Virtual Currencies – Temporary Fad or Here to Stay?

The idea of the virtual currency has actually been around for quite some time in one form or another; take Second Life for example. However, it’s thanks to bitcoin and the buzz around it (both positive and negative) that an increasing number of people are now familiar with the concept.

Uptake in the ‘real world’ has been slow so far, but with the appetite already present we are starting to see ‘bricks and mortar’ stores worldwide accept the currency. So what does this mean for those working in the financial services market? With the increased awareness and familiarity among consumers, does this mean we are approaching a tipping point for virtual currencies? Moreover, if we are how likely is it that a nation state will adopt one as its main currency in the near future?

For the development of a virtual currency system, it could be argued that the arrival of the euro was a vital part, with a variety of sovereign countries and central banks agreeing to one single currency that could be used for cross-border trading. In many respects virtual currencies are similar, but what differentiates them is that they don’t need to worry about crossing a border or meeting the requirements of a central bank.

If you look into the whole process, these currencies are based on some of the fundamental principles of a transaction, such as the faith that the spenders place in the currency matching the perceived value of the vendor. Take early gold exchanges as an example; it is easy to draw similarities with the values placed on a lump of gold as being more valuable than something else like tin. It is all a matter of trust and as more people take an interest, trust in these currencies will start to grow.

This growth is not going to happen overnight by any means. As with any new technology, there are security and fraud issues that need to be addressed. With bitcoin, each transaction is anonymous and what you see is where it goes from to where it is received. Also, bitcoin and other recent examples of virtual currencies don’t need to observe national protocol, which makes regulation something of a nightmare. By its very nature, there is no one holding the ropes, so how do you enforce regulation at this stage? What’s more, without a global bank in place to enforce the rules it requires each sovereign bank to agree to one single set of policies. That is highly unlikely.

It may be that we start to see more central banks around the world try to regulate bitcoin by placing tax on it, but this will be hard to accomplish. On the other hand, who is to say that every nation will want to regulate virtual currencies? For those in unstable economies, this could help them manage their economy more easily.

As we look toward 2015, what is clear is that any full scale move to virtual currencies is still many, many years off. We still need to see an acceptance that these currencies are here to stay and understand the broader global macro-economic impact these new systems will have. Only then will we see serious conversations really take place around the ability to regulate virtual currencies.

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