Bitcoin has proven to be an innovative disruption that challenges the established paradigms of global financial systems. Based on mathematical proofs and being open source in nature, this fundamentally disruptive technology is decentralised, unregulated and consensus-driven.
Will Bitcoin become a new growth engine in the financial ecosystem of the world, or will it be regulated into extinction? To discuss this, a panel of Bitcoin experts met at Echelon 2014 in Singapore, the emerging Bitcoin hub of the Asia-Pacific; it was moderated by David Moskowitz, the Founder of Coin Republic. The panel members were:
To regulate or not
In large cash transactions, due diligence is required to ensure their legitimacy. Given that Bitcoin circumvents these checks, regulations, the members felt, are needed as that would increase trust and adoption of Bitcoin.
Some held the view that while regulation increases trust, governments can kill Bitcoin, simply by not regulating it. Bitcoin would also have to distance itself from anarchism in order to increase use, given that such ideologies tend to reduce Bitcoin’s appeal to mainstream users.
Taking a contrary view, Forgac felt regulations are unnecessary and “…designed by bureaucrats to increase their power and by corporate players seeking to kill off competition”. Rather than getting in regulations, he preferred a laissez faire approach that would rely on the goodwill of entrepreneurs, letting the market sort itself out.
Also Read: Back to the basics: What is Bitcoin?
The panel reflected on Tokyo-based Mt. Gox’s collapse – the lack of regulations for Bitcoin resulted in its bankruptcy, destroying the holdings of investors. They echoed the need of appropriate regulation and ease-of-use to for it to go mainstream.
Maintaining the contrary view, Forgac noted how Bernard Madoff deceived regulators and executed a Ponzi scheme despite regulations. However, the panel reiterated that accounting, community and trust need development, with the use case for Bitcoin requiring further development. For adoption to grow, Bitcoin entrepreneurs must build uses around real needs, as well as submit to financial regulations in order to protect consumers and investors.
ItBit’s representative, Antony Lewis, shared how major insurance companies are consulting with Itbit to formulate Bitcoin insurance schemes to protect investors from losses. Third-party audits and security reviews are also discussed as being necessary by firms offering Bitcoin products, in order to grow confidence in Bitcoin and establish trust among mainstream customers.
Supply and volatility
Discussing Bitcoin mining, the question of supply control was raised, since countries like Israel, China and the US have A1 chip manufacturing capability. These chips are essential for bitcoin mining, and the concern was that those with significant manufacturing capacity could use them to take the bulk of Bitcoin mining outputs and control Bitcoin supply.
Marginal utility was raised as an issue in using fiat currency vs using Bitcoin. The panel maintained that Bitcoin enjoys a long-term advantage, as its supply growth is predictable, and it preserves value in the long term. Fiat currencies were highlighted as vulnerable to monetary policy changes, long-term fluctuations and sudden increases in supply, altering the utility and benefit enjoyed by consumers. However, Bitcoin is in the infancy of adoption, with changes coming as adoption increases, with its use case and regulatory framework evolving.
The question of managing volatility and increasing adoption was floated, with Bitcoin’s flux compared to foreign currency fluctuations. Bitcoin has greater fluctuations and more volatility than fiat currencies. However in the long term, fiat currencies are volatile downwards, while Bitcoin is volatile upwards. Volatility was noted as decreasing, compared to Q4 2013, with Bitcoin volatility at less than one per cent. The panel opined that with its growing liquidity, more people will adopt it, increasing its stability.
Security and fraud
The panel concluded by discussing security and fraud issues. The members noted that increased security in Bitcoin would raise costs, but may be necessary for increasing adoption, like credit cards integrating security and insurance. However in Bitcoin terms, merchants handling credit cards is comparable to giving a private key to a Bitcoin wallet.
Bitcoin firms, in acting as financial custodians, are already dealing with fraud prevention. Many Bitcoin exchanges and brokerages, like ItBit, keep their bitcoins offline as part of their security procedures, but no industry standards exist. It was pointed out that these standards and security technologies would eventually emerge, coming from silo technologies developed by the financial sector, but taking time to productise.
As the discussion wound down, the overall conclusion reached was that Bitcoin adoption would continue to grow for the foreseeable future, so will it opportunities. However, regulatory challenges would have to be addressed by the industry as well as government regulators in the near-future.