Virtual currencies such as Bitcoin are expanding the frontiers of our digital economy. The main questions that arise is how can their potential to stimulate a new form of economy be balanced with the cyber-safety needs of citizens?
These virtual currencies have gained much attention in recent years and this emerging technology offers significant opportunities for policy-making. The European Central Bank differentiates between two categories of virtual currency, one being electronic money schemes using traditional units (such as Euros) and the other whose units are an ‘invented currency’ such as a virtual currency. Electronic schemes, linked to traditional money formats, have a clear legal foundation and basis in established institutions.
They derive worth through the implicit support of national and, more and more, supra-national governments and establishments. A virtual currency like Bitcoin depends instead upon records of transactions to be noted in associate anonymous on-line ledger called a ‘blockchain’.
This prevents double-spending of Bitcoins and removes the need for third-party verification of transactions, a function traditionally performed by financial institutions such as banks. Bitcoin is a virtual currency simply representing an electronic ‘peer-to-peer’ payment network. The system is operated by users sending Bitcoins to each other, stored in a ‘digital wallet’, in exchange for the sale of goods or services. A transaction is created by transmission via the Bitcoin network and recorded on the ‘blockchain’, grouped in ‘blocks’, which is completely accessible to all using the network. A transaction is then confirmed within a block of current transactions (subsequent transactions confirming the integrity of previous ones). This process is completed by ‘miners’ using substantial amounts of computing power to process increasingly lengthy blockchains and receiving a Bitcoin reward accordingly.
Bitcoin is in fact the first global electronic currency ever to have been developed. The anonymity afforded to users of Bitcoins forms the basis for the major impact of Bitcoins: removal of the need for a ‘third-party verifier’ of transactions. Bitcoin usage would help to ‘de-fragment’ the global financial market, which has always been the preferred market model by banks around the world seeking to prevent the emergence of a global electronic currency. This therefore offers a number of potentially highly-positive impacts stemming from the fact that use of virtual currency could be cheaper, easier and faster than existing methods of payments. For example, users of Bitcoins do not need to use bank accounts, with the associated credit and security checks that make their use complicated in comparison, simply accessing a ‘digital wallet’ via an internet connection.
Scientific Foresight Unit In-depth Analysis 10 Transaction costs of making payments for goods and services should fall dramatically were virtual currencies to be more widely used. This would help smaller business and ‘start-ups’ as this type of running cost can disproportionately impact upon their operating expenditure capacities. Not only this, but use of Bitcoins could vastly improve access of buyers with sellers. With an enlarging of markets for good and services, accompanied by faster personal and business transactions across international borders, the impacts for the EU’s and the global economy are potentially massive. Furthermore, if virtual currencies were to be embraced by financial institutions this could usher in a new era of highly secure, cheaper, and easier to access means of payment.
The issue of the security of virtual currencies should also be one of concern for policymakers alongside the positive benefits it could provide. For example, use of Bitcoins opens up the possibility of fraud and other criminal activities increasing alongside greater use of this virtual currency. This is because users can only be identified by unique numbers in comparison to existing bank customers, who are typically identified through fixed details such as names, dates of birth, addresses, etc. As it is impossible to know whether a Bitcoin user represents an individual or a group, would regulatory and enforcement agencies be able to successfully follow transactions, beyond the blockchain.
A key question to address is the type of regulation that will be appropriate for virtual currencies. Should existing type of financial regulation be used, given it is already notoriously difficult to enforce financial regulation? There is no ‘home country’ for Bitcoin and thus raises further issues of which jurisdiction this system would fall under. For example, if Bitcoin fraud were carried out affecting multiple users from across the world, which jurisdiction would lead in prosecution of offenders (assuming perpetrators could be identified)? Moreover, how should payments made in virtual currencies be taxed? Some governments are considering defining Bitcoin as a form of property and therefore applying laws on property taxation accordingly.
However, the advantages of the virtual currency and the transparency provided by the blockchain or distributed ledger technology will help increase the safety of the transactions and reduce fraudulent activities through continuous monitoring.