Is anyone else as fascinated by the concept of Bitcoin as I am? For those of you who are not aware of Bitcoin, it is a virtual currency which is nothing more really than encrypted computer code that is accepted as a form of payment among users and businesses. The value of the currency fluctuates and is set by a market and not by any country or central bank. (As of October 24th, 1 Bitcoin is worth $196 USD) Bitcoin is a system to replace a centralized banking intermediary (that we have to trust to accurately record electronic financial transactions), with a decentralized intermediary that we don't have to trust. That decentralized intermediary is the network of Bitcoin users.
People frequently call Bitcoin a peer-to-peer electronic currency, which like music and file sharing peer-to-peer networks, implies that you could share or send bitcoins directly to someone else with no intermediary involved. However, there is a third party involved; it's just that the third party is a decentralized network of people rather than a single centralized institution like a bank. It is 'peer-to-peer' in the sense of being a payment system under the control of no single institution, but it involves more than just two parties to a transaction. What is also interesting about this virtual currency is that, unlike hard currency and bank notes which can be printed in quantities at any time by central banks, the Bitcoin money supply will be capped when it hits a pre-determined total number of 21 million bitcoins.
To me, the most interesting aspect of this new technology is what the threat might be to traditional financial outlets and channels, like banks. Bitcoin and the threat it might contain, if more broadly accepted and adopted, may go beyond what alternative payment channels (e.g. PayPal, Square) now pose to traditional financial institutions. More and more mainstream websites and retailers are starting to accept Bitcoin as a means of payment. The biggest issue to more widespread acceptance and usage of this currency now, however, is the perception of Bitcoin as a way for criminal activities to hide behind and be facilitated. Money laundering, drug purchases and even gun purchases allow buyers to avoid the usual screening and background check processes.
Financial institutions, to the degree that they are aware of or acknowledge the existence of alternate currencies like Bitcoin have argued for their demise and asked legislators to rule them as unlawful for some of the reasons noted above. But I think it may be closer to the scenario which existed when the Betamax player was released in to production in 1980s. In the early ‘80s, Jack Valenti, head of the Motion Picture Association of America lobbied against the creation of the VCR. Valenti actually said, in front of Congress no less, that the “VCR is to the American film producer and the American public as the Boston strangler is to the woman home alone.” Yet, what did the VCR eventually do the movie industry? It saved it! Imagine how much better off the industry might be today of the fear of that new and unknown technology was embraced rather than discouraged. Let's hope that financial markets and institutions in general can learn from past, otherwise, they may be doomed to repeat it.
