By Sanya Darakhshan Kishwar, Central University of Bihar, Gaya.

A Critical Analysis of viability of Bitcoins as Currency

Bitcoins is a peer-to-peer payment system introduced as open-source software in 2009 by developer Satoshi Nakamoto.[1] The payments in the system are recorded in a public ledger using its own unit of account,[2] which is also called Bitcoins. The US Treasury calls Bitcoins a decentralized virtual currency as the system has no central repository and no single administrator.[3] Although its status as a currency is disputed, media reports often refer to Bitcoins as a cryptocurrency or digital currency.

Are Bitcoins safe enough?

Bitcoins as a form of payment for products and services has seen growth[4]and merchants have an incentive to accept the digital currency because fees are lower than the 2–3% typically imposed by credit card processors.[5] The European Banking Authority has warned that Bitcoins lacks consumer protections.[6] Unlike credit cards, any fees are paid by the purchaser not the vendor. Bitcoins can be stolen and chargebacks are impossible

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The block chain ledger

All Bitcoins transfers are recorded in a computer file that acts as a public ledger called the block chain, which everyone can examine. It differs from conventional modes as it doesn’t contain bills or promissory notes .[7]

Ownership

The ownership of Bitcoins is encompassed in a key which is identified by a unique address. If we lose the key we can’t claim compensation[8]

Views of economists over Bitcoins

 Bitcoins is new internet based digital currency facilitating transactions without middlemen substantially reducing transaction costs. Marney Cox believes it to be cheaper, faster, and more accurate and secure than traditional forms which may not replace money but prove success in virtual trading network. Some economists are of the view that due to instability of currency in countries the demand for alternative forms of money is on the rise. The fallback in US dollar has found repose in technological improvements like Bitcoins. They hope stability will eventually come and Bitcoins will be a more viable option. As per economists, Bitcoins brings forth a powerful way to exchange value that doesn’t rely on governments or banks.

Research says that foreigners hold over half a trillion dollars and related desire led to soar in price of gold. In the scenario there is huge demand for anonymous, extra governmental web based currency which is all found in Bitcoins. Some economists are of the view that online payment systems, and online currency exchanges, both centralized and decentralized, have legitimate places in the global trade of business. Security in Bitcoins transfer will come soon when it becomes official currency.

Disadvantages of Bitcoins as per economists

Gary London defined Bitcoins as an online currency whose transactions are beyond government control, difficult to track coupled illegal transactions and bubble nature. He is of the view that it works well for the illegal drug trade and is of great interest to speculative investors/gamblers who want to profit from its volatility. He believes it will sustain for only niche markets. It may lead to no bank robberies but a lot more cybercrime. Economists observe that Bitcoins already has lots of competition. The website ‘altcoins.com’ lists 30 other crypto currencies. Any currency needs stability which is lacking in Bitcoins as it fluctuates dramatically. As per research the concern is that the run-up in the price of Bitcoins to $1,000 looks like a classic bubble which always end badly. Phil Blair defines it as a hypothetical version of money that has no backing by any government, gold or value at all. He observes it as money backed by only promises.

Bitcoins facilitates anonymous buying and selling of things like drugs which government is trying to stop.It is pointed out that the utility of Bitcoins is diminished if anonymity is eliminated. The Bitcoins value for buyers of the currency may be a little like betting on a Ponzi scheme. Bitcoins is a concept of virtual money and lacks two things : valuation of currency and a liquid market. It is vulnerable to illegal activities which led to tax evasion and shut down of Silk Road.

Legal issues

 Prospective Bitcoins purchasers and investors should not overlook the fact that Article I, Section VIII of the U.S. Constitution states that the U.S. Congress has the authority to coin money, regulate the value thereof and fix the standard of weights and measures.

  1. Article I, Section X of the U.S. Constitution states that no state shall coin money. Congress could restrict the use of a private currency if it deemed it to be in the nation’s best interest.
  2. If  Bitcoins  hinders  the Federal Reserve from implementing its monetary policies for fostering stable prices, full employment and moderate long-term interest rates it would hinder public policy.

