Central Bank boss says bitcoin is here to stay
For the last two years, middle-aged bankers and pundits have been throwing darts at bitcoin. Virtual currencies, we are regularly warned, are “doomed” and “unworkable”. They are little more than the faddish offspring of geeks dabbling in drug dealing.
Apparently not. Last weekend, no less a figure than the director of markets at Ireland’s Central Bank delivered a speech on virtual currencies. Gareth Murphy said that fiscal and regulatory authorities are starting to take ‘crypto-currencies’ such as bitcoin very seriously.
“Central banks, financial regulators, ministries of finance, fiscal authorities and statistical authorities should be interested in virtual currencies,” he says.
They are a reality because of “the ease with which transactions can occur between counter-parties located anywhere in the world, the relatively low cost of effecting payment and transmitting funds and the fact that many large technology companies are household names that are trusted”.
In other words, bitcoin is not a fad. It, or virtual currencies like it, are a likely part of an evolving economic payments infrastructure.
“As a virtual currency starts to permeate economic activity, regulated financial service providers such as banks, insurance companies and asset managers may find themselves having to adapt to this new environment in order to maintain market share,” said Murphy.
This is quite an extraordinary thing for a senior central bank official to say. It also puts economic commentators’ weekly predictions of bitcoin’s imminent doom into a clearer perspective.
Put simply, virtual currencies are growing, not failing. There are between one and three million bitcoin ‘wallets’ in existence today. But that figure is expected to increase sharply over the next year. Investor money is starting to flow in, too.
Last week, a bitcoin start-up, Xapo, raised $20m in funding from blue-chip venture capital investors, including Greylock Partners and Index Ventures. Another bitcoin company, Circle Internet Financial, raised $17m in March and is using some of the money to set up a base in Ireland. The company has already hired a European managing director based in Dublin, Garrett Cassidy. His job is to build the business by being a point of contact for banks who want to explore possibilities with virtual currency acceptance.
Some retailers have moved ahead with bitcoin trading, whether banks accept it or not. In the US, large online companies such as Expedia, Overstock.com and TigerDirect accept payment in bitcoin. The rapper 50 Cent recently began to accept payment for new albums in the virtual currency, too.
One big draw to the crypto-currency is its lack of transaction fees, which can get close to 5pc using some payment systems. That’s a significant marginal saving, making it worth the risk for some corporate traders.
But there are still some risks.
Because it’s an unregulated transaction, there is no insurer of last resort in the guise of a central bank to sort out large problems. Nevertheless, even this may be starting to evolve.
“Where there is theft of a virtual currency, it is for police authorities such as the gardai to investigate and pursue this criminal matter in the first instance,” says Murphy. “Although regulators may pursue further sanctions after the issue of the theft has been dealt with.”
If Murphy’s remarks give some encouragement as to the growing stake claimed in the economic landscape by virtual currencies, wholescale regulation is still some way off. The Central Bank is confining itself to asking bitcoin traders to approach the Central Bank “to work” with the institution, rather than taking an initiative itself. It is somewhat constricted, said Murphy, by a combination of public sector resource constraints and a commitment to only proceed in concert with European regulators. Which means a slow pace.
I don’t own any bitcoin. I find it awkward and cumbersome. And I certainly have no interest in ‘mining’ bitcoin. (This is a process which often requires investing in specialist IT equipment and running up energy bills for a very uncertain, marginal return.) But that doesn’t mean I can’t see an emerging trend. If Murphy’s intervention in the widening debate is any indication, things are moving on this.
Despite widely publicised hacking attacks, thefts and regulatory roadblocks, the trading price of bitcoin has remained relatively stable over the last six months.
It may be a smart move for banks and traders to start taking it more seriously.