The Usage of Bitcoin Bitcoin has been around for almost a decade now, introduced back in 2008, the principal of Bitcoin being to remove intermediaries. The U.S Treasury has identified bitcoin as a virtual currency, while it’s more commonly described as the first cryptocurrency and the largest of its kind by total market value, currently being $19.2bn. The general consensus was that Bitcoin would take the world by storm, but we have yet to see the storm, which was also seen to uproot commercial banking as we know it today, a material decline in sticky bank depositors a negative for bank top line revenue. As things stand, well-known companies that accept Bitcoin for payment include Amazon, Apple Expedia, Overstock, Subway, Reddit, Microsoft, Dell, Tesla, Bloomberg.com, Kmart, Sears, Gap, Victoria Secret. Figures on Bitcoins are few and far between, but with over 100,000 merchants and vendors accepting bitcoin as payment, the numbers suggest that progress is finally being made, the number of merchants accepting Bitcoins having increased by 4 fold between 2014 and 2015 alone. Research produced by Cambridge University concluded this year that there are between 2.9m and 5.8m unique users actively using a crypocurrency wallet, most of them using Bitcoin, which is far greater than the estimated 0.3m to 1.3m unique users back in 2013. The upside for the consumer is the reduced fees for transactions, where merchants and vendors accept Bitcoins with fees of between 0% to less than 2%, certainly more competitive than credit card fees, the downside obviously being the lack of protection to the consumer or the merchant for that matter, bitcoin users unprotected by refund rights and chargebacks, though this is changing… The latest news is the legalization of the use of bitcoin in Russia, with Japan’s passing a law accepting bitcoin as legal tender perhaps even more compelling when considering how far behind legislation is in other G7 countries, let alone the G20, despite the wide acceptance. The value of bitcoin has certainly been held back by the lack of recognition and regulation in key economies, suggesting that Japan’s move could begin a domino effect, which would be quite a boon for the bitcoin bulls, when considering the fact that the value of bitcoin increased by 8%, equivalent to $1bn, to take the market cap to $19.5bn. In the end, Japan’s move makes sense and Russia is looking to follow suit, the lack of regulation allowing Bitcoin to be used as a means to wash dirty laundry. Russia is looking to legislate to recognize Bitcoin as a financial instrument by next year for just that reason and we can expect other countries struggling with money laundering to follow suit. Bitcoin’s Future Conflict There’s a long way to go before Bitcoin becomes a globally accepted form of currency, virtual or not, with some counties having outright banned the use of Bitcoin, though the number of countries are diminishing, with the wider issue being the lack of regulation on Bitcoin itself coupled with concerns over technology limitations. Technological development over the short to medium-term will certainly influence the value of the markets and, as a global regulatory landscape develops, we would expect the usage and demand to increase, driving the value, the types of returns that are not apparent with cash, still currently maintaining its ’Cash is King’ status. Whether investors consider Bitcoin as an alternative hedge or an investment remains to be seen. Either way, when considering the year-on-year surge in the value of Bitcoin, just shy of 200%, the only way is up should regulatory walls continue to fall and transaction volumes continue to rise, with Bitcoin having hit an all-time high $1,400 last week. Bottlenecks will undoubtedly limit transaction volumes over the near-term, leaving the door open for more traditional payment methods to compete, but it is only going to be a matter of time before payment systems are upgraded and Bitcoin has the opportunity to become a primary payment mechanism. In the end, the success and evolution of Bitcoin across mainstream economies and beyond will likely boil down to the attitudes of Central Banks. The PBoC earlier in the year had announced that it would be making a greater effort to regulate the Bitcoin market, including establishing a taskforce to inspect and ensure Bitcoin exchanges had the appropriate anti-money laundering systems, warning exchanges that they would be closed down if in violation. The actions of the PBoC led to certain exchanges suspending activity, resulting in Bitcoin losses at the time. Ultimately the fact that the PBoC is looking to clean up and increase oversight is a long-term positive and suggests that the use of Bitcoin will surge in the years ahead, despite the fall over the near-term attributed to the increased oversight. The intentions of Satoshi Nakamoto was ultimately to knock central banks off their perch, the inventor of Bitcoin publicly discussing a distrust towards central banks. The evolution of Bitcoin has certainly opened the eyes of many, bringing into question the need for central banks should Bitcoin become the method of choice, as there would be no requirement for the issuance and settlement. The use of Bitcoin may remove certain roles of central bankers, but in the end Bitcoin will never be responsible for or even be in a position to influence monetary policies. Central banks will continue to ultimately to hold the fate of Bitcoin in their hands, regulation and acceptance at government level vital to its success and continued evolution cross border. For now, central banks appear to be diligently looking into the technology that Bitcoin has introduced, looking to use the decentralized method of record keeping, more commonly known as the blockchain or distributed ledger, the incentive being to complete and log transactions in a real economy more effectively. The BoE and the PBoC are certainly advocates of the decentralized method that would allow the respective central banks to track their respective currency through the financial system in real time. The BoE has estimated that the use of a digital currency on a distributed ledger could add as much as 3% to a country’s economic output through efficiency gains alone. FOMC members and the FED Chair have also talked positively on distributed ledgers, with voting-member Brainard having spoken on the benefits of the use of such innovative technology just last week. Interestingly, the fact that Central banks are beginning to embrace the technology, which had been developed to dethrone them could ultimately cement the position and power of central banks, though it would be difficult for them to then attempt to unravel the very same technology in a bid to undermine Bitcoin down the road. Bitcoin may have a mixed following at present, but there are a number of countries that are ultimately considered the Bitcoin friendly, with the list likely to continue growing as more governments acknowledge and legitimise the use of Bitcoin. Countries with particular fondness towards Bitcoin The U.S: Has the highest number of cryptocurrency users, the highest number of Bitcoin ATMs and also the highest bitcoin trading volumes globally. The U.S is the home to Silicon Valley after all and it will certainly bode well for Bitcoin’s future, with many countries looking towards the U.S for guidance and best practice. Denmark: The government is looking to completely transition to digital currency, though it remains unclear whether Bitcoin will prevail, the Danish Central Bank having previously declared that Bitcoin is not a currency and that it would not regulate its use. Sweden: Also looking to shift to digital currency, the Central Bank’s decision to cut interest rates into negative territory has led to an increase in demand, supporting appetite for Bitcoins and alternatives to protect capital. Unlike Denmark, the Swedish regulator has publicly declared Bitcoin as a legal currency. South Korea: There are currently no laws in South Korea regulating the use of Bitcoin, where people are able to buy Bitcoin in 7-Elevens. The Netherlands: While extremely popular, Bitcoin is not regulated in the Netherlands, though this doesn’t seem to deter, with Bitcoin ATMs, start-ups and a Bitcoin Embassy in existence. Finland: Bitcoin has been classified as a financial service by regulators, exempting it and Bitcoin purchases from VAT. Bitcoin ATMs have been on the rise and Finland is also home to one of the leading global peer to peer Bitcoin exchanges, Local Bitcoins. Canada: Bitcoin is regulated under counter-terrorist financing and anti-money laundering laws, with Toronto and Vancouver considered to be Bitcoin centers, as Canada looks to follow the U.S in the use of cryptocurrencies. The UK: The BoE continues to monitor Bitcoin technology, while it continues to be classified as private money, with VAT applied and also subject to capital gains tax, where there P&Ls are involved. Australia: Previously imposed double taxation on Bitcoin has been removed, though continues to remain unregulated by the RBA, which acknowledged that there are no laws against the use of Bitcoins and the usage is more of an arbitrary one. Japan: The Japanese government moved to legalize Bitcoin as a currency effective by law at the start of April in a move that saw Bitcoin’s value rise above the $1bn mark, with some of Japan’s largest retailers accepting Bitcoin payment as a result of legislation. It is in fact said that Bitcoin trading in the Yen is the one of the most liquid markets globally. We expect to see Russia join the list of advocates in the near future, following comments from the Russian Deputy Finance Minister that regulators will be looking to recognize Bitcoin and other cryptocurrencies legally next year, the government eager to tackle money laundering, which certainly incentives greater oversight and regulation, ultimately leading to its legitimacy. There’s a long road ahead and technology will need to improve and limitations will need to fall away, but with governments and regulators the world over beginning to take a more pragmatic view and understand the need to legitimize in the interest of anti-money laundering and other preventative policies, Bitcoin could well benefit from central banks’ advancement and development of distributed ledgers.
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