Regulatory issues

  1. Wall Street Journal has launched Bitbeat , a section which rounds up Bitcoins news.
  2. FinCEN(Financial Crimes Enforcement Network) confirmed that Bitcoins miners will be considered as investers not money transmitters which complies with money laundering rules.
  3.  As per European Banking Authority Bitcoins traders aren’t protected against losses if their virtual exchanges collapse as in Mt.Gox.
  4. As Bitcoins digital wallets are exceeding $ one  million  , illegal generation of Bitcoins is on the upsurge too with Bitcoins worth more than $ 963000 seized in Feb 2014.
  5. China has barred all financial institutions such as ‘baidu’ from handling Bitcoins transactions.
  6. Russia[9] , Canada,[10] Cyprus [11], Indonesia[12], Japan[13], Hong Kong [14] all find its regulation illegal and dubious enough under the current legal and regulatory system.
  7. The legal status of virtual currencies in India is such that they have gained widespread acceptance despite skepticism to tangible entities. However, the RBI warning in Dec 2013 resulted in shutting down of many Bitcoins operators.

Conclusion

 Forming a strong dissenting opinion from the above discussion and research on the viability of Bitcoins as currency, a conclusion is drawn that Bitcoins are a virtual currency with issues in both legal and regulatory terms. The anonymity resting in it is a hindrance in the path to proper money laundering and transparent money transaction system. Further this system is vulnerable to robbery, theft, cyber- crimes and is obscure and dubious as is not safe enough if the address key is lost there is no way for compensation.. However companies are yet to understand the demerits of this system. Like many other successful entrepreneurs with Libertarian sympathies, Richard Branson is on the Bitcoins train. Branson’s space exploration company, Virgin Galactic, is now accepting the digital currency as payment, but what is going to happen next? Will Virgin Galactic pay their fuel costs with Bitcoins or funnel it to suppliers who also accept Bitcoins? Well, in that case as per my view the whole economy would start to run in Bitcoins from paying taxes to accepting payments and that too in the veil of anonymity with no trace as to who is paying the money and to whom and equal vulnerability to theft and robbery which is evident from the reports as it is not at all a viable currency in any sense as it is barred by laws in countries like Illinois also. Further it cannot be a trustworthy way to deal with serious issues like gold and foreign exchange or taxation department. So for me Bitcoins get thumbs down.

[1]Bitcoins: A Peer-to-Peer Electronic Cash System“. Bitcoins.org. October 2008. Retrieved June 9, 2014.

[2]Regulation of Bitcoins in Selected Jurisdictions“. The Law Library of Congress, Global Legal Research Center. January 2014. Retrieved June 9, 2014

[3] Bustillos, Maria (2 April 2013). “The Bitcoins Boom“. The New Yorker. Condé Nast. Retrieved June 9, 2014

[4] “BitPay Passes 10,000 Bitcoins-Accepting Merchants On Its Payment Processing Network”. Techcrunch. Techcrunch.com. 16 September 2013. Retrieved  June 9, 2014.

[5] Wingfield, Nick (30 October 2013). “Bitcoins Pursues the Mainstream“. The New York Times. Retrieved June 9, 2014

[6]Warning to consumers on virtual currencies“. 1 EBA/WRG/2013/01. European Banking Authority. 12 December 2013. pp. 1–3. Retrieved June 9, 2014

[7] Ramzan, Zulfikar. “Bitcoins: What is it?”. The Khan Academy. Retrieved June 9, 2014.

[8] Grocer, Stephen (2 Jul 2013). “Beware the Risks of the Bitcoins: Winklevii Outline the Downside”. Moneybeat (The Wall Street Journal). Retrieved June 10, 2014

[9]Russia: Bitcoins Exchanges Can Be Penalized”. The Library of Congress. 2 February 2014. Retrieved 30 May 2014.

[10] Duhaime, Christine. “Canada to Regulate Bitcoins, Digital Currencies and online casinos under its anti-money laundering and counter-terrorist financing laws“. Retrieved 7 June 2014. Duhaime Law

[11] “Cyprus Central Bank warns about risks in use of Bitcoins“. Retrieved June 9, 2014.

[12] Vallikappen, Sanat (13 March 2014). “Singapore to Regulate Bitcoins Operators for Laundering Risk”. Bloomberg. Retrieved June 9, 2014

[13] Summary of Bank of Japan Press Conference, at 10

[14] “Singapore acts first to regulate Bitcoins”. New Europe. 23 March 2014. Retrieved June 9, 2014

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