Australian Bitcoin Exchanges Now Must Be Registered

Last week, the Anti-Money Laundering and Counter-Terrorism Financing Amendment Bill 2017 was passed into law.  The new law, for the first time, regulates Australia’s growing digital currency sector. Similar measures are already in place in the US, Canada and the EU.

It amended the Anti-Money Laundering and Counter-Terrorism Financing Act 2006 to:

  • expand the objects of the Act to reflect the domestic objectives of anti-money laundering and counter-terrorism financing regulation; expand the scope of the Act to include regulation of digital currency exchange providers;
  • clarify due diligence obligations relating to correspondent banking relationships and broadening the scope of these relationships; qualify the term ‘in the course of carrying on a business’;
  • allow related bodies corporate to share information;
  • expand the range of regulatory offences for which the AUSTRAC Chief Executive Officer (CEO) is able to issue infringement notices;
  • allow the CEO to issue a remedial direction to a reporting entity to retrospectively comply with an obligation that has been breached;
  • give police and customs officers broader powers to search and seize physical currency and bearer negotiable instruments and establish civil penalties for failing to comply with questioning and search powers;
  • revise certain definitions; and clarify certain powers and obligations of the CEO; and Anti-Money Laundering and Counter-Terrorism Financing Act 2006 and Financial Transaction Reports Act 1988 to de-regulate the cash-in-transit sector, insurance intermediaries and general insurance providers.

One important change was that operators of Australian exchanges for Bitcoin and other digital currencies will now need to register with the country’s anti-money laundering agency.

It also sets out the conditions under which they may trade.They must  identify and verify their customers, keep records of transactions, report threshold transactions and suspicious matters, and run an anti-money laundering and counter-terror financing program.

It is now a criminal offence to provide digital currency exchange services without being registered with AUSTRAC and penalties for non-compliance start from two years’ jail and/or $105,000 for failing to register. They go as high as seven years jail and $2.1 million in penalties for corporations and $420,000 for individuals for severe offences.

 

ASIC’s Fintech “Sandbox” To Remain Unchanged

ASIC has released a consultation paper  and a review of its regulatory sandbox, introduced in December 2016.

 

In the review ASIC proposes to retain class waivers known as the fintech licensing exemption, that allow eligible financial technology (fintech) businesses to test certain specified services without holding an Australian financial services or credit licence for up to 12 months. The exemption is subject to a number of conditions, such as client and exposure limits, consumer protection measures, adequate compensation arrangements, and dispute resolution systems.

The fintech licensing exemption is a world-first approach that allows eligible fintech businesses to test certain services for up to 12 months without an AFS or credit licence.

Outside of the fintech licensing exemption, many fintech businesses rely on exemptions provided under ASIC’s relief powers. They have provided a number of exemptions from the licensing requirement for offering certain types of products and services. This is because, depending on the nature, scale and complexity of the products and services offered, it is not always appropriate for a business to obtain a licence and meet all of the usual regulatory obligations. They have provided relief for ‘low value’ non-cash payment facilities, the provision of generic financial calculators, and some services for mortgage offset accounts.

ASIC had committed to reviewing its fintech licensing exemption following 12-18 months’ operation.

ASIC Commissioner John Price said, ‘by introducing ASIC’s fintech licensing exemption,we have given a range of fintech businesses the chance to test their ideas without needing a licence.’

‘Even in cases where interested fintechs have discovered that they were not able to make use of the fintech licensing exemption, we have found that its introduction has encouraged businesses to come forward and consider their other options that result from the flexibility in ASIC’s existing regime.’

ASIC’s current fintech licensing exemption allows eligible businesses to test specified services for up to 12 months with up to 100 retail clients, provided they also meet certain consumer protection conditions and notify ASIC before they commence the business.

To date, four fintech businesses have used the fintech licensing exemption. Relying on the exemption, one business tested its financial services (providing advice and dealing in listed Australian securities); two businesses are currently testing advisory and dealing services in deposit products; and one business is testing acting as an intermediary and providing credit assistance.

In addition, over a dozen fintech businesses have also contacted ASIC about using the fintech licensing exemption.The consultation period closes on 27 February 2018.

