Do we need a bitcoin regulation?
Bitcoin as a virtual currency presents significant challenges to regulators, but one should not be too hasty to regulate Bitcoin, without fully understanding the implications of blockchain technologies more generally – especially with regard to their impact on innovation, competition and regulation.
“What goes up must come down.” Whenever Bitcoin reaches a new peak, someone anticipates the imminent breakthrough. One of the features of financial bubbles is that it is difficult to perceive that they are such. Before the subprime mortgage crisis, there was little reason to think that the perpetual rise in property prices in the United States did not obey any natural law. Bitcoin already has its own Cassandra, starting with Jamie Dimon, JP Morgan’s CEO, who never misses an opportunity to attack it. However, it’s hard not to be suspicious of something that in the last ten months has increased its value from $ 1,000 to $ 5,600. At the beginning of September, Bitcoin fell very low when China announced tighter regulations. A few weeks later, a similar initiative by South Korea had no effect.
We should remember that there are no right or wrong prices. The price system’s purpose is to communicate information. People who sell Bitcoin for a certain amount, or buy it at a given value, do it on the basis of expectations that grew from their understanding of the circumstances in which these exchanges take place. And it is difficult to have firm expectations about new things.
When a payment is made in Bitcoin, the coins move from the portfolio of those who sell them to that of the one who buys them. There is no “wire transfer” or centralized counterparty. Bitcoin provides a series of benefits to consumers: it can be used to transfer funds across borders at virtually no cost—providing new opportunities for cheaper and faster international money transfers, and, potentially, bringing a new efficiency into the remittance market.
Our first problem in a sale is to make sure that the other person is selling something that is actually at their disposal. Throughout history we have developed different types of records, we have invented specific professions, and, therefore, we ask the State to be the last guarantor of the contracts into which we enter.
Bitcoin’s blockchain is a decentralized public ledger that is transparent and trustless and that contains all transactions occurring in Bitcoin. This information is not stored: there is no single point of entry; but information is recorded, replicated and distributed across the network, and, of course, crypted for security reasons. The process makes the concept of fraud unimaginable: there is no single counterfeit document, but an infinite number of copies of it, all constantly updated. The real innovation beyond Bitcoin is not the currency itself; it’s the underlying technology, the blockchain that enables people to cooperate in a distributed manner, and to transact with one another without the need for any trusted authority or centralized clearinghouse. When it comes to regulation, blockchain technologies can be regarded as some kind of regulatory technology enabling laws to be enforced more transparently and efficiently. One of the key benefits of blockchain for regulation is that it solves the problem of “who watches the watcher”—which is a fairly common problem for many fiduciary institutions.
From a regulatory perspective, therefore, if virtual currencies present a series of challenges relating to taxation, money-laundering and terrorist financing, the real challenge is to figure out how to regulate them in a way that does not impinge upon the actual benefits that blockchain technologies provide, in terms of transparency, accountability, consumer protection and regulatory compliance. The blockchain is an emerging technology that has yet to disclose its full potential. What we are seeing today is only the tip of the iceberg; we do not yet know how this technology will evolve and what opportunities it will bring. Yet, current applications of the blockchain can be regarded, by analogy, as many things that we do know: it can be seen as a currency, as a security, as a commodity, etc.
To this innovation, which could have wide applications, Bitcoin joins a logic the same as that of gold, for centuries the true currency of humanity. Unlike the currency issued by states, gold is scarce: its availability depends on how much you can extract from the Earth. We already know that Bitcoin’s “mines” will soon be exhausted until they are empty in 2140. This makes it very attractive in the eyes of those who fear the “inflationary” derive of central banks.
Bitcoin “capitalises” – but the term is improper – less than $100 billion. The size of the phenomenon is still contained, but the potential for innovation is great. It is clear that there are many fears, especially if the last outcome can really be the “disintermediation” of traditional payment systems: a challenge to banks and finance. Bitcoin as a virtual currency presents significant challenges to regulators. But one should not be too hasty to regulate Bitcoin, without fully understanding the implications of blockchain technologies more generally, with regard to their impact on innovation.
Bitcoin as a virtual currency presents significant challenges to regulators, but one should not be too hasty to regulate Bitcoin, without fully understanding the implications of blockchain technologies more generally – especially with regard to their impact on innovation, competition and regulation. We are often tempted to regulate what we do not understand. Violent price fluctuations seem to require more stringent rules. But, perhaps before deliberating, it would be better to wait and take the opportunity to discover: understanding new things takes time and patience.