June 30, 2017    4 minute read

This Is Why Investors Are Nervous About Bitcoin’s Growth

IMF Lends Legitimacy to Currency    June 30, 2017    4 minute read

This Is Why Investors Are Nervous About Bitcoin’s Growth

A recently published IMF document sends a clear message to the banks that they should look more closely at cryptocurrencies. Another document published on the of 19th June, authored by nine well-known economists working with the IMF, including Donga He, Rossa Leckow, and Vikrama Haksara chimed in, stating:

“In general, the financial sector is ready to change. It is hard to decide whether it will be evolutionary or revolutionary. Legislation will require intelligence, experimentation and cooperation “

In their opinion, transformations of this kind create many new opportunities, both for customers themselves as well as for service providers and even legislators. However, the report also highlights some issues, related to regulation, trust, security, scalability, transparency, and data privacy amongst others.

Obstacles to Growth

Legislation will have to be created to focus far more on market participants as well as on their specific market activities.

A more diversified group of companies and platforms using new technologies in the financial services industry will enforce stronger top management and the need to develop new rules and standards for data integrity management, algorithms, and platforms. Moreover, in the face of rapid technological change, the new legislation will be forced to seek the right balance between the performance and stability of financial systems as well as privacy and transparency of data sent through them.

By saying “new technologies in the fintech sector”, IMF economists are primarily referring to Bitcoin (the word “Bitcoin” appears in the report several times) and the underlying technology of blockchain. The market participants will pay more attention to the potential of blockchain technology, which is the foundation of Bitcoin. Its decentralised nature has enormous potential to make far-reaching changes in the current global financial system.

“The boundaries between intermediaries, markets and providers of new services are shifting,” writes an IMF economist.

The current financial system, including the banking system, has many shortcomings. The current technological solutions in this industry leave a lot of space for an upgrade, generating, among other things unnecessary intermediaries or too high entry barriers for new players and monopoly phenomena. This, in turn, entails higher transaction costs or an excessively extended time for such operations.

In the epoch of the Internet, there is no distinction between (electronic) messages addressed to a domestic or foreign recipient. We cannot exclude the possibility that in the near future we may be dealing with “national cryptocurrencies” as well as those “issued” by the Central Bank itself.

Importance in the Payment Market

Paradoxically, the biggest obstacle to the spread of the bitcoin in the payment market seems to be what constitutes a source of interest in it as an investment property (i.e. a rapidly rising price). Money holders, who are dynamically gaining in value, rather reluctantly dispose of it. It is difficult to reliably visualise to what extent Bitcoin is actually used for the purchase of goods and services. Two years ago, there were 100,000 million companies worldwide accepting payments in virtual currency. These estimates, presented by one of the companies offering Bitcoin Payment Systems, are no longer available on its website.

An interesting source of information on the spread of Bitcoin is Coinmap – an online service that allows users to manually add and locate businesses that accept virtual currencies. At present, the Coinmap database has almost 9,000 registered companies accepting payments in bitcoin all over the world – four years ago there were less than 2,000. Most of them are located in developed countries, primarily in Europe and the USA.

Conclusion

More than ten million people around the world are now in possession of a significant number of Bitcoin. The Chinese government has given positive signals to the digital currency and blockchain technology. Currently, China makes 90% of Bitcoin’s worldwide turnover and is the home of the biggest digital currency companies.

It remains to be seen if governments will follow the advice of the IMF and adjust their regulation toward a smooth transition process of embracing Bitcoin as a commonly accepted currency. At this moment, they remain sleepy and slow. Giving Bitcoin a strong legal backing could open a new chapter in the history of finance.

 

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