Could Bitcoins ever Replace Conventional Money?

Updated: Aug 21

Written by Luca Zin


Introduction


The industry that I am going to base my research upon will be the ‘’financial technology’’ one, better known as fintech). Even though many of us believe that the term FinTech refers only to the post-financial crisis rise of the new service-based start-ups and applications, it can also refer to any technology-enabled financial solutions (Arner et al, 2016).


Fintech has, in fact, evolved over three different stages: firstly, with the analogue context, i.e. the introduction of ATMs; secondly, with the process of digitalisation of finance from the 1990s onwards, i.e. the introduction of credit cards; and finally, with the new era of FinTech as we all know it today (Arner et al, 2016). One of the main new products that it has brought to us in the last years are Bitcoins (BTC). Some believe that these will eventually replace conventional money.


The aim of this paper is to give an insight into Bitcoins, their pros and cons, and analyse when, or if, they are going to replace our conventional money.

Overview


Bitcoin is a network and a cryptocurrency that allows a new payment system and completely digital money (Bitcoin, 2017). It is the first decentralised peer-to-peer (P2P) payment platform that is powered only by its users without any central authority. It is, essentially, cash for the internet without the moderation of banks (Bitcoin, 2017).


Bitcoins are produced in a procedure called mining (Kien and Ly, 2014). In this procedure, users deliver computing power to proceed with Bitcoin transactions (Kien and Ly, 2014). They can be bought and sold on the so-called Bitcoin exchanges, who match buyers and sellers to create a market for Bitcoins (Kien and Ly, 2014).

Advantages of Bitcoin


The first main advantage of Bitcoins, is that no one can freeze them. This means that governments cannot block bitcoins, thus block someone’s wealth. Therefore, Bitcoins’ users will have complete freedom to do whatever they want with their money (Onies et al,2011).


Secondly, it is almost impossible to intercept bitcoin transactions. Thus, it would be extremely hard for a third party to impose any taxes on bitcoins (Kien and Ly, 2017). Thirdly, no one can access their bitcoin wallet (Onies et al, 2011). Therefore, there is a high level of privacy (Kien and Ly, 2014). Moreover, bitcoins can be transferred anywhere in the world with extremely law transaction fees, if any (Kien and Ly, 2014).


Furthermore, Bitcoins can be considered as an interesting alternative to conventional money in terms of transparency and security. Bitcoins are stored in an encrypted format on one’s PC, therefore, it is extremely difficult for hackers to access and steal electronically (Onies et al,2011).


Finally, Bitcoin’s anonymity can be considered an advantage to people living in countries with an unstable economy (Woo et al, 2013). Bitcoin can be used to avoid high taxes, capital control and confiscation. This led to people from some countries (e.g. China) increasing their bitcoin usage when their currency rate went down (Woo et al, 2013).


Disadvantages of Bitcoin


The most straight forward disadvantage is, of course, that bitcoin is still not widely accepted as a form of payment (Onies et al, 2011). Moreover, the price of bitcoin is extremely volatile. It has moved 10% daily since it has been introduced. These swings in Bitcoin’s value reflects shifts in its recognition as it gets more widely known and used (Woo et al, 2013). High price volatility also undermines Bitcoin’s role as a payment method, as large retailers are reluctant to accept such a volatile currency (Woo et al, 2013).


Furthermore, as it is extremely hard to track, it could be used to pay illicit activities of products (e.g. money laundering or buying forbidden services or goods) (Hernandez -Verme and Valdes Benavides, 2017). Additionally, regulators could try to carry out reforms to control bitcoins transactions. If this happens, it would increase the transaction costs for using bitcoin despite its efficiency and the transparency compared to cash (Woo et al, 2013). It would be extremely unlikely for governments to promote a new type of currency that could be viewed as one facilitator for black market or tax evasion.


Hence, governments are trying to fit Bitcoins into the broader international tax system (Woo et al, 2013). Finally, Bitcoin’s use as a new global currency will be probably hindered as it is still not legally considered a currency (Woo et al, 2013).


Controversies


The main issue with Bitcoins is that, due to their untraceability, they could be used for illicit uses such as money laundering or acquisition of illegal goods (e.g. illegal drugs) (Bloomberg, 2017). To tackle this issue, a few countries have declared illegal the usage of bitcoins, and many others are trying to limit bitcoin’s transactions.

Conclusion


There is a strong technological change in the payment system. Our society is moving towards a less cash-based society. However, due to the mining issues, bitcoins could not be considered as a new type of currency and will not replace our conventional money in the short term (Wonglimpiyarat, 2015) (Gallagher, 2017).


Moreover, Bitcoin is not supported by any government due to their insecure payment infrastructure and their law traceability. These factors will also delay the usage of Bitcoins in the future (Wonglimpiyarat, 2015).


Bitcoin has no value. The price changes with the demand and supply of traders. Hence, it could increase extremely fast as it could decrease and be valueless if people stop buying it (Wonglimpiyarat, 2015).


Finally, as Bitcoins are not issued by governments, central banks around the world are reluctant about accepting Bitcoins, hindering their progress (Wonglimpiyarat, 2015). The only way to increase the usage of Bitcoin would be an implementation of a secure payment platform and ICT infrastructure (Wonglimpiyarat, 2015).

Bibliography


Arner, D., Barberis, J. and Buckley, R. (2016). The Evolution of Fintech: A New Post-Crisis Paradigm?. SSRN Electronic Journal.


Bitcoin (2017). FAQ – Bitcoin. [online] Bitcoin.org. Available at: https://bitcoin.org/en/faq#who-created-bitcoin [Accessed 28 Nov. 2017].


Bloomberg, J. (2017). Bitcoin: ‘Blood Diamonds’ Of The Digital Era. [online] Forbes.com. Available at: https://www.forbes.com/sites/jasonbloomberg/2017/03/28/bitcoin-blood-diamonds-of-the-digital-era/#693f0591492a [Accessed 28 Nov. 2017].


Gallagher, C. (2017). Digital currencies won’t replace paper money anytime soon according to this senior bank official. [online] The Independent. Available at: http://www.independent.co.uk/news/business/news/digital-currency-bitcoin-wont-replace-paper-money-bank-of-japan-finance-banking-technology-a8069491.html [Accessed 28 Nov. 2017].


Hernandez -Verme, P. and Valdes Benavides, R. (2017). VIRTUAL CURRENCIES, MICROPAYMENTS, AND THE PAYMENTS SYSTEMS: A CHALLENGE TO FIAT MONEY AND MONETARY POLICY? European Scientific Journal.


Kien, M. and Ly, M. (2017). COINING BITCOIN’S “LEGAL-BITS”: EXAMINING THE REGULATORY FRAMEWORK FOR BITCOIN AND VIRTUAL CURRENCIES. Harvard Journal of Law & Technology, Volume 27(2), p.594.


Onies, A., Daniele, G. and Olayinka, T. (2011). Digital Currencies. [online] Cs.stanford.edu. Available at: http://cs.stanford.edu/people/eroberts/cs181/projects/2010-11/DigitalCurrencies/index.html [Accessed 28 Nov. 2017].


Wonglimpiyarat, J. (2015). Bitcoin: The revolution of the payment system? Journal of Payments Strategy & Systems, 9(4), pp.235-239.

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