Bitcoin does not need to replace normal currency in order to have a future, according to an expert on digital currencies from professional services firm Ernst & Young.
Speaking at an event in London, Roger Willis, who has been following bitcoin since its inception in 2009, described myths around the currency, one of which was its position as a replacement for “fiat” money.
“Fiat currency is essentially currency the government decrees to be legal tender,” Willis says. “Bitcoin wasn’t really developed to be a replacement for fiat currency. You see a lot of people talking about how bitcoin is going to take over, or how bitcoin doesn’t have the properties that lend to it being used widely.
“But it was really developed to be used in ecommerce and for micro transactions. It wasn’t really to replace our sterling, our us dollars, and our euros.”
With that in mind, the future risks for the currency take on a different shape. Currently, many critics are concerned with problems like price volatility and the deflationary nature of bitcoin. There will only ever be 21m bitcoins, and that has led some to fear that the currency will have a “deflationary” element in the future, leading to each unit getting comparatively more valuable over time.
Deflation is often blamed for the “lost decade” in Japan, and an Ernst and Young spokeswoman stressed that the company adheres to the mainstream economic view that mild positive inflation is best for a national currency. But when it comes to using bitcoin as an ecommerce tool, deflation isn’t necessarily problematic.
Instead, Willis highlighted problems of speed and fraud control as the most pressing priorities for bitcoin. In order to prevent fraud, the bitcoin network “confirms” transactions every 10 minutes.
“One of the weaknesses with bitcoin is you generally have to wait for five to six transaction confirmations before you’re sure that the money hasn’t been ‘double spent’, and that can take up to 40 or 50 minutes,” Willis says.
Some establishments have already decided that speed is worth the risk. For instance, the Pembury Tavern, a pub in Hackney, London, which takes bitcoin, accepts unconfirmed transactions as payment. But not every retailer can afford to do that – particularly if they are selling goods more expensive than beer.
Overall, Ernst and Young “have a balanced view” on bitcoin, according to Colin Pickard, a financial services director at the company.
“There are definite possible gains, in terms of lowered transaction costs, but there are some significant negatives, in terms of accountability and how to deal with anonymous users and how to regulate in the market.
“A great number of companies that are operating today that don’t think of themselves as financial institutions will have to be regulated and treated a lot more like financial institutions are today. But we aren’t positive or negative on bitcoin itself.”
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image: © Zach Copley