ASIC also launched their Innovation Hub in 2015, and has worked with 233 fintech businesses that cover the spectrum of fintech.

 

DigitalX Announces Plans In Key Cryptocurrency Exchanges

DigitalX Ltd, has announced today that the ASX-listed blockchain software and initial coin offering corporate advisory firm, is dipping its toes into cryptocurrency exchanges.

The Perth-based company has more than $18 million in liquid assets, including $5 million in cash, more than $10 million in bitcoin and about $2 million in ether, power ledger (POWR) and etherparty (FUEL).

The Board of DigitalX has initially approved the use of up to $1 million for the provision of market making services, offering both a buy and a sell price.

The company has begun a risk of cryptocurrency exchanges, with a focus on the Australian marketplace.

DigitalX will also utilise arbitrage trading to take advantage of mispricing across approved exchanges.

Market making will involve providing liquidity to both sides of the cryptocurrency market while maintaining a small open position in the asset being traded.

DigitalX will maintain bid and ask limit orders below and above the spot price. These orders are regularly cancelled and updated as the spot price changes.

The company says this strategy is expected to produce the best results when price volatility is high.

DigitalX says it doesn’t require an Australian Financial Services License to buy and sell the company’s digital currency on digital currency exchanges under the current regime.

“DigitalX has a strong track record dating back to 2014 as one of the leading liquidity providers in the Bitcoin marketplace, supplying wholesale Bitcoin liquidity to exchanges, commercial operators and institutions,” says DigitalX CEO Leigh Travers.

“We wound down our trading desk last year due to a lack of funding. However, our strong financial position, together with the appreciation in the value of Bitcoin, has allowed us to reignite this service.”

The company in June announced a $4.35 million investment from Blockchain Global Limited.

DigitalX decided to take $2 million of the investment in bitcoins rather than Australian Dollars.

At last report, the company held 453 Bitcoins. At today’s price of $US16,838, DigitalX’s holding would be worth $USD7.63 million.

The ‘utopian’ currency Bitcoin is a potentially catastrophic energy guzzler

From The Conversation.

The recent upsurge in the price of Bitcoin seems to have finally awakened the world to the massively destructive environmental consequences of this bubble.

These consequences were pointed out as long ago as 2013 by Australian sustainability analyst and entrepreneur Guy Lane, executive director of the Long Future Foundation. In recent months, the Bitcoin bubble has got massively bigger and the associated waste of energy is now much more widely recognised.

In essence, the creation of a new Bitcoin requires the performance of a complex calculation that has no value except to show that it has been done. The crucial feature, as is common in cryptography, is that the calculation in question is very hard to perform but easy to verify once it’s done.

At present, the most widely used estimate of the energy required to “mine” Bitcoins is comparable to the electricity usage of New Zealand, but this is probably an underestimate. If allowed to continue unchecked in our current energy-constrained, climate-threatened world, Bitcoin mining will become an environmental disaster.

The rising energy demands of Bitcoin

In the early days of Bitcoin, the necessary computations could be performed on ordinary personal computers.

But now, “miners” use purpose-built machines optimised for the particular algorithms used by Bitcoin. With these machines, the primary cost of the system is the electricity used to run it. That means, of course, that the only way to be profitable as a Bitcoin miner is to have access to the cheapest possible electricity.

Most of the time that means electricity generated by burning cheap coal in old plants, where the capital costs have long been written off. Bitcoin mining today is concentrated in China, which still relies heavily on coal.

Even in a large grid, with multiple sources of electricity, Bitcoin mining effectively adds to the demand for coal-fired power. Bitcoin computers run continuously, so they constitute a “baseload” demand, which matches the supply characteristics of coal.

More generally, even in a process of transition to renewables, any increase in electricity demand at the margin may be regarded as slowing the pace at which the dirtiest coal-fired plants can be shut down. So Bitcoin mining is effectively slowing our progress towards a clean energy transition – right at the very moment we need to be accelerating.

How much energy is Bitcoin using?

A widely used estimate by Digiconomist suggests that the Bitcoin network currently uses around 30 terawatt-hours (TWh) a year, or 0.1% of total world consumption – more than the individual energy use of more than 150 countries.

