For Bitcoin, a Roller Coaster With a Silver Lining?

julie conroy1Guest Contributor: Julie Conroy, research director, Aite Group

Establishing a new, non-sovereign digital currency is not for the faint of heart. Bitcoin, the poster child for cryptocurrencies, has weathered a barrage of ups and downs over the last six months as financial and regulatory entities struggle to understand the currency and its role in commerce as well as the broader macroeconomic environment.

Bitcoin and other digital currencies have often gotten a (not undeserved) bad rap. The anonymity that the currencies facilitate and their position outside of sovereign oversight have made Liberty Reserve, WebMoney, and Bitcoin the currencies of choice in the cybercriminal underground.  The early October FBI bust of Silk Road, an underground Web forum for drug sales, netted more than US$3 million in confiscated bitcoins. The FBI is also working to break through the encryption protecting the site mastermind’s personal stash of the currency, estimated to be worth over US$80 million at current market prices.

The bust, while serving to reinforce the negative reputation of digital currencies, could have a silver lining for proponents of bringing Bitcoin mainstream: It showed that even when anonymity prevails, cryptocurrencies such as Bitcoin leave an electronic transaction stream that can be used to trace transactions. In addition, a number of legitimate use cases are taking hold alongside the illicit use. Thanks to its universal, standardized structure and low transaction costs, Bitcoin lends itself well to cross-border remittance, microtransactions, and even e-commerce.

Another obstacle to going mainstream, however, is regulatory uncertainty—regulators just don’t yet know what to do with Bitcoin. Thailand has banned digital currency exchanges outright; Germany has acknowledged the currency as a legitimate transaction unit and even collects sales tax on the transactions; and U.S. federal regulators have imposed daunting requirements that Bitcoin exchanges get licensed as money transmitters and comply with AML regulations. Moreover, an inquiry by the New York attorney general has cast such a bright light on the ecosystem that Dwolla cut ties with the currency on October 11, 2013.

Amid these ups and downs, Bitcoin’s value has fluctuated substantially but recouped lost value quickly, a sign of resilience.  It is too early to know whether Bitcoin and its brethren will weather the storms necessary make it to mainstream. To do so, the currencies will need to sacrifice some of their outsider standing and work within sovereign regulatory structures in order to remove the uncertainty swirling around them. The question is whether this can be accomplished while the currency retains the efficiency that drives value in legitimate use cases.

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