In Part I, we gave an overview of Bitcoin and how it’s different from the digital “real currency” that is in widespread use today. In Part II, we’ll ask and answer the question – Is Bitcoin just a fad? Is it novel in concept, but not particularly advantageous for the average person, or does it have staying power?
Regardless of what you might think about Bitcoin today, its strongest proponents and harshest critics agree on one thing – Bitcoin and its underlying blockchain technology cannot be ignored. Major players in the financial industry and tech industry are pouring significant money and resources into studying the blockchain. For them, it’s not the currency they’re interested in, but rather the technology that makes it work. Proponents of the currency, however, argue that the blockchain cannot be separated from the Bitcoin, the currency.
Most notably, financial institutions, the very ones that Bitcoin, at least conceptually, aims to make obsolete, are investing in understanding how Bitcoin works. As recently reported,
“Barclays, Goldman Sachs, JPMorgan, RBS, UBS and several others backed [an] initiative to get an early start on how financial institutions could leverage blockchain technology to enhance payments. . . . Some industry experts say the blockchain could overhaul a legacy, outdated global banking system and lead to far faster and more reliable payments. Many players also point to the potential of blockchain technology to streamline B2B payments in particular and solve the increasingly troubling issues in the space of cross-border friction and large payment volumes that are often unique to the B2B arena.”
As further reported by PYMNTS.com, ex-JPMorgan executive Blythe Masters said,
“Distributed ledger technology does have the potential to be disruptive of certain business models. But it has at least as much potential to be enormously empowering of existing business models in terms of making them lower cost, more efficient and less risky.” In an interview with CoinDesk, Alex Batlin, the former engineer heading up UBS’ London-based blockchain innovation lab, said, “In principle, [blockchain technology is] probably one of the biggest confluences of technology and business right now.”
Interest in Bitcoin technology goes beyond the financial sector too. Recently, the Wall Street Journal reported that IBM is betting on the blockchain as a technology that can do much more than support Bitcoin, such as creating and performing contracts and contractual obligations—i.e., smart contracts. IBM is “modifying the original [B]itcoin ideas to build a blockchain that operates without currency, ensures that contract details remain private and makes it easier for companies to embed business rules into their smart contracts—for example, automatically paying for a package upon delivery.”
IBM’s Arvind Krishna posited one practical example of how the blockchain may change how we do business:
“Take a business agreement between two or more companies. They can record the terms of that agreement on a blockchain, knowing it will execute and be enforced autonomously (e.g., ‘if you pay me in less than 15 days, then I will give you a discount.’). Nobody is in private control of the ledger and nobody can secretly change the terms of the agreement. So, with blockchain, facts and agreements are recorded certifiably and indelibly, increasing trust, reducing risk, and thus reducing friction in business.”
Undoubtedly, interest in the blockchain technology is growing. Where there’s interest, there is usually adoption. And when people and organizations start adopting a new way of doing things, regulation soon follows. Conceptually, Bitcoin is decentralized and thus unregulated—actually, it’s self-regulating as “miners” verify each transaction. But that doesn’t mean it will never be regulated.
Predictably, many state and federal agencies will ultimately collaborate in tackling the issue of how to regulate Bitcoin. For instance, New York recently passed legislation requiring companies offering virtual currency services to apply for and obtain a BitLicense. Similar legislation in California has recently stalled but may be revived early next year. FinCEN and the Treasury are paying close attention to Bitcoin, and right now, there is a lot of room for interpretation by different federal agencies when it comes to existing laws and whether or how they apply to Bitcoin (or virtual currencies generally). For example, some businesses that have decided to accept Bitcoin are protecting themselves against value fluctuations by hedging their Bitcoin positions like commodities. Last month, though, the CFTC settled its first enforcement action involving an unregistered Bitcoin derivatives trading platform, which connected buyers and sellers of Bitcoin option contracts. The CFTC issued a consent order, “find[ing] that Bitcoin and other virtual currencies are properly defined as commodities” and thus subject to the Commodities Exchange Act.
It remains to be seen how other regulatory regimes will treat Bitcoin—as commodity or currency. If it’s currency and a business deals in Bitcoin, is that business a “money transmitter” or “money services business” subject to the Bank Secrecy Act and anti-money laundering laws? If so, does Bitcoin’s pseudoanonymous nature complicate reporting requirements? Every Bitcoin transaction is public, but that only means the Bitcoin addresses of the parties to the transaction are visible. Nothing on the blockchain would personally identify the individuals or organizations behind those transactions, so how would you handle complying with Know Your Customer rules?
Though the government has yet to provide much guidance concerning virtual currency, one thing is clear: the government isn’t ignoring it. Assistant U.S. Attorney General Leslie R. Caldwell said,
“The department is aware of the many legitimate actual and potential uses of virtual currency. It has the potential to promote a more efficient online marketplace. It also potentially can lower costs for brick and mortar businesses, by removing the need to pay credit card-related costs. And in theory, it can help speed and reduce the cost of cross-border transactions. But we also have seen that criminals have been among the first to enthusiastically embrace the use of virtual currency, primarily in crime involving the internet. . . . [A] real commitment to compliance is a must, particularly given the significant risks in the virtual currency market. . . . As the virtual currency markets attempt to move past their association with the Silk Roads and Liberty Reserves of the online world, are used to finance legitimate activity, and are becoming increasingly subject to regulation, robust compliance with existing anti-money laundering laws and regulations is necessary – indeed, critical – to bolster the reliability and value of virtual currency.”
So is Bitcoin the second coming of the Internet—here to transform how we conduct business and exchange value in a globally connected online world? Or is it simply the currency of criminals that provides no benefit to the average law-abiding citizen? Time will tell. But the idea of virtual currency, and the underlying blockchain technology that makes Bitcoin the most popular, is not just a passing fad. Like the Internet itself, it will continue to evolve, and it’s hard to imagine how fundamentally it could change the way we do payments, just as hardly anyone could have imagined 20 years ago that you could read this article on a phone that fits in your back pocket.