Frances Coppola
Bitcoin/Blockchain Overview
Coppola begins the article explaining how bitcoin and the blockchain work and how bitcoins are created through mining. She noted that as the energy cost for mining bitcoin has increased, many are wondering if there could be more productive uses for the energy.
Because bitcoin transactions are recorded on all computers in the bitcoin network, the currency is less anonymous than physical cash and more like an international payment system.
The peer-to-peer nature of bitcoin appealed to people in the wake of the 2008 financial crisis. People adopted it as a symbol of new technology that could save a broken financial system. Investors had grown concerned about the central banks’ quantitative easing.
Because there is a limit on the number of bitcoins to be mined (21 million), there is no risk of hyperinflation destroying its value. Hence, bitcoin attracted people who did not trust the government or wanted to avoid government attention.
Negative Bitcoin Aspects
On the downside, bitcoin’s untraceable nature made it attractive to money launderers and drug dealers. The currency’s reputation as a criminals’ currency has proven hard to shake, even after the FBI closed the Silk Road website in 2013. A 2015 study indicated a strong perceived association between bitcoin and criminal behavior.
Nevertheless, bitcoin has gained acceptance among retail outlets and online global payments. The first bitcoin ATM emerged in 2013 in Vancouver, Canada. Since 2011, physical bitcoins have been minted.
As bitcoin use has expanded, exchanges emerged. As have bitcoin funds such as Bitcoin Central, offering bank-type services. Online bitcoin marketplaces have sprung up.
Regulatory Oversight
The anonymity of bitcoin made its exchanges, funds and marketplaces targets for hackers, causing many thefts. Fraudulent bitcoin investment schemes also emerged.
Regulators naturally became concerned about tax evasion, fraud and money laundering, and they have taken action to restrict bitcoin. Some countries, such as Ecuador and Iceland, have banned it, while more countries have enacted some restrictions. Most countries tax bitcoin trading and investment profits. Few countries recognize it as “money,” although the U.S. does. In the U.S., bitcoin exchanges have to register as money transmitting businesses.
Bitcoin’s Challenges
Bitcoin faces a dilemma as a global payment system. It could remain a niche technology, or it could challenge existing international payment providers. One issue is the currency’s capacity limits. To be a leading global payment solution, the bitcoin community has to agree to increase the blockchain’s size so it can handle larger volumes. Such agreement has not yet occurred.
There are also cryptocurrency challengers to bitcoin. Ethereum provides the same transaction anonymity as bitcoin, but it is more versatile. Ethereum supports “smart contracts” that allow consumers to establish their own legal conditions.
Banks are developing new global payment systems based on the Ethereum blockchain’s technology.
Bitcoin remains a long way from becoming a global settlement currency that can challenge the U.S. dollar and become a substitute for government-issued currencies. Bitcoin may also face competition from digital currencies issued by banks in addition to competition from Etherum.
Blockchain technology, however, has drawn the interest of governments that view it as a solution to central clearing issues. Whether or not bitcoin survives its current challenges, blockchain technology is revolutionizing global payments.