Is Bitcoin mo' money or no money?

Last month the Bank of England wrote an in-depth explanation of money, in which it explained why Bitcoin is more like a commodity - e.g. gold - than a currency. Basically it isn’t popular enough. Yet.

US market regulator the Securities and Exchanges Commission (SEC) issued its latest note of concern regarding Bitcoin in May, and US central bank the Federal Reserve (The Fed) received advice on the pseudo-currency this month too.

What is most apparent from the discussions is that Bitcoin is still a massive unknown for the senior economics experts in major economies; regulators are being cautious about creating rules around its use and its fate will most likely be determined by popular demand.

This is an interesting position for Bitcoin to be in. If it becomes adopted, or at least accepted as a payment method by enough users and merchants then it could have a future. But too much bad PR and it could find itself dropped like a Zimbabwean dollar.

The threats that Bitcoin is seen to pose vary. The Fed’s advisory noted that it could engender:

• Disintermediation of traditional payment networks, promoting shadow transacting.
• Disruption of traditional channels of commerce with high potential for illicit use.
• Potential as a contagion of instability through volatility or lapse in network integrity.

The SEC’s warning was more focussed on the ability for users to be misled and defrauded by unscrupulous parties.

It certainly seems unlikely that a currency/commodity that requires an online storage system, many of which (in the case of Bitcoin) have been apparently robbed in the last 12 months, will ever offer a reasonable alternative to insured bank accounts in currencies that can be physically held if required.

The most likely use of Bitcoin, as with derivatives - another poorly understood and often miss-sold products – is speculation and hedging. That prompts me to think that the last point on the Fed’s list is of most concern. A sudden drop in value that undermines a major party’s credit has been demonstrated time and again to be a systemic threat. Systemic threats are unlikely to be a focus for users of Bitcoins and, given that its origins are reasonably unclear, Bitcoin could be a major systemic Trojan horse. But only if it takes off.