By Benjamin Lasserre
Recently, cybercurrency’s have littered the news headlines of the news ranging from columnist spouting the virtues of these future currencies or as another passing tech fad. However, the realities of cybercurrencies, particularly cryptocrurrencies such as Bitcoin could have a serious affect on cross-border trade, monetary policy, market liquidity, and inflation.
Cybercurrencies by definition have no legal tender status in any jurisdiction. There major appeal being anonymity. There are four major types of cyber currencies, being virtual currency, digital currency, cryptocurrency, and e-currency. I will focus on crytocurrencies as they are by far the most popular and relevant to future trends. A cryptocurrency is not reliant on any central institution and provides anonymity for all users.
In their October 2012 report the ECB outlined their concern with the cybercurrency. They stated that since the crypto-currency is decentralized the currency is under no direct regulation of any monetary authority. Meaning the Central Bankers’ current tools will be rendered irrelevant. Open Market operations of buying and selling government bonds to expand the monetary base will lead to no change to the already allotted size of the cybercurrency. These tools would have to change.
Regulators would find success in ensuring that cybercurrencies like Bitcoin aren’t used for speculative investments by regulating the cybercurrencies relative value to the domestic currency. Monetary authorities could hold reserves of Bitcoins and buy and sell them.
Tariff and Taxation Policy
These currencies are traded cross-border through unofficial channels that leave to no traces. ASA risk consultants state the countries should be worried about money laundering, and funding of terrorist or crime organizations to name a few. With no ability for regulators to track those involved in the transaction or what is being purchased governments will be have no ability to apply tariffs on those transactions. This could lead to massive price shifts in industries that were previously protected by the domestic economy. Even on a domestic level, governments would have any ability to receive revenues from capital gains taxes.
It used to be thought that the only way to ensure that double spending of cyber currencies could only be achieved through a central database; however Bitcoin achieves this through a new and ingenious method. Bitcoin’s safety is that it binds its community together. After a Bitcoin transaction is made and before the deal is posted the settlement must be verified by a third party that must “mine” the Bitcoin in order to ensure that it is indeed a legitimate transaction.
Recently however, we have seen several highly public Bitcoin robberies where the hackers gained control over many accounts and were able to remove the Bitcoins from their proper account into another untraceable account. These sorts of security breaches are of serious concerns going forward.
Many proponents of Bitcoin say the there is no inflation possible with these currencies as there is an unmovable finite amount. The growth of Bitcoin occurs when people ‘mine’ or validate the transaction. For their work miners currently get 50 Bitcoins. As a more transactions occur it becomes more difficult to “mine” and coded into Bitcoin is a continuous 50% reduction in the number of Bitcoins given per successful “mine” leading to end in 2040, after which miners will charge a fee for their transaction work.
However, this finite amount does not make Bitcoin safe from inflationary pressures. There is a possible long-term appreciation of the currency if the number of people use it grow faster than the number of coins created.
In the end countries and monetary authorities across the globe will be faced with decisions on how to handle these new currencies. Only time will tell how things will develop for the cybercurrencies.
Birch, David. “Two Sides of The Same Bitcoin: Crytocurrency and the Big Picture.” Finance Monthly (n.d.): 18-22. Print.
“Bitcoin in China: A Dream Dispelled.” The Economist (2014): 72. Print.
““Money from Nothing: The Socioeconomic Implications of ‘Cyber-currencies’”.” ASA Institute for Risk & Innovation (2013): n. pag. Print.
““The Present And Future Impact of Virtual Currency”.” Senate Banking Committee : Subcommittees on Economic Policy and on National Security and International (n.d.): n. pag. Print.
“Virtual Currency Schemes.” European Central Bank (n.d.): n. pag. Print.