In this latest article in the series 'all you needed to know but were too afraid to ask', we explain what bitcoin is and what its potential might be
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This article was first published in the January 2018 UK edition of Accounting and Business magazine.
PwC and EY have both recently announced that they have accepted client payments in bitcoin. Amazon has indicated it may soon do the same. According to reports in the media, Amazon recently registered three new website domain names related to ‘crypto-currency’ (amazonethereum.com, amazoncryptocurrency.com and amazoncryptocurrencies.com), a clear sign of intent.
Virtual currencies are now reaching the mainstream. They have already changed the payment industry and how individuals and businesses transact. But with so many conflicting opinions about bitcoin, it can be hard to work out its benefits and potential. Will it replace money and how is it affecting business?
What is it?
Bitcoin is a digital or ‘crypto-currency’. Individuals and businesses can use it to buy things and transfer value without intermediaries such as banks. Transactions are encrypted and time-stamped. The currency was created in 2009 by Satoshi Nakamoto − a pseudonym. The individual’s identity is still being debated.
In the last few years, the interest in bitcoin has burgeoned. Bitcoin’s global market is worth billions of pounds. At time of going to press, one bitcoin was worth more than US$11,000, with many investment experts believing that it is a bubble waiting to burst.
Coin owners can transfer its value to anyone else in a ‘chain’ of transactions, which form a block. These blocks form a ‘blockchain’ − a digital ledger that can record and verify transactions, such as bitcoin, legal contracts, financial statements or even medical records (see AB, May 2016, page 64). Records in a blockchain can only be changed with the permission of everyone involved in the transaction. You can convert bitcoins into cash at an exchange, just as you can for a traditional currency.
You’ll usually need a mobile app or computer program to use bitcoin. Bitcoins are kept and exchanged using a digital wallet.
You can invest in bitcoin funds, such as the Bitcoin Investment Trust offered by British stockbroker Hargreaves Lansdown.
The dark side
Bitcoin is unlikely to replace real money, according to some experts, who say that because bitcoin isn’t regulated and, because it’s widely used by criminals and on the ‘dark web’, it’s unlikely to become an everyday thing used by billions of people.
Banks have generally not offered bitcoin services since it began, preferring to invest in blockchain and other financial technology (‘fintech’).
Jamie Dimon, chief executive of JPMorgan Chase & Co, a financial services company with assets of US$2.6 trillion, made headlines when he was reported as saying that that bitcoin was ‘a fraud’ and would eventually ‘blow up’.
‘The currency isn’t going to work,’ Dimon was reported as saying. ‘You can’t have a business where people can invent a currency out of thin air and think that people who are buying it are really smart.’
Others in financial services are open minded about bitcoin’s potential. In 2016, Mark Carney, governor of the Bank of England, said in a speech that a distributed ledger/blockchain for everyone could open the possibility of creating a central bank digital currency. Doing so could give people direct access to ‘the ultimate risk-free asset’ and perhaps ‘abruptly re-shape banking,’ Carney said. But he cautioned that before the Bank of England would use blockchain or bitcoin, it would need assurance that blockchain distributed ledger systems were secure, fast and reliable. ‘The payments system we oversee processes half a trillion pounds of bank transactions, equivalent to around a third of annual GDP, each day,’ he said.
Bitcoin and related technologies may create business opportunities for financial firms. Accounting firms are keen to advise businesses on blockchain and bitcoin technology. Some are even using bitcoin. At the start of 2017, EY Switzerland allowed its clients to pay invoices for auditing and advisory services using bitcoin. The Big Four firm gave its staff a digital wallet to use bitcoin and installed a bitcoin ATM in its building. And in early December, PwC Hong Kong followed suit, announcing that it would accept bitcoin as payment for its advisory services.
Bitcoin ATMs will make the digital currency more accessible, but how can the growing bitcoin industry be regulated?
Because digital currencies are unregulated, consumers have no right to claim compensation. Some regulators have talked about regulating parts of digital currency, although this would be tricky, as digital currencies have thrived on the ability to be bought and sold anonymously.
Bitcoin is not the only digital currency. Other popular ones include ethereum and ripple. Ethereum, the second biggest digital currency, is like bitcoin. A Swiss not-for-profit organisation that was created in 2014, ethereum runs on a large network of computers run by volunteers. In November, one ethereum digital coin was worth about US$400.
It’s used for payments and verifying transactions (property, shares, legal agreements or anything of value), using its own version of blockchain technology. If these smart contracts take off, it could have major implications for financial services firms, accountants, lawyers and other intermediaries who people have relied on to verify transactions.
Ripple, trading as XRP, is a cross-border payment system and digital currency, sending payments using its blockchain network. Cross-border payments can be made in four seconds, compared with about three days for inter-bank transactions using the Swift network, according to ripple. Its corporate customers include American Express, France’s Credit Agricole bank and TransferGo, a UK payment transfer company. In November 2017, one unit of XRP was worth about US$0.23.
What next for bitcoin and other digital currencies? It may (when combined with blockchain) change financial services, business and consumerism. It may also be an over-hyped asset bubble that’s overtaken by a newer and better technology. Everything should be clearer in about five years.
Nick Huber, journalist
"Regulating the bitcoin industry would be tricky, as digital currencies have thrived on the ability to be bought and sold anonymously"