Bitcoin has created waves worldwide since the digital currency was introduced in 2009. Investors backing Bitcoin believe that it has the potential to become a global currency – that could change the way people use and send money everywhere.
Instead of the conventional model of banks managing money and its movement, Bitcoin presents a new, hitherto unexplored form of decentralized, unregulated value creation. Bitcoins are a type of digital currency that is created by computers and stored in electronic wallets. They can be used for online payments, traded or exchanged for regular currency.
Bitcoin is amongst the world’s youngest currencies, in existence for barely 5 years now. Yet many major commercial platforms have started accepting Bitcoin payments. In under a year, bitcoin ATMs have made their presence felt. Many distributed portals and firms are enabling Bitcoin transactions.
In June 2010, a single Bitcoin was valued at $0.08. On the 17thof November 2013, a single Bitcoin was valued at $1216 approx. on the Mt. Gox exchange – a rise of several thousand percentage points. To put it into perspective, an investor who owned a 100 Bitcoins in 2010, which were worth about $8 then, would be looking at over $1.2 mil as investment returns in 2013 if he cashed in.
Bitcoin offers almost real-time settlement – a key pain point with many legacy payment systems. Bitcoin also meets the Fed’s wish list on reduced costs for global, cross border transactions.
Last November, in a series of hearings of the US Congress, lawmakers and regulators acknowledged that Bitcoin has innovative and legitimate use as a payment system. Bitcoin offers feasible solutions to many of the questions raised by Federal Reserve’s paper calling for comments on how to modernize our payment systems. For starters, Bitcoin offers almost real-time settlement – a key pain point with many legacy payment systems. Bitcoin also meets the Fed’s wish list on reduced costs for global, cross border transactions.
Part of what makes Bitcoin so special is its open source, decentralized nature. Just like the Internet itself.
Part of what makes Bitcoin so special is its open source, decentralized nature. There’s no concentration of power, or a central point to attach. It’s very distributed. Just like the Internet itself.
The key challenge with financial institutions taking up the Bitcoin cause more enthusiastically is the lack of clear guidance from regulators. Everyone is still trying to figure it out. It has characteristics of both cash and electronic funds – so which category of regulations need to be followed? Financial institutions need to be able to clearly tell the regulators who did the transactions, the legitimacy of both parties, and the reason they did that transaction – especially for large funds. With bitcoin however, the identity of both parties may be unknown. Bitcoin addresses are not connected to a personal identity. Outsiders would just see that a transaction for a certain amount happened from A to B. Not much else.
“If we can figure out a way to do it and we can get our regulators comfortable with it, we’d be all for it”
Many are comparing the rise of Bitcoin, to the start of the Internet back in 1995. In the two decades since, the Internet has revolutionized the world as we know it. Will Bitcoin do the same for the banking sector as we know it? Only time will tell. Banks and other financial institutions ought take care not to be left behind. “If we can figure out a way to do it and we can get our regulators comfortable with it, we’d be all for it” says Silvergate’s CEO, Alan Lane.