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How Bitcoin went legit
Even eight months ago, the world of Bitcoin was a dark and dangerous place. Now the UK government is looking into the region into the Bitcoin capital of the world. The currency is finally growing up.
To Bitcoin purists, this must feel all wrong: This week George Osborne announced a review into uses for the cryptocurrency as part of plans to make the UK a world capital for financial technology (‘fintech’ to its friends). Given Bitcoin was founded on the principles of transcending national boundaries – and with it, governments – it’s a strange direction for the currency to take.
But Osborne sees this as the obvious way to bring together two of his favourite things: Technology and the financial sector.
“Key to the government’s long-term economic plan is cementing Britain’s position as the centre of global finance,” he said.
Ours isn’t the only government to have started taking notice of Bitcoin. Last month, the New York Department of Financial Services published its first draft BitLicenses, new rules governing how digital currencies are traded in the state.
Under the rules, any Bitcoin-based business will be required to maintain records of their customers’ names and addresses. They’ll have to hold Bitcoin reserves of 100 percent of the amount they hold (pretty harsh, considering US banks’ capital requirements are about five percent of deposits), and they’ll have to publish a DFS-approved consumer complaint policy. They’ll also be subject to security audits.
Why now? In its early years, Bitcoin had two main uses: Funding criminal activities, and as an investment. But over the past few months, it has become less useful for both. Instead, the right conditions have emerged for it to be seen as something new: A legitimate currency.
It began with the closure of online drugs marketplace Silk Road, which traded using Bitcoin, in October last year. In a dramatic raid on a San Francisco library, founder The Dread Pirate Roberts’ – 29-year-old Ross Ulbricht to his mum – was arrested, which pretty much put an end to using Bitcoin to pay for illegal activities.
Shortly afterwards, the currency peaked at just over R11 000 and began to fall, dropping to a low of R4 000, then rising to over R6 000 again, where it’s hovered for almost three months. In February, Mt Gox, one of the first Bitcoin exchanges, filed for bankruptcy protection.
All fairly calamitous events, if you think about it. Imagine if the pound collapsed as a major currency exchange toppled in the UK: Those in charge would face serious questioning.
But as it was Bitcoin, and thus most people involved knew the risks from the outset, instead it set the stage for conversations among leaders about how the currency could be brought out of the underworld and into the mainstream. The result is governments looking into the idea of regulating it, with the eventual goal that consumers might begin to see Bitcoin as less of a risk.
Now the currency has stabilised, even retailers are being turned on to the idea of using it. The number of well-known brands accepting it as payment is expanding fast: Asos, WordPress, Soundcloud, Airbnb – the list goes on. Alright, so you can’t go down Tesco’s and pay for your Big Shop with it – but it’s only a matter of time.
Now it’s no longer rocketing in value, the currency’s main potential lies in its ability to lower transaction costs. Want to move cash abroad? It’s cheap to convert into Bitcoin – and once you’ve done that, you can move it anywhere you want with minimal costs.
With those kinds of savings in mind, a new wave of entrepreneurs – many of whom use profits from their original Bitcoin investments as seed capital – has launched businesses aimed at taking it legit. Businesses such as Vaurum, a robust Bitcoin exchange aimed at financial institutions, are trying to get ordinarily risk-averse industries – banks, pension funds, etc – interested.
So although it began as a way to bring down governments, the likelihood is it’ll be down to international leaders to find a way to regulate the unregulatable.