Bitcoin: Revolution or Pipe dream?
By Simon Lerner
Bitcoin: Revolution or Pipe dream?
12 Jan 2014 - Bitcoin

To its most radical enthusiasts bitcoin augurs nothing short of a revolution in the global financial order, to its detractors it is a cyber utopian pipe dream with little chance of cutting it in real world of financial markets and state actors.

These are fast moving times for the virtual currency. The value of a bitcoin on the Mt.Gox exchange has increased from around $12 a year ago to high of $900 after the US Senate Home Affairs Committee discussed the legitimacy of the currency. Shortly after it fell to a level around the $500 mark

Not so long was it considered synonymous with money laundering, organized crime and illegal drugs; even ‘narcoterrorism’ for one US state regulator, which issued 22 subpoenas against it. In October, bitcoin’s value crashed after U.S. law enforcement officials shut down Silk Road, an online market place for drugs and other illegal services, as well as political dissidents, in which an estimated $1.2 billion dollars of illegal bitcoin transactions took place.

For some bitcoin advocates this was a constructive step towards cleansing the currency’s image. A step away from the fringe and towards the mainstream.

Business celebrity has lent its support. The Winklevoss twins claimed earlier in the year that they owned nearly 1% of all bitcoins. They plan to launch a Bitcoin Exchange Traded Fund – “the Winklevoss Bitcoin Trust”. Mathew Mellon, of the American banking family, has launched Coin validation, a system for locating Bitcoin owners and identifying questionable activity. The idea is to provide a mechanism for Bitcoin businesses to ensure that they are compliant with regulations.

Yet it is precisely this normalization process, which concerns part of the bitcoin community who fear its core values of anonymity and individual enfranchisement will be sacrificed in the process.

A sizeable segment of the Bitcoin community has an ideology, which is essentially anti-state, crypto-anarchist, or perhaps even anarcho-capitalist. Their logic is that Bitcoin, as the first truly decentralized and un-subjugated currency or payments system, can break the state and institutional monopoly over finance and facilitate a genuinely free market. Banks will no longer govern banking, and governments will no longer control money. Governance structures are we know them are no longer. Compromising with regulators inevitably means these aspirations are undermined, and bitcoin is co-opted to the interests of the state and financial establishment.

Faultlines within the bitcoin community are evident. An emerging fintech community is keen to capitalize on bitcoin and work with regulators. Their aspirations are less ideological, though far from limited. They see bitcoin not so much as an ideology, but ras a new technology with the capacity to act as a catalyst for revolutionary changes in finance services, communications and businesses.

Broadly summarised these changes lie in significantly cutting money transmission costs, improving financial privacy, providing a refuge from government debased currencies and furthering financial empowerment in developing economies. The proliferation of mobile in the developing world role lack of commensurate banking services, indicate it has major potential in expanding mobile payments systems. As a data package, it can drive innovation in areas such as information and stock exchange, as well as currency.

Regulators have not shut down bitcoin as its detractors warned that they would. In Germany, Bitcoin has been classed as private money, and in the US a federal court has ruled that it has the same core qualities as money.

Skeptics warn that soon as the currency migrates to regulatory structures, the ensuing tax and compliance obligations will means it loses its competitive advantage over conventional payment systems.

Many still feel it has the capacity to be a mainstream financial product. However, it will take a concerted effort to raise it away from its association with illicit activity and fringe politics, without losing its core attributes in the process.

Photo Credit: Bitcoin