By Hormoz Faryar
Bitcoin and other virtual currencies have the potential to make a massive financial firestorm in the markets in the near future. Most pundits are focused on its daily value, but there is more to it than that.
There are roughly 3 main groups of people in society regarding views of virtual currencies:
1. I don’t know much about it, and I don’t think it’s a big deal. It’ll pass like flash in the pan.
2. It’s almost like a scam or something created by a rogue entity. The “It’s not good” camp.
3. It’s great and it’s going to change everything for the better. We should all get involved.
It’s difficult to know who is right here, but group 1 arguments are weakening right now. Virtual currencies are here to stay it seems. It seems market capitalization of virtual currencies is storming towards 1 Trillion US Dollars, including the attached industries.
On the surface, Bitcoin seems relatively harmless. It enables trade and speedy transactions. The ancient banking system that we have founded our economy on looks slow and dated compared to the potential that virtual currencies offer. A large number of services and infrastructure is being built around Bitcoin for example.
The regulators are looking at the situation and have taken three main stances:
1. Embrace Bitcoin quietly. (embrace until no longer viable and acceptable)
2. Regulate it as an investment or other financial instrument. This is a good choice politically since capital gains tax is what many governments are after.
3. Ban it. Which seems difficult given Bitcoin's digital nature.
Choices 1 and 3 are difficult to maintain since virtual currencies are here to stay. Flatly banning them or embracing them, is not an easy option for any country or regulator.
It leaves us with option 2 - regulate it, which is the variant most governments are leaning towards.
Governments want to “ride the wave” and encourage job creation, increase tax revenue and join the start-up scene while they are at it.
Let’s stay with Bitcoin as an example. The problem starts with how the foundation of our financial system is tied to certain currencies and the control mechanism of those currencies. If Bitcoin infrastructure is built to enable day-to-day transactions then there is by default less need for other ways to do business.
Why? Because most banks and value transactions on the planet are conducted in a handful of currencies (like US Dollar, Yen, Euro or the Chinese Yuan).
Bitcoin is by design not controllable. It has no visible creator, owner or policy maker, and that’s where the problem starts. It has no oversight. If you can pay salaries, rent, online shopping, savings… with Bitcoin, then there is less need for our country-specific currencies and that in turn changes the valuation of the financial institutions. In a world where we have a well advanced Bitcoin the calculation of everything changes.
Think of it this way, if for example the price of Bitcoin against the US dollar was $200 a couple of years ago, and it’s at 20 times that now at $4000, and at the same time Bitcoin is becoming a true payment currency (base currency or saving’s currency), then this means that the share price of most institutions are in free fall. Their price in Bitcoin has crashed. Actually, most things have fallen in value compared to bitcoins.
If Bitcoin goes mainstream, which it is already doing at an incredible rate (a handful of Bitcoin ATM’s being installed globally every week), then we will have a giant virtual currency at hand, but without oversight and real control. Think of Bitcoin as a gold coin, but much more viral and useful for payments. Like a gold coin that can be bought and delivered on your phone with a few clicks. It seems regulating gold miners is a walk in the park compared to regulating Bitcoin miners. It’s not easy to secretly mine gold anymore, but it is when it comes to mining Bitcoin.
Bitcoin’s value increase itself isn’t the worry, it’s the way it’s going to be replacing other base currencies that may send shockwaves in the economy.
To some, having no control may sound utopian since we will finally have a gold standard type of currency, where inflation proofing is easy. No more government overspending or “printing” and all other issues that traditional fiat currencies bring with them. Some prefer no control rather than control in the hands of a few.
The fact is that financial regulators won’t allow this, and therefore it’s a matter of time before a concerted effort from regulators will try to push the currency to the fringes.
The problem is that if a push on Bitcoin happens in 5 years from now, and even if they do manage to push Bitcoin out, we will already have a large proportion of the population have their salaries and savings in Bitcoin. In 5 years we will certainly have a huge Bitcoin ecosystem and any large scale disturbance to that ecosystem will cause a storm.
Meanwhile, thousands of retailers are starting to accept Bitcoin as payment, and the financial adaptation is edging towards going mainstream.
Next move is, as usual, on the regulator’s side.
Hormoz Faryar is the Global Head of Institutional Sales at the Equiti Group