By contrast, in his 2013 analysis, Guy Lane estimated that a Bitcoin price of US$10,000 would see that energy use figure climb to 80 TWh. If the current high price is sustained for any length of time, Lane’s estimate will be closer to the mark, and perhaps even conservative.

The cost of electricity is around 5c per kilowatt-hour for industrial-scale users. Miners with higher costs have mostly gone out of business.

As a first approximation, Bitcoin miners will spend resources (nearly all electricity) equal to the price of a new Bitcoin. However, to be conservative, let’s assume that only 75% of the cost of Bitcoin mining arises from electricity.

Assuming an electricity price of 5c per kWh and a Bitcoin price of US$10,000, this means that each Bitcoin consumes about 150 megawatt-hours of electricity. Under current rules, the settings for Bitcoin allow the mining of 1,800 Bitcoins a day, implying daily use of 24,000MWh or an annual rate of nearly 100TWh – about 0.3% of all global electricity use.

Roughly speaking, each MWh of coal-fired electricity generation is associated with a tonne of carbon dioxide emissions, so a terawatt-hour corresponds to a million tonnes of CO₂.

So much energy, so few users

An obvious comparison is with the existing financial system.

Digiconomics estimated that Visa is massively more efficient in processing transactions. A supporter of Bitcoin, Carlos Domingo, hit back with a calculation suggesting that the entire global financial system uses about 100TWh per year, or three times as much as the Diginconomics estimate for Bitcoin.

As a defence, this is far from impressive. First, as we’ve seen, if the current high price is sustained, total annual energy use from Bitcoin mining is also likely to rise to 100TWh.

More importantly, the global financial system serves the entire world. By contrast, the number of active Bitcoin investors has been estimated at 3 million. Almost all of these people are pure speculators, holding Bitcoin as an asset while using the standard financial system for all of their private and business transactions.

Another group is believed to use Bitcoin for illicit purposes such as drug dealing or money laundering, before converting these funds into their own national currency. The number of people who routinely use Bitcoin as a currency for legitimate transactions might be in the low thousands or perhaps even fewer.

Shifting the whole global financial system to Bitcoin would require at least a 200-fold increase, which in turn would entail increasing the the world’s electricity use by around 500%. With the current threat of climate change looming large globally – this constitutes an unthinkably large amount of energy consumption.

Better alternatives to Bitcoin

The disastrous nature of Bitcoin’s energy consumption should not lead us to abandon the associated idea of blockchain technology altogether.

There are alternatives to the “proof of work” method of validating changes to the blockchain, such as “proof of importance”, which is analogous to Google’s page ranking systems. Projects such as Gridcoin are based on calculations that are actually useful to science. But these ideas are in their infancy.

For the moment, the problem is Bitcoin and how to deal with it. There is no obvious way to fix the inherent problems in its design. The sooner this collective delusion comes to an end, the better.

Author: John Quiggin, Professor, School of Economics, The University of Queensland

Bitcoin’s rise will have ‘disastrous’ consequences for the planet

From The New Daily.

The Bitcoin frenzy currently gripping the world is taking an unexpected toll on the planet – in the form of a carbon footprint almost as big as New Zealand’s.

And with the cryptocurrency’s astronomical growth showing no sign of slowing, this carbon footprint is likely to grow – prompting some commentators to warn of an “environmental disaster” in the making.

The culprit is Bitcoin ‘mining’, the little-understood process that both secures the existing Bitcoin system, and creates new Bitcoins.

This process, according to Digiconomist, is incredibly energy intensive, and is fed largely by China’s highly polluting, carbon-intensive coal-fired power stations.

These revelations come as the Australian Securities Exchange revealed it would be using the same technology used by Bitcoin – Blockchain – to run its system, the first stock exchange in the world to do so.

Writing in The Conversation on Monday, Professor John Quiggin said the rise of Blockchain itself should not be prevented, as there were other ways to use it that were not as energy intensive.

But he said that Bitcoin itself should be abandoned, describing it as a “collective delusion” with “massively destructive environmental consequences”.

Bitcoin’s rise continues

On Monday, the value of a single Bitcoin reached $A22,343, more than 20 times its value a year ago.

The unprecedented surge – offering massive returns on small investments – has proved irresistible to everyday investors, pushing more and more to buy the currency, and forcing its value into what many warn is bubble territory.

