The digital currency Bitcoin has proved to be an intriguing innovation in the world of finance from its very conception in 2009. Linked with drug deals, prostitution and money laundering its birth has been both controversial and shrouded in mystery. The origins of its inventor are not known, although it is suggested that Satoshi Nakamoto, the only name provided in the founding paper, is a 37 year old male living in Japan. Various rumours abound on the founder’s existence but whilst the hunt for Nakamoto continues at the business insider, the more interesting question is whether there is a role for digital currency in the future of finance?
Mining for digital gold
Bitcoin is a cryptocurrency, which is an electronic payment system based on cryptographic proof instead of trust. The mathematical formula used in the process of issuing the currency imitates a limited stock pile of gold. A finite number of 21 million Bitcoins are available with computer algorithms monitoring the number of Bitcoins in circulation. New Bitcoins may be released as part of this monitoring process, which provides an incentive for people to undertake this laborious task. This is known as ‘mining’. However, if your computer skills aren’t quite up to scratch, you can fill your digital wallet by purchasing online – currently one Bitcoin trades at around $95. A word of warning though – there have been wild swings in its valuation.
International, fast and cheap
So why use this digital currency instead of dollars, sterling or euros? The main draw is that you can transfer money globally, quickly and at minimal cost. Up until now, you couldn’t make a web based transaction without a trusted 3rd party intervening. Now, using Bitcoin, it would be possible for me to purchase coffee from Guatemala, bananas from St Lucia and espadrilles from Brazil in 10 minutes without worry of exchange rate fluctuation and a minimal transaction charge. Bitcoin’s system is completely transparent, transactions are anonymous and not subject to tax.
Surely the great monetary economist Milton Friedman would be an advocate. When calling for the Fed to be abolished he suggested an automated system, driven by a mathematical model, where the money supply increased at a steady, predetermined rate issued by the treasury in order to create a more stable environment for spending and investment. Sound familiar..?
The darker side – a digital black market
The anonymity of transactions has led to a darker side in the use of the currency. You can now buy drugs from a digital black market known as the Silk Road, an anonymous online marketplace for psychedelics and stimulants amongst other paraphernalia. It has been used by organised crime groups linked to money laundering and the sex trade. Recently the authorities seized a digital currency exchange Liberty Reserve for illegal activities worth $6 billion. Also, there are security concerns – recent hack attacks caused one person to lose over $200,000 worth of holdings. Bitcoin did however state that the security issue had been resolved, making it harder for virtual robbers to grab some digital swag.
The future of digital currency and the CFO
With an increasing number of customers choosing to transact online there is no reason why a digital currency could not succeed in the future. The key to the success of a digital currency will be in its public adoption rate. Currently it’s uncommon to purchase the morning newspaper with a Bitcoin, but uptake is on the increase with Fidor Bank AG forming a partnership with Bitcoin Germany and the Winkelvoss twins’ $10 million market flotation.
So what factors should be considered if your business decides to add a Bitcoin account? Firstly, we should recognise that the digital currency is still at an early stage in its lifecycle and therefore a high risk. Adopting Bitcoin in a company would broaden a customer’s ability to purchase online. However, the highly volatile currency value would present a problem in pricing products. The credit check process may be replaced by verification of the online account of the purchaser, in addition to a complicit trust in the monitoring process and security of the network. Also, the CFO should consider reputational impacts on the company, considering current links with the digital black market.
Despite Bitcoin itself having flaws, the concept of a digital currency, a way to transact freely and transparently in an increasingly globalised economy, is compelling and one that finance departments should be prepared for in the future.