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That weird and wonderful thing called bitcoin

I keep getting into debates about bitcoin and when banks should take notice of bitcoin.

C’mon.  If a bank hasn’t noticed bitcoin yet, then they must be a bank completely uninterested in banking strategies.

bitcoin is important, but it’s not the be-all and end-all.

In fact, it is fairly irritating.

It is irritating because bitcoin is being discuss as ‘legal tender’, ‘a currency’ and ‘an alternative to banking’ all over the shop, when it is none of these things.

My friend Dave Birch recently pointed out that it is not ‘legal tender’ although, in Germany, some people think it is.

Virtual currency bitcoin has been recognized by the German Finance Ministry as a "unit of account", meaning it is can be used for tax and trading purposes in the country.

Bitcoin is not classified as e-money or a foreign currency, the Finance Ministry said in a statement, but is rather a financial instrument under German banking rules. It is more akin to "private money" that can be used in "multilateral clearing circles", the Ministry said.

"We should have competition in the production of money. I have long been a proponent of Friedrich August von Hayek scheme to denationalize money. Bitcoins are a first step in this direction," said Frank Schaeffler, a member of the German parliament's Finance Committee, who has pushed for legal classification of bitcoins.

In fact, bitcoin is a multifaceted thing.

It is a form of value store, a form of money, a form of trade and a form of investment instrument.

On the one hand, it is a tradable commodity, like stocks and shares. Useful, but just a representation of value for as long as it has volumes of trading and liquidity.  Should that volume of trading and liquidity disappear, then so will bitcoin.

That’s what people thought when bitcoins were hacked at MTGox, with the exchange bankrupting itself and, in so doing, taking a large portion of monies from its investor community (of which I was one!).

As Marc Andreessen, the founder of Netscape and massively influential Silicon Valley VC says:

Legendary entrepreneur Marc Andreessen @pmarca tells @beckyquick why he is defending #bitcoin pic.twitter.com/hDcQQVqoj5

— Squawk Box (@SquawkCNBC) February 25, 2014

But then he would say that, as he’s invested millions in it.

Nevertheless, a virtual exchange collapses but bitcoin goes onwards and upwards.

It’s now accepted by Expedia for hotel bookings, as well as other firms like Dell now adopting its usage.

In fact, most notably, Richard Branson has been making a big deal about bitcoin.  First, accepting bitcoins for payments for flights on Virgin Galactic and, more recently, investing in BitPay during its recent $30 million Series A funding round.

Add to all this the excitement of the community itself …


… and everyone thinks this cryptocurrency will fly high.

The reason being that people are building the ecosystem around this digital value exchange as we speak.  In fact, many compare bitcoin today to the internet twenty years ago.  

Donald Norman said this at the Financial Services Club two years ago and Jeremy Allair, CEO of startup Circle Internet Financial, repeated the statement to American Banker this week that Bitcoin is like the internet in 1994.

It's at the level of code and TCP/IP.  www is just happening and soon we'll get the Bitcoin HTML and more to make it as easy to use as Facebook.


This is why it's a fledgling thing, starting to grow and prosper.

Or maybe not.

Maybe it will just crash and burn.

In fact, I guarantee it will crash and burn unless it is regulated.

This was a twitterfest I had recently with a couple of other guys, where my core point was that money without government, is irrational.

There is no such thing.

Money was invented by governments to govern.  That is the point of money.

Therefore, the idea that you can have a new form of ecosystem off the regulatory network just does not work.

Governments will always focus upon markets that are dark, because that’s where terrorism, money launderers, criminals and paedophiles hang out.

If you have a dark net with a dark currency, governments will do all they can to close them down.

So bitcoin will only ever succeed if it is regulated.

And regulations are starting to happen: 

On July 17, New York became the first state to attempt to regulate Bitcoin and other forms of cryptocurrency (referred to as virtual currency in the proposal). New York Department of Financial Services (NYDFS) Superintendent Ben Lawsky announced the so-called BitLicense proposal on Reddit. While some in the Bitcoin community welcome regulation as a validation of Bitcoin’s right to exist, the majority oppose it as the first roots of centralization.

There’s a number of reactions to this news.

Coin Telegraph reports that the “standardization (the BitLicense) promote in consumer protection, financial transparency, and technical security across various service providers should lead to greater levels of trust from consumers and the broader business community”;


Cryptocoins News  says that “the saddest part of these new regulations is that they could actually turn Satoshi Nakamoto into a criminal after a period of 45 days if he does not decide to register his creation of the Bitcoin protocol with Ben Lawsky and the New York Department of Financial Services.”


Much as the community might luck to buck the government (with a ‘b’ and an ‘f’), the government is going to buck them (repeat).

This is a point reinforced this week in Brett King's post on same subject.

So where bitcoin ends up is in a newly regulated market structure.

This market structure will operate at three levels:

  • Legitimising bitcoins
  • Trading bitcoins
  • Storing bitcoins

We already have a structure for generating bitcoins based upon mining, the blockchain and the protocol.

