The figure surprised Alex Boorman, global research director at financial services analyst RFi. What he learned next was even more surprising.
Boorman, the author of the HP-RFi Payments Report, posed a question for survey respondents who had not yet used Bitcoin: “Essentially, Bitcoin is an alternative virtual currency that can be used online. It uses cryptography to send payments from one address to another. It has no central authority and is not issued by a government. How likely would you be to use this form of payment in the future?”
Twelve per cent of survey respondents said they would be likely to use it. That suggests there is a ready user base for a viable virtual currency.
Bitcoin is just the best known of several virtual currencies in existence today. Dr Raymond Choo, an information security expert at the University of South
Australia, notes Q-coin was popular in China before its use in the trade of real goods and services was banned by the Chinese government. Other virtual cryptocurrencies, such as Peercoin and Litecoin, continue to operate.
Certainly, virtual currency is attracting increasing attention from official bodies. The European Central Bank published a landmark paper in 2012 examining virtual currency. In August 2013, Germany formally recognised Bitcoin as something with which Germans can transact – and which the German government can tax. In November 2013, the then US Federal Reserve Chairman, Ben Bernanke, said virtual currencies “may hold long-term promise” for some purposes. And the Australian Taxation Office has promised to issue an advice regarding Bitcoin by 30 June 2014.
“Governments and regulators have also recognised the need to more closely monitor and track virtual currency purchases and accounts to avoid the industry being exploited for money laundering or terrorism financing purposes,” says Dr Choo.
“For example, Singapore – one of Southeast Asia’s financial hubs – has announced plans to regulate virtual currencies and virtual currency intermediaries to mitigate potential money laundering and terrorism financing risks.”
Sceptics abound
Many academics and prominent economists maintain that virtual currencies will prove a flash in the digital pan. In a recent blog post, John Hopkins University Professor Steve Hanke noted that although Milton Friedman had predicted the emergence of virtual currency in 1999, he believes Bitcoin is just a speculator-fuelled bubble.
University of Queensland economics Professor John Quiggin agrees. Sceptical about currencies not backed by governments, Quiggin says virtual currency has little intrinsic value as an alternative payments platform beyond its promise of anonymity – which he believes is in any case overstated.
Deakin University law Professor Louis de Koker similarly does “not see much oxygen for virtual currency, except among people who are generally disaffected and concerned about governments”.
But Ivan Zasarsky, lead partner of the financial crime unit of Deloitte Forensic, believes virtual currency will persist, regardless of Bitcoin’s fate or the hurdles it must overcome. “It’s just a matter of who will be issuing it,” he says.
Whatever the eventual fate of virtual currencies, a growing range of companies are starting to accept this form of payment.
Earlier this year, BitPremier – which exchanges Bitcoin for luxury goods – sold a villa in Bali for 800 Bitcoin. At the time of writing, it has a Ferrari on offer for 490 Bitcoin. Private equity firm Fortress Investment Group last year bought US$20 million worth of Bitcoin (and is currently sitting on a loss).
In January 2014, Sydney-based Nudge Accounting announced it would accept payments in Bitcoin. In February, Sydney-based web technologies company, Hotwire PE, announced plans to establish the Denariuz cryptocurrency bank, backed by a reserve of 100,000 Bitcoin, although it has yet to secure an APRA licence.
Virtual accounts
This means virtual currencies need accounting for. And it’s in the world of accounting that Bitcoin runs into trouble.
Deloitte’s Zasarsky notes that “if you have general agreed accounting principles on a global basis”, then when accounting for virtual rather than flat currencies, it’s “business as usual in many respects”. He adds that accountants should remain prudent, conservative and look to emerging regulation on the issue.
“This is accountancy of units that are represented in the valuation of a good,” says Zasarsky. “The challenge is if the conversion is not transparent.” If it is not possible to value the good or asset then it needs to be looked on as goodwill, he says. “If it is ascribed value by way of flat currency, it is not monetised, but it is valued.”
The real challenge for accountants, says Zasarsky, is that unless virtual currency’s value can be pegged against some trusted exchange – and that remains an issue – then “representing it on a balance sheet would be fictitious”.
Money famously functions as a medium of exchange, a store of value and a unit of account. Bitcoin certainly provides exchange. But as a store of value and a unit of account, its utility is questionable.
Its value against other currencies soars and plummets. A December 2013 study by Stern School of Business economist David Yermack found it was at least 10 times as volatile as other currencies. He concluded that “holding Bitcoin even for a short period is quite risky, which is inconsistent with a currency acting as a store of value and which greatly undermines the ability of a currency to function as a unit of account”. And you cannot deal with the risk through hedging or insurance, he added.
In other words, there are serious challenges for anyone attempting to use Bitcoin as the foundation for accounts.
If today’s best-known virtual currency is an accounting failure, the world may have to wait a little while yet for others to take off. Bitcoin may prove to be the virtual currency equivalent of Alta Vista, the early leader in internet search. Alta Vista famously stumbled and has now virtually disappeared. But its successor, a search engine called Google, learnt from its mistakes.
