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If banks are this scared of Bitcoin, gold must terrify them
Virtual Currencies Threaten to Go Viral
By Stephen Foley
Financial Times, London
Friday, April 26, 2013
http://www.ft.com/intl/cms/s/0/55733b80-addf-11e2-a2c7-00144feabdc0.html
NEW YORK -- There are many reasons to doubt the monetary value of Bitcoin, the virtual currency whose exchange rate has been gyrating wildly this month, but no one can deny its comedy value.
"Bitcoin has worth just because a bunch of people on the Internet have agreed it is worth something -- like Psy," joked Stephen Colbert recently, comparing Bitcoin to the South Korean entertainer whose music video "Gangnam Style" went viral last year.
As on the Colbert Report show, so too at the New York branch of the Federal Reserve, which held a gathering this week for some of the grandees of financial regulation. When one person asked if Bitcoin could become a viable unit of international exchange, participants burst out laughing.
To recap: Bitcoin was created four years ago by an unknown computer scientist and the limited stock of "coins" grows only according to a predetermined algorithm. The idea is that it will become an alternative to state-backed currencies and to traditional banking.
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A small number of mainly online retailers, and an unknown number of offline drug dealers, accept payment for their wares in Bitcoin, but the value of the currency is determined by nothing more than speculation. The US dollar price of a Bitcoin, $13 at the start of this year, peaked at $266 this month and has pinged between $54 and $144 since.
Because it has no single person, company, or entity controlling it, Bitcoin stands out from other virtual currencies, from the Air Miles used to buy flights and hotels, to the "gold" used to buy virtual weapons in World of Warcraft, to the Amazon Coins that owners of its Kindle Fire will soon be given to buy apps on the device.
But the craze for Bitcoin has brought debate and scrutiny to them all, and we might already have entered the phase when the regulators strike back.
In recent weeks several Bitcoin businesses have had their bank accounts shut down, suggesting traditional banks are getting worried about enabling the currency. It comes on the heels of a ruling in the US that all businesses that exchange or transfer virtual currency are "money services businesses" and must register with the government and introduce money laundering checks and training for staff.
BitFloor, a New York-based exchange, shut down after its account was closed. In Canada, Ottawa-based broker Canadian Bitcoins has had two of its four banks shut down.
James Grant, founder of Canadian Bitcoins, says he was given no clear explanation why his banks abandoned him.
"These are growing pains," he says. "Big corporations, governments, and banks are trying to find ways to deal with it, but when they find it is not going away, they will find ways to accept it, and to adapt their laws and policies to it."
In a survey of virtual currencies last October, the European Central Bank concluded they were too small to worry about yet, but their growth should be monitored lest they start to threaten financial stability.
Many virtual currencies exist within their own virtual economies, such as World of Warcraft, or the online universe known as Second Life, but these are hard to keep totally closed. World of Warcraft gold is available for purchase on the black market for real-world currency; Second Life’s Linden dollars are exchangeable for US dollars. When Q-coins, a virtual currency introduced by Chinese telecoms company Tencent, began to be traded for yuan in the black market, the Chinese authorities banned its exchange for real world goods.
The worry for central bankers is that there is no check on how much currency can be created by whoever controls the money supply, if anyone does control it. Inflation, bubbles, crashes and other volatility could ensue, and traditional monetary policy would be less effective.
Bitcoin copycats are already springing up. A company called OpenCoin says it will start giving away the 100 billion "Ripples" it has created out of thin air, in the next few weeks, initially to software developers.
OpenCoin chief executive, Chris Larsen, doesn't see lots of virtual, borderless currencies competing. He thinks there might be one big winner. "I think of it like this: What did MySpace have to do to beat Friendster, and what did Facebook have to do to beat MySpace? Can anyone iterate on Facebook? There were hundreds of attempts at social networks, but only three big steps to get where we are."
OpenCoin's decision to give Ripples to developers is a calculated one. It hopes they will start to use them as currency in applications they develop, and as Ripples' utility increases, so should their value. The question is: How many other Silicon Valley companies will now be tempted to launch rival currencies?
As for Bitcoin, maybe its adherents will have the last laugh, or maybe the regulators -- or perhaps it is just one for the comedians.
"I don't understand," Mr Colbert deadpanned, after being told of Bitcoin's mid-April crash. "How did this unregulated, imaginary currency invented by an anonymous hacker and backed by the full faith and credit of YouTube comments ever go wrong?"
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