Bitcoin - What is it for?

By Duncan Calow
15 Jan 2014 View Comments
duncan-calow

I had hoped for one particular New Year's resolution for us all - no more virtual currency hype in 2014. Not least in respect of Bitcoin: every pundit's favourite subject and the online phenomena du jour of the last twelve months.

Surely that particular topic used up its fair share of both old and new media as coverage snowballed during 2013? One BBC report reckoned there had been 41 English-language articles published about Bitcoin last January rising to well over 2500 in December. Coverage seemed to swing from breathless excitement that the world of finance was changed forever - to a cynical assessment of virtual currencies as speculative bubbles at best and Ponzi-schemes at worst - often in the course of the same news report or posting.

Further reading

Wasn't it time for a pause and reflection on the subject? Not a chance. Less than a week into 2014 headlines of soaring Bitcoin valuation were back - apparently in response to one of the leading social gaming companies accepting the currency as payment. A few days later came scare stories of malware-infected ads on a leading portal enslaving users' PCs for the purposes of illicit Bitcoin mining.

Best of all, within hours of the New Year dawning, were reports of the imminent launch of a new virtual currency: the "Coinye" apparently inspired by (but, to be clear, in no way endorsed by - as subsequent stories of cease-and-desist letters seemed to illustrate) a certain well-known rap star. What next - classic 80's pop duo inspired Dollar dollars?

Let me stress, virtual currencies are a fascinating topic. I've been involved in a few when setting up the rules and regulations of various MMOs and virtual worlds. Which is a serious business to get right, but great fun too. It's the nearest you can get to playing God or, perhaps, a finance minister in a post-coup revolutionary government after the shooting has died down.

Bitcoin, in particular, has so many intriguing aspects: whether for cryptography experts, developers of peer-to-peer technologies or students of the Austrian School of economic thought. The latter are now getting to test if the free market really can run money better than the state. Yet it's a realistic recognition of the continuing role of exploration that's been missing from much of the public assessment of this particular virtual currency.

What should we be saying about virtual currencies? Well, definitely that we are still at a stage of experimentation and that it is way too early to predict much about them.

Developments online and in technology generally are so often presented as overnight sensations but the reality, of course, is that they are anything but that. The news agenda over the holidays was about the impact of mobile-commerce on the high street. Yet it has been a long old road from flogging holidays on Teletext, via boo.com, to retailers having to embrace multi-channel strategies - as it has been from WAP phones to tablets. And electronic currency, online money and payment systems are no different. From Mondex through to Second Life's Linden Dollars we have been here before.

So fundamentally, outside of buying fetching leather tunics in our favourite fantasy gaming worlds, what is it that we need virtual currencies for? Are they ultimately the preserve of a limited market of enthusiasts and professionals or do consumers want a deregulated payment platform to order pizza and pay bills? In any event, that lack of regulation needs attention.

The European Central Bank defines virtual currencies as inherently unregulated. Certainly most examples are designed to fall outside provisions like the EU E-money Directive. Yet after two attempts at that particular legislation (with a third likely needed) the existing two-tier regulated or non-regulated approach may just not be flexible enough to support, without hindering, the safe and successful development of virtual currency.

But who knows? By the time new law emerges we could all have moved to Alderney as billionaires to spend newly minted Bitcoins of a very un-virtual kind. Or so I read somewhere. Happy 2014.

Duncan Calow is a partner at law firm DLA Piper

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