Julie Conroy is a research director for Aite Group’s Retail Banking practice, and covers fraud, data security, anti-money laundering, and compliance issues. Ms. Conroy has presented at numerous risk management conferences, including BAI Payments, NACHA, the Members United Economic Forum, MasterCard Global Risk Symposium, and various vendor user conferences. She has been quoted in numerous media outlets, including The Wall Street Journal, U.S. News and World Report, American Banker, SmartMoney, and NPR. She will be speaking at the NICE Actimize ENGAGE Client Forum in New York, on October 23rd on “Digital Currencies: The Good, The Bad & The Ugly”.
Establishing a new, non-sovereign digital currency is not for the faint of heart. Bitcoin, the poster child of cryptocurrencies, has weathered a barrage of ups and downs over the last six months, as financial and regulatory entities struggle to understand the currency and its role in commerce as well as the broader macroeconomic environment.
Bitcoin and other digital currencies have often received a bad rap (not undeserved.) The anonymity that the currencies facilitate, as well as their position outside of any sovereign oversight, has made Liberty Reserve, WebMoney, and Bitcoin the currencies of choice in the cybercriminal underground. The recent FBI bust of Silk Road, an underground web forum for drug sales, netted over US$3 million in confiscated Bitcoin. The FBI is also working to break through the encryption protecting the site mastermind’s personal stash of Bitcoin, estimated to be worth over US$80 million at current market prices.
The bust, while serving to reinforce the negative reputation of digital currencies, could have a silver lining for the proponents that are trying to bring Bitcoin to the mainstream. The FBI bust showed that even when anonymity prevails, Bitcoin leave an electronic transaction stream that can be used to trace transactions.
There are a number of legitimate use cases that are taking hold alongside the illicit use. Thanks to its universal, standardized structure, along with low transaction costs, Bitcoin lends itself well to cross-border remittance, micro-transactions, and even e-commerce. Another obstacle to going mainstream, however, is regulatory uncertainty. Regulators just don’t yet know what to do with Bitcoin. U.S. regulators have imposed daunting requirements that Bitcoin exchanges obtain licensing as money transmitters and comply with AML regulations; Thailand has banned digital currency exchanges outright; meanwhile Germany has acknowledged the currency as a legitimate transaction unit, and collect sales tax on the transactions.
Amid these ups and downs, Bitcoin’s value has fluctuated substantially, but has shown an ability to recoup lost value quickly, a sign of resilience. It is too early to know whether Bitcoin and its brethren will weather the storms and make it to mainstream. To do so, the currencies will need to sacrifice some of their outsider standing and work within sovereign regulatory structures in order to remove the uncertainty swirling around them. The question is whether this can be accomplished while retaining the efficiency that drives the value in the legitimate use cases.