Heads up: Bitcoin

Bitcoin is a decentralised peer-to-peer digital crypto-currency. It is unregulated, unguaranteed and can offer a high degree of anonymity.  It is one of several digital currencies that rely upon secure, encrypted peer-to-peer exchange. Its trust, worth and constant use lie entirely outside of the ‘fiat’ of our conventional financial and institutional system. Its legitimacy derives from the community that uses it.

In its initial years, Bitcoin users were mainly drawn from the niche tech and online community. It is now making the transition from the margin to the mainstream. Already this year there have been attempts to integrate Bitcoin into existing monetary systems:  the US Financial Crimes Enforcement Network classifying US ‘Bitcoin miners’ as Money Service Businesses and, as such, subject to registration and other legal obligations. In August 2013, Germany accepted Bitcoin for tax and legal purposes.

Over the last six to eight months, the Bitcoin community has attracted significant venture capital investment, and its exchange with offline currencies is growing more intense. The value of the currency has increased from around $15 for one Bitcoin at the beginning of 2013 to around $800 at the time of writing: although it is prone to significant fluctuations.

The rapid growth of crypto-currencies creates a series of challenges and opportunities for the offline world. While crypto-currencies create opportunities, such as reduced costs for businesses and consumers, there are a number of significant challenges – such as raising taxes and currency instability.

Demos is starting a major series of work in partnership with Elliptic – a digital currency services group  – and Angus Banks, CEO of Skimlinks, examining the long-term impact of crypto-currencies on a range of political, economic and social institutions. We will be conducting detailed research work into crypto-currency use, effects, and likely trajectory.

Throughout 2014 we will be releasing a number of short briefing papers and hosting events to share our findings.  In particular we will cover:

Individual Consumers: It has no basis in law, only in use – its value is only buttressed by its continual acceptance by an, up to now, almost entirely virtual community. So – how can you trust a currency that is not guaranteed by a government or backed by a central bank?

Business: Bitcoin allows a user to bypass banks, and all the charges they levy. Traditional transaction costs can be up to 3 per cent. Bitcoin may be a compelling value proposition for small merchants; although with still limited use and a volatile exchange rate, there are clearly risks involved.

Banks: Bitcoin poses a significant challenge to banks. Allowing large multinational corporations to globally transfer money cheaply, or even freely, could incentivise these organisations to operate largely outside of the traditional banking sector.

The financial sector: Integrating Bitcoin into the financial structure will be a major challenge. This will require industry and regulators to mutually agree upon a categorisation of Bitcoin. The way Bitcoin becomes a part of the financial landscape will depend largely on whether it is treated as a true currency, or as a potentially volatile and tradable commodity. This will also inform the regulatory and tax frameworks that apply to all crypto-currencies.

Central government: Peer to peer currencies reduce the ability of central banks to manipulate the money supply; have significant implications for how to track illegal transactions, and may erode tax raising powers. The challenge for central government is how to ensure the currencies encourage innovation, business freedom, consumer choice, without losing control over key functions of the state.

For more information on the project or to get involved please contact Jamie.Bartlett@demos.co.uk or Carl.Miller@demos.co.uk.