MARCH 2016 SPECIAL FEATURE BITCOIN: WHAT'S UP WITH THAT?

Special feature

Bitcoin mysteriously appeared in the wake of the huge 2009 bank rescues in the US and the UK and transferred fast, and anonymously for pennies via the blockchain. It's a genius piece of programming which creates an "open ledger" atop every computer in the network and (critically) logs and vouches for transactions.

You've heard of Bitcoin partly because Bitcoin—may—be a valuable new mode of moving money around an increasingly digital, interconnected and interdependent global economy. It's been a libertarian dream, the idea of a currency that's everywhere and nowhere; for years now, Bitcoin activists have been promoting a new financial dawn.

But you've probably also heard of Bitcoin in far less flattering terms: Bitcoin made the news regarding a US-based Ponzi scheme by the "Bitcoin Savings and Trust" promising investors up to 7 percent weekly interest.

That was clearly too good to be true. Come July 2013, the U.S. Securities and Exchange Commission charged the company and its founder; adjudged guilty, the company was fined $40 million US. And financial investigators blew the lid off Silk Road, a lucrative drug trafficking network that ran on

Bitcoin and collapsed with a resounding crash when the arrest warrants arrived. There have been other, similar scams, none of which seems to have more than temporarily slaked the appetite of big financial services entities to see if there's anything to the Bitcoin technology.

Since 2013, Bitcoin has grown not only in credibility but also in the number of pilot projects major global banks have undertaken to test the peer-to-peer "crytpocurrency". Authorities as influential as PayPal's former president David Marcus and billionaire philanthropist Bill Gates have mentioned Bitcoin favourably, but with plenty of caveats.

We're so awash in predictions of a brave new world that a healthy skepticism is warranted. One of the biggest of the brave new world predictions revolves around Bitcoin, the "cryptocurrency" (meaning: a unit of value which can be encrypted and transferred digitally).

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People are confused. They think because it's called cryptocurrency it's a currency. I don't think it is a currency. It's a store of value, a distributed ledger.

It's a great place to put assets, especially in places like Argentina with 40 percent inflation, where $1 today is worth 60 cents in a year, and a government's currency does not hold value.

It's also a good investment vehicle if you have an appetite for risk. But it won't be a currency until volatility slows down. Whenever the regulatory framework is clearer, and the volatility comes down, then (PayPal) consider it.

Are cryptocurrencies “money”?

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Gates thinks Bitcoin will win adoption because it's clearly cheap—far less expensive than most bank service charges to move money around. Marcus, now head of Facebook's mobile messaging initiatives, cautiously defined Bitcoin not as a currency but as a "distributed ledger": a mode of measurable exchange and said this at the height of the Bitcoin craze in late 2013:

Well, over two years later some very heavy hitters are taking Bitcoin apart (not PayPal) and putting it back together again, including the Bank of Canada, which has publicly warned that the world's central banks might "struggle" to deploy monetary policy in a global marketplace where digital currencies win traction. And Bitcoin, according to the gods of finance at the Bank, doesn't meet the three-part criteria for an actual currency:

The commonly held definition of money includes three criteria:

1 Money should be generally accepted as a medium of exchange.

2 Money should be a unit of account so that we can compare the costs of goods and services over time and between merchants.

3 Money should be a store of value that stays stable over time.

In November, 2015, the Bank's senior deputy governor, Carolyn Wilkins, speaking at the University of Toronto's Rotman School of Management, identified Bitcoin as but one in an emerging market of alternative financial technologies and concepts which, she observed, are driving ever more transactions "outside the traditional financial sector":

....(where) central banks (cannot) act as lenders of last resort as they do for their own currencies. This means that households and businesses could suffer important losses if such an e-money were to crash...we need to anticipate this and manage the risks and benefits that could arise from the broader adoption of e-money..."

Why? Because if the global marketplace increasingly uses non-central bank denominated currencies, like the US greenback or the Canadian dollar or the euro, then central banks will have correspondingly less influence over a market crisis.

Markets abhor a vacuum.

So other financial services giants are investigating Bitcoin alternatives. Goldman Sachs has patented a Bitcoin cousin called SETLCoin—and with Wall Street figuring out how to make Bitcoin's blockchain a universal cash register, the dreamy days of Bitcoin are likely over.

What remains to be seen, though, is just which of Wall Street's or The City's Bitcoin 'variant' strikes fire. Stay tuned. p