Bitcoins have the potential to be a game changer for the financial services industry. If the governments and the financial sector find the right way to regulate the digital currency munt, then the chances of this happening are relatively high, concludes accountants and consulting firm EY in a newly published report.
Bitcoins have been a hype, lately. There is, however, also is a lot of controversy around the digital currency, criticasters are pointing at the low level of regulation and the ungrounded ‘hype’ status it is receiving. Others call it a bubble, stating that the current price, which recently exceeded the $1,000 dollar limit and currently hovers around $700, is not sustainable. At the same time, some Bitcoin experts are full of praise, highlighting the fact that it breaks the monopoly of banks and financial institutions and provides consumers with a more moral currency system.
The different opinions are best illustrated by the largely contradicting views that recently have been published by (central) banks. The People's Bank of China stated that the Bitcoin has no ‘real’ meaning and thereby never can obtain the same legal status of regular currency. In the US a Texas judge ruled a few months ago that the Bitcoin is a currency or a form of money and therefore a legal tender. Also the German Government considered the Bitcoin a unit of account and a ‘legitimate’ means of payment. Morgan Stanley called the impact of Bitcoin recently ‘stunning’. Finally, the central bank in France indicated that caution in the use of the Bitcoin is essential. The bank points out the high speculative nature of the digital currency and indicates the financial risk it forms to its users.
In the report, EY said that the digital currency could bring significant benefits to the financial services industry as its use could drastically cut the costs of maintaining currency systems. For example, managing physical money across access points (ATMs), a costly exercise for banks, could be replaced by a virtual system. This would massively reduce these costs.
Also costs in cross-border transactions would fall, as Bitcoin represents a standardized format, opposed to the hundreds of different currencies used across the globe. In addition, the overall maintenance costs of currency systems would fall, as paper-based systems are more costly to maintain. Lastly, Bitcoins could, in theory if well managed and protected, represent a big step in combatting black money, as a trace-path is easier to maintain for digital developments compared with paper-based money.
Although the consulting firm labels the potential of Bitcoins as potentially ‘game changing’, it at the same time sees several risks. The risk of a cyber-attack on Bitcoins tops the list – “it would be a big mistake for anyone to think that Bitcoin is not vulnerable to hacks”, thus the researchers. From an acceptance perspective, the consulting firm says that, unless governments are to regulate Bitcoin, the digital currency will still be facing serious hurdles and will never lift off.