Digital Currencies: Where to from Here?
Lee White | May 3, 2016 |
The most popular of the digital currencies, Bitcoin, was launched in 2008 by the mysterious “Satoshi Nakamoto” to provide an alternative payment system that was instantaneous, inexpensive, and secure. There is no doubt that Bitcoin is revolutionary, but there is ongoing debate as to whether it will be accepted as a mainstream currency.
Bitcoin’s short history has been characterized by both entrepreneurial success and steadfast resistance.
But what is Bitcoin, and how does it work?
Bitcoin and the Blockchain
Bitcoin is a limited-supply, web-based digital currency. Its most notable characteristic is that it is decentralized: unlike traditional money, Bitcoin is not controlled by a government, institution, or external authority. The number of coins is capped at 21 million—a limit some predict will be reached in 2140.
Unlike traditional currencies, Bitcoins aren't printed and have no physical form. Their value is created through their perceived benefits and their scarcity.
Bitcoin transactions are processed in groups—known as blocks—by people called miners, who solve mathematical problems using specialized computers. This process is referred to as “mining” Bitcoin. Once they have been confirmed by the miners, blocks, which record the details of each transaction, are added to the “blockchain”.
The blockchain is the disruptive technology that underpins Bitcoin. It records the details of every Bitcoin transaction ever made, and is entirely transparent and searchable by the public. As a secure and transparent chronological record or “ledger” that is distributed across millions of computers, the blockchain has the potential for use across many other industries—most notably financial services.
Moving on despite Uncertainty
Enthusiasts of Bitcoin cite near instantaneous transfer, low or no transaction costs, high levels of security, and relative ease of use as its most significant benefits.
To date, more than USD $1.1 billion has been invested in Bitcoin-related start-ups, including significant investments by Sir Richard Branson, the New York Stock Exchange, Goldman Sachs, MasterCard, and many others.
With more than 15.2 million Bitcoins in circulation, Bitcoin market capitalization has increased by USD $3 billion from the same time last year to USD $6.6 billion. Encouraged largely by speculators, trading volumes have continuously increased since the digital currency’s inception.
Resistance to Bitcoin has been fuelled by regulatory uncertainty, price volatility, and associations with money laundering and criminals.
Its cause was not helped by the widely publicized collapse of the Mt. Gox exchange or the US FBI closure in 2013 of Silk Road, an illegal drug and weapon emporium that used Bitcoin as a medium of exchange.
The value of a Bitcoin peaked in 2013 at just over USD $1,100. Near the end of the first quarter of 2016 it was trading at USD $430. Dramatic price differences are often observed in a single day, due in part to regulatory decisions from jurisdictions that are still coming to terms with the existence of a virtual currency.
Global regulators and taxpayers are grappling with various challenges concerning the tax treatment of Bitcoin. Both Australia and the US, for example, view Bitcoin as property: as such it is liable to capital gains and sales taxes. In Canada, Bitcoin is subject to the same tax laws as barter transactions. In the UK it is treated as a currency. The People's Bank of China has so far been silent on the taxation of Bitcoin, but issued a statement in 2013 prohibiting financial institutions and third party payment processors from dealing with Bitcoin directly.
Where to from Here?
Digital disruption, including the rise of digital currencies such as Bitcoin, will continue to test regulatory boundaries as governments around the world struggle to keep up with the speed at which technology is changing. Internet technology such as Bitcoin knows no jurisdiction, meaning global regulators will need to work together to address these challenges.
As some sectors struggle with digital disruption, insightful accounting leaders will see Bitcoin as a useful prompt, helping the profession to seize opportunities.
Is the accounting profession ready to be disrupted? Is it agile enough to learn, understand and respond?