But a more sophisticated, select group – Bitcoin miners – is also  seemingly increasing, likewise attracted by the rocketing value of a digital currency that many called the gold of the 21st century.

How Bitcoin mining works

Bitcoin mining involves using a computer to solve a mathematical problem posed to it by the Bitcoin system.

When the computer solves this problem, it validates previous Bitcoin transactions, increasing the security of the Bitcoin system. In return for performing this service, the miner – as likely as not some teenager working from his or her bedroom in Shanghai – is rewarded in Bitcoins.

The video below attempts to explain the whole thing in simple terms (with questionable success).

As the video explains, Bitcoin mining requires a truly phenomenal amount of electricity – currently 32 terawatts a year, according to Digiconomist.

To put that in context, Australia uses 224 terawatts of electricity a year, while New Zealand uses 40, according to figures published by the US Central Intelligence Agency.

If Bitcoin were a country, it would be the 60th-biggest consumer of electricity in the world, ahead of 160 other countries. In other words, Bitcoin is becoming a significant contributor to climate change.

And the likelihood is it will get worse, for two reasons.

First, there is only a finite number of Bitcoins that can ever be mined. Currently around 17,000 have been mined. The limit is 21,000.

The closer we get to the 21,000 figure, the harder it is to mine Bitcoins. As a result the computer power required to mine Bitcoins increases, with the electricity used going up as a result.

(All this, by the way, puts a huge strain on miners’ computers.)

And second, as the value and profile of Bitcoin increases, the number of aspiring miners will also likely increase, further pushing up electricity usage.

Supporters of Bitcoin would like to see it become a global currency to rival the US dollar. But Professor Quiggins warned against this.

“Shifting the whole global financial system to Bitcoin would require at least a 200-fold increase, which in turn would entail increasing the world’s electricity use by around 500 per cent,” he said.

“With the current threat of climate change looming large globally – this constitutes an unthinkably large amount of energy consumption.”

The Blockchain is Reinventing Business

From The Conversation.

Bitcoin may be the most famous example of a blockchain in use, but it is actually a rather unimaginative way to use it.

The blockchain is finally starting to fulfil its promise as a game-changing technology, a kind of infrastructure for record-keeping. To facilitate movement of value (such as money) and changes in ownership (shares, for example), and even to manage online identities.

The Australian Stock Exchange (ASX) has announced that it will use a blockchain-based system to record who owns shares of listed companies, and to keep track of transactions and settlements when people buy and sell shares.

The move comes as the price of Bitcoin has risen more than US$14,000 in the past year. Yet Bitcoin does not really exploit the new databases and record-keeping infrastructure that blockchain technology makes possible.

The blockchain is also called a “public” or “distributed” ledger. Think of a spreadsheet that is publicly available to view, and simultaneously held on numerous computers. When someone transfers a Bitcoin, it is verified by the system, encrypted, and a new line (or “block”) is added to the spreadsheet.

The ASX’s blockchain will replace the ASX’s CHESS (Clearing House Electronic Sub-registry System) system. Currently, the ASX requires each trade to be verified against the ASX’s centralised database of ownership records and reconciled with payments.

So while trades take place in fractions of a second, the actual clearance (making sure who owns what) and settlement (the transfer of money and shares) is cumbersome, slow, expensive, and prone to human error.

The ASX’s blockchain will greatly simplify this process. Instead of having to reconcile trades against a centralised database, the verification of ownership and settling of accounts can be done directly between participants (as is done with Bitcoin trades). This is much simpler, faster and more secure.

A monumental shift

The fact that the ASX’s blockchain announcement made headlines around the world shows what a big leap forward this is.

The ASX’s blockchain will streamline the settlement process, improving productivity and therefore reducing costs in the Australian stock market. This means that our financial markets will work better, offering an immediate benefit to Australia’s economy.

Exchanges are also a global business, and the adoption of blockchain technology in Australia’s major exchange means that it has a competitive edge over other exchanges.

Companies choose where to list, based on a variety of factors including the quality of the exchange technology. More business for the ASX will translate into more local jobs.

One potential downside of the ASX adopting the blockchain, however, is