The nature and prospects of “virtual currencies”, and bitcoin in particular, have been keenly debated. In early December 2013, Chinese government authorities took the first steps towards defining and regulating virtual currencies, which had a substantial impact on the bitcoin market. Nonetheless, bitcoin has shown remarkable resilience, so far enjoying undiminished interest. This eUpdate is the sixth part in a series of eUpdates on bitcoin-related topics and is essentially an update on the third and the fifth parts in a series. The first part of the series described what bitcoin is. The second part explained the legal status of bitcoin and how it is approached in different countries. The third part analyzed the effects of the Chinese demand on bitcoin, as well as how bitcoin is approached in China. The fourth part analyzed risks which virtual currency users may encounter. The fifth part discussed further steps taken by Chinese government towards regulating virtual currencies and their impact on the bitcoin market. The seventh part will discuss Mt. Gox’s demise and its effect on the bitcoin market. The eighth part will explain how recent shutdowns have led to renewed and intensified calls for government authorities from around the world to start regulating virtual currencies.
Continuing concerns about bitcoin
In early January 2014, the Institute of International Finance (IIF), which represents more than 450 banks and financial institutions, issued a report on bitcoin.1 According to the IIF report, despite bitcoin’s many ingenious features, its use as a widespread medium of exchange appears limited. Volatility remains a key concern for bitcoin. “If it persists, this remarkably high volatility will compromise bitcoin’s capacity to function as a medium of exchange, as it deters most large companies from accepting the digital currency as a form of payment,” the IIF report concluded. It also noted that new and comprehensive regulation of bitcoin could strengthen its legitimacy, offer greater consumer protection and improve regulators’ ability to monitor potential illicit activity involving the virtual currency.
A recent study conducted by the Chicago Federal Reserve2 concluded that “bitcoin protocol provides an elegant solution to the problem of creating a digital currency, i.e., how to regulate its issue, defeat counterfeiting and double-spending, and ensure that it can be conveyed safely—without relying on a single authority”. The study underscores that bitcoin is effectively a “fiduciary currency” with no intrinsic value, hence it is inherently fragile. Therefore, despite bitcoin’s “ingenious features,” it is so far incapable of providing a currency of stable value, and its use as a broadly accepted medium of exchange appears limited. However, it does represent a remarkable conceptual and technical achievement, which may well be used by existing financial institutions (which could issue their own bitcoins) or even by governments.
Despite the concerns, bitcoin does not seem to have lost its popularity amongst investors and users in Asia. To avoid risks associated with bitcoin, some investors choose to invest in companies providing bitcoin-related services instead of investing directly in bitcoin. For example, Li Ka-shing, reportedly Asia’s richest man, through his venture capital company, Horizons Ventures, recently invested in BitPay3, a bitcoin payment system equivalent to PayPal.4 Also, Zou Lunlun, a recognized guzheng artist and a co-founder of the International Academy for Musical Arts (IAMA) in Hong Kong, became the first to accept bitcoin as an alternative payment method for her online music lessons, thereby avoiding banking and payment processing fees.5
In early January 2014, bitcoin price surpassed $1,000 again on Mt. Gox (Japan), after Nasdaq-listed Zynga Inc., a provider of social game services, said it would begin accepting bitcoin for some of its online social games.6
Development of bitcoin ATM market
Robocoin Technologies, a company which opened the world’s first bitcoin automated teller machine (ATM) in Vancouver in October 2013, was reported to be setting up a second one in Hong Kong by the end of January 2014, in partnership with the local entrepreneurs.7 Hong Kong beat off stiff competition from New York and Singapore, said Jordan Kelley, Robocoin’s chief executive. There was so much enthusiasm for bitcoin in Asia that establishing a presence in the region was vital, he added. Robocoin chose Hong Kong to launch the second ATM because of its strong links to Vancouver. After opening the world’s first bitcoin ATM, more than C$1 million (HK$7.29 million) worth of transactions were conducted in less than a month.
First-time buyers of bitcoin would find it easier to invest and transact in bitcoin using an ATM. Registration process for online bitcoin exchanges is lengthy and can make customers wait for several days before they can make the first purchase of bitcoins. When using a bitcoin ATM, registration is expected to take just several minutes.8 Jordan Kelley said Robocoin is committed to complying with local regulation and delivering consumer protection software. The ATMs will combine biometric authentication, government-issued ID scanning, as well as verified facial matching to make them secure.9
Bitcoin ATMs are also expected to land in Taiwan later in January 2014.10 Meanwhile, Robocoin is planning to expand its presence in Europe, North America and other Asian countries. Robocoin has not yet disclosed the exact locations. It is unclear whether any bitcoin ATM will be set up in China, given its clampdown on bitcoin operators in December 2013.
Robocoin is not the only company vying for the lead in the bitcoin ATM market. In late December 2013, Lamassu Bitcoin Ventures announced the sale of its 100th bitcoin ATM, and claimed to have received more than 120 orders since it started accepting pre-orders in August 2013.11 Lamassu expects its machines to be set up throughout Europe and North America. It has also set up an online map of bitcoin ATM locations, which will be updated as new units go live across the globe.
1 http://www.iif.com/gcm/article+801.php; http://www.scmp.com/business/banking-finance/article/1402262/banking-group-sceptical-about-bitcoins-future-calling
3 BitPay, founded in May 2011, handles transactions for some 14,000 companies across 200 countries and regions. About half are in the United States, 25% in Europe and 25% in the rest of the world. See https://bitpay.com/