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Will governments ever fully accept bitcoin? ​

WGS001B24- Will governments ever fully accept bitcoin Shutterstock Tom Stepanov 580981612
WGS001B24- Will governments ever fully accept bitcoin Shutterstock Tom Stepanov 580981612

There is no shortage of hype and speculation surrounding the value of bitcoin.

The virtual currency is either the next big thing or simply the latest in a long line of tech bubbles soon to burst, depending on your point of view.

 

A crucial question when it comes to which of these prediction is closest to the mark, is whether bitcoin and other ‘virtual currencies’ will ever be embraced by governments and companies as an accepted part of how financial markets operate.

 

Bitcoin has taken the world by storm since its 2009 debut, rising in value from about 0.05 cents to around 19,000 dollars by December 2017, though the price has since fluctuated considerably.

 

Developed as a form of digital peer-to-peer payment by a figure known as Satoshi Nakamoto, about whom little is known, the currency – whose transactions are not linked to personal details – has been viewed with suspicion because of its use by criminals to do everything from collect ransom money to sell drugs and launder dirty money.

 

Meanwhile, other e-currencies such as Ripple and Ethereum have also enjoyed a boost in value thanks to the interest in bitcoin, although here too prices have retrenched.

 

Moving in to the mainstream

 

Until recently, virtual currencies, also known as tokens or coins, have been largely unregulated by government agencies, and coin exchanges have been the frequent targets of fraud and criminal hacking attacks that have left accounts drained.

 

Jamie Dimon, chairman of JPMorgan Chase bank, has called bitcoin “a fraud”, while European Commission Vice-President Valdis Dombrovskis asked EU financial watchdogs to update warnings on its investment risks.

 

Despite this there are signs some aspects of cryptocurrencies are becoming more accepted. In December 2017, Mark Carney, governor of the Bank of England, compared e-currencies to equities, such as stocks and shares, rather than currencies.

 

At about the same time, the US Commodity Futures Trading Commission allowed two financial exchanges to begin trading bitcoin futures contracts – bets based on how much it will be worth at given dates.

 

 

 

A house divided

 

Some banks worried the contracts’ introduction was rushed, while investors wanted to benefit from the high volatility in bitcoin prices without being exposed to the risks and costs of owning them. Futures contracts can also act as a sort of insurance policy for coin owners defending against sudden losses.

 

Still others argued the regulated exchanges should operate a separate transactions clearing house, so if bitcoin transactions became unstable they would not infect other brokers, but without success. Meanwhile the exchanges have admitted they need proper infrastructure to handle extreme swings in valuations.

 

Trades have so far been muted, with only about 3,100 contracts opened between both exchanges in their first two weeks.

 

What is clear is that market makers are divided over the possible benefits and risks. Plans to develop other bitcoin-related products, such as exchange traded funds based on futures trading, have been withdrawn in the US at the request of regulators.

 

China and South Korea, meanwhile, have been clamping down on bitcoin trading because of fears it may cause their financial systems to become unstable, and most central banks are not rushing to issue their own cryptocurrencies for similar reasons, although Jamaica is investigating such possibilities and Japan has recognised bitcoin as legal tender.

 

However, if the financial world is divided over bitcoins’ benefits, almost all are united in their support for blockchain, the technology behind most e-currencies.


The Bank of England. Source: Shuterstock

 

Building blocks

 

The Bank of England’s Carney has said blockchain – also known as “distributed ledger technology” of which there are several variations – has the potential to transform some financial services.

 

Unlike existing clearing systems, distributed ledgers are updated after every transaction in real time for everyone in a network to see.

 

Carney has said admin and duplicated effort for payments and securities trades settlements could be cut out, and middle-men such as separate clearing houses and trade monitoring ledgers done away with by distributed ledgers. 

 

But while telling UK policy makers last year the Bank was “actively interested” in blockchain, Carney said he was in no rush to introduce it.

 

JPMorgan Chase’s Dimon, retracting his earlier comment that bitcoin was fraud, also expressed faith in distributed ledgers.

 

His bank had earlier announced a blockchain-based system, the Interbank Information Network, that aims to “significantly reduce” the number of parties needed to verify global payments, reducing transaction times "from weeks to hours."

 

Others have been keener to embrace the idea, with Brazil’s central bank for one committing heavily to blockchain research.

 

And Estonia, which like many central and eastern Europe countries is racing to build a knowledge-based, high-tech economy, in 2012 introduced blockchain to its state-run registries, including national health, judicial, legislative, security and commercial code systems.

 

The Estonian government says blockchain technology is solving many of the problems of government-managed data as well as addressing many of the security concerns surrounding it. 

 

It seems that, while individual e-currencies may come and go, distributed ledgers like blockchain are destined to play an increasingly important role in the global economy.