a vehicle for future economic development. For others, cryptocurrency allows for untenable illegal activity, with the potential to cripple national governments’ monetary control.
Only the future will tell.
7 January 2018