We then need a structure for trading bitcoins that is more reliable than the MTGox version we saw crash and burn.

This means governments will work on issuing some form of bitcoin licensing for trade purposes, such as the New York regulations drafted this month.  I almost see it as a license like the one under the Payment Services Directive for becoming a ‘payment institution’ or the emoney licence being used by Facebook to start processing payments.

It’s a digital value exchange license in this case, or a virtual currency license if you prefer.

Finally, storing bitcoins will be the choice of the individual but, for the safest store, they’ll probably put them in the bank as banks have guarantees as safe stores (that’s why they have licences).

So from being the bad boy in the wild west of the net, bitcoins and Bitcoin (the unit of account and the infrastructure) moves into the mainstream model of value exchange as per stocks, shares, money and other stores of value.

Take note.


Great article by Matthew Sparkes in The Telegraph if you’re wondering how bitcoin works in terms of buying some …

Before you can buy any coins you must create a “wallet” to store them. This is essentially a computer file which holds digital money. You can do this by installing the bitcoin client, the software which powers the currency. But be warned: if your computer is hit by hackers or a virus, or you simply misplace your files, you may lose your bitcoins. The data on your computer is what has value and once it’s gone, it’s gone.

The alternative is to use an online wallet such as blockchain.info where this data is stored in the cloud. This is easier to setup, but you will be trusting your money to a third party. Blockchain.info has been one of the larger and more reliable sites until now, but there are no gaurantees when using a decentralised, unregulated currency.

Once you have a wallet you’ll see an address which looks something like this:1GVA4cyUc7wXCu1nsN6TahVkMXE4vC1nGe. This is safe to distribute and is what people would use to send you money – think of it like an account number and sort code, rather than your secret PIN. As you can see from that link, all bitcoin wallets are public. It's often described as an anonymous currency but this is far from the truth. Essentially, your "bank statements" are public, but nobody knows whose they are.

Now that you have a wallet, you can get some coins. One of the easiest options at the moment is Bittylicious, whose simplicity almost makes up for its name. Rather than selling bitcoins directly, this exchange puts sellers in touch with buyers. But all of that is largely invisible to buyers – you only need to interact with the site and don’t even need to know who you're buying from.

Enter how many bitcoins you want to buy and the address you want them sent to (as above, but use yours, not mine – check it carefully, then check again), pay for them by transferring money with online banking and wait. If you’re already using Barclays’ clever Pingit app then you can also use this to pay. If you want to buy large amounts you'll need to verify your identity but for smaller volumes there's no need.

The site promises that transactions will complete in two hours, or it will refund your money. It also supports rival but similar crypto-currencies FeatherCoins and Litecoins. There are dozens of bitcoin competitors although none have gained the same amount of traction. I tried it this week and my 0.01BTC came through within minutes at a cost of £5.60.

Marc Warne, the founder of Bittylicious, admits that his service is not always the cheapest, but avoids the costly and complex international bank transfers which some services demand, and which can make buying small amounts prohibitive.

“A lot of people do use it to invest, they’ve heard about it and they think it’s a good idea and it’s going to go up. A fair amount of people, myself included, do use it for real things. I pay my accountant with it,” he said.

“I think, long-term, definitely it’ll go up. Short-term, it could go in any direction. I think you must be long-term because it’s just that much more volatile, but I genuinely think it’s got a future.

“Nobody knows what's next when it comes to bitcoins, that’s the joy of it. The way it works is quite weird, although fundamentally it's digital cash and everyone can understand that,” he said.

The average purchase made through the site is £100, but since launching nine months ago he has seen £1.5m pass through. Currently it sells around £20,000 of bitcoins each day, although this can fluctuate wildly when it makes headlines.

Nobody can say for sure what will happen to bitcoin in the future: it could be accepted as the de facto online payment system for the internet, or it could fade away into an obscure chapter of digital history. But it'll be fun to watch in either case.

Does bitcoin have a future?

22.51%  Yes, it will replace the pound  (1,197 votes) 

49.44%  Yes, but it will only ever be an online niche  (2,629 votes) 

28% No, it's just a fad   (1,492 votes) 

Total Votes: 5,318



About Chris M Skinner

Chris M Skinner
Chris Skinner is best known as an independent commentator on the financial markets through his blog, the Finanser.com, as author of the bestselling book Digital Bank, and Chair of the European networking forum the Financial Services Club. He has been voted one of the most influential people in banking by The Financial Brand (as well as one of the best blogs), a FinTech Titan (Next Bank), one of the Fintech Leaders you need to follow (City AM, Deluxe and Jax Finance), as well as one of the Top 40 most influential people in financial technology by the Wall Street Journal’s Financial News. To learn more click here...

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  • Thanks for the mention Chris.

  • Tell that this to Visa and MasterCard, they will not allow anything to be connected to a crypto currency.