Bitcoin: The Real Deal

bitcoins
bitcoins

The question on everyone’s mind is: what are bitcoins?

UU researcher Hanna Deleanu explains. The easiest answer is: bitcoin is an electronic payment system. Some of us pay for coffee with their phone – money comes out of their Google wallet, PayPal, or bank wallet. Similarly, they could pay with their phone using bitcoins stored in their bitcoin wallet.

Origins and the goal of bitcoins

Now for the interesting aspect of bitcoin– it’s operational protocol, or the set of rules that govern the recording of transaction, their validation, the creation of new money. Bitcoin's operational protocol was designed by engineers as an alternative to the mainstream payment system.

Bitcoin's protocol was shaped by libertarian-anarchist ideals and was supported by the trust crisis that followed the Great Financial crisis. For this reason, the bitcoin protocol makes payments less amenable to governmental monitoring and less vulnerable to abuse from any Central Bank.

Current debates: speculation, crime and regulation

Speculation

The question asked most is: Is bitcoin a bubble? Well, it certainly isn’t for the faint hearted:

  • The price of bitcoin has been highly volatile shortly after its inception in 2009. But when in 2017 bitcoin's price increased more than tenfold to over 10,000 Euros a BITCOIN – that was when it made the headlines.
  • Regulators and Central Banks (e.g. the Dutch Financial Markets Authority, the European Central Bank, and the People’s Bank of China) have long warned against bitcoin as a speculative tool. Analyzing transaction patterns in bitcoins, Glaser and colleagues showed that these were used primarily for speculative purposes and not as payment systems. 
  • These warnings were recently echoed by Nobel Prize winner Robert Shiller – who called bitcoin “an attractive story” whose prize will certainly drop.
  • The upcoming European regulation of cryptocurrencies and of the cryptocurrency ecosystem will likely negatively affect bitcoin's price.

Criminal money

Of the many novelties introduced by bitcoin, the most discussed is the fact that any person can create an account with minimal set-up costs and no identity vetting. Another Nobel Prize winner, Joseph Stiglitz recently spoke out against BITCOINs who in his view are used primarily by criminals to launder money and to transact across borders.

Research by Dr. Hanna Deleanu and professor Susan Rose-Ackerman in 2016 showed that exchange platforms in bitcoins often do not properly identify their customers – leaving room for abuse from dodgy customers.

New regulation

Originally designed as a safeguard against the concentration of powers, the anonymity of bitcoins has created significant challenges for regulators and financial businesses alike. Regulating businesses that deal with bitcoins to prevent them from being used to launder money, is cumbersome. Not doing it would disadvantage traditional financial entities and perhaps endanger the entire financial system.

Conversely, imposing traditional anti-money laundering regulation would only drive the criminal businesses underground and increase the costs of the legal ones. So, is this a lose-lose situation?

Because the old regulations are not applicable, regulators, policymakers, financial entities and researchers can come together and design the new generation of regulations – one that is more effective, less costly and more inclusive.