Digital Currency and the Implications on International Trade
By: Gregory Waltzer
As the globe catches wind of the Bitcoin phenomenon, many individuals have stated the potential benefits and shortfalls of a virtual currency. Although Bitcoin has recently gained quite a bit of publicity, it is neither the newest nor the only successful digital currency we have seen thus far.
As recent media has highlighted Bitcoin as the currency of choice in black-market transactions through the Silk Road, an anonymous exchange where illegal goods are often purchased and sold, many people are debating whether the regulation of a digital currency is economically feasible and beneficial in regards to international trade. With influential names such as Jamie Dimon (CEO of JP Morgan) is against it, Marc Andreessen (co-founder of Netscape web browser) is loving it, and Alan Greenspan (former Federal Reserve Bank Chairman) has quoted it as a bubble, thus, the world remains inquisitive about the development of a digital currency within the global economy.
What is Bitcoin? Bitcoin is a virtual currency developed by an individual hacker or group of hackers under the alias ‘Satoshi Nakamoto.’ What separates Bitcoin from other virtual on and offline currencies, such as Facebook’s ‘credits’ or Second Life’s ‘Linden Dollars,’ is the concept that it is neither created nor administered by a single authority like a central bank, company or website. In contrast to government fiat money, Bitcoin uses a mathematical algorithm in place of monetary policy. To acquire new virtual currency, users must ‘mine’ for new coins through competing using their computers to solve complex mathematical equations or purchase coins from ‘miners’. In contrast to fiat money where more currency can always be printed, Bitcoin has a finite number of coins and will be capped at 21 million. This presents the potential to avoid inflation as a result of printing money, however, each transaction increases the amount of data within a Bitcoin, which slows down the system.
Although unregulated, digital currencies such as Bitcoin represent both a technological and economic milestone in introducing a decentralized form of currency. Having said this, many are wondering if Bitcoin is a foundation for a more transparent virtual transaction platform or rather ambiguous currencies that will continue to foster elicit underground market places such as the Silk Road. Fred Ehrsam, co-developer of the California based Bitcoin exchange and ‘wallet’ service, stated that digital currency such as Bitcoin still faces challenges in being successfully implemented as ‘mining’ for coins is difficult, hackers can often steal an individuals currency or can simply be lost. Although the currency’s leading exchange, Mt. Gox recently collapsed resulting in a loss of roughly $500 million in customer deposits. Despite this, the United Kingdom has decided to drop its previous plan to tax Bitcoin transactions and instead oversee the industry and provide guidance regarding the tax treatment in trading the virtual currency. The openness of government authorities to the virtual currency phenomenon has led many to speculate that Bitcoin will try to be regulated as opposed to extinguished.
Although the currency has faced challenges regarding the legality and transparency of its use, Bitcoin has provided developments in the benefits of ‘crypto-currency.’ Bitcoin transactions are irreversible, preventing fraud for retailers who deal in the currency. Additionally, firms that provide spot-price conversions into dollars typically have much smaller fees than banks or credit card companies, especially from abroad. With that said, would you put your wealth behind something developed by an individual or group of anonymous hackers?!
Implications on International Trade
Although the details regarding the impacts that will arise from the emergence of an international virtual currency such as Bitcoin are unknown, a reformed and transparent form of digital money may have some very profound impacts on the global economy that we know today. In a world of increasing e-commerce, a uniform currency provides for a business environment where foreign exchange rate exposure would not exist. Reducing transaction times would provide for increased trade efficiency while decreasing spot-rate conversion costs to society as a whole. In addition, removing the ability to create additional currency not only offers hopes of mitigating potential inflation risks, but also may generate concerns regarding funding government deficits as well as the liquidity of financial markets.
Food for Thought
- In a world driven by technological advancements, is it unrealistic to consider a system of virtual currency to be the global transactional standard?
- How might the value of digital currency change as countries choose to join or must all countries join at once?
- What would the implications be on smaller countries versus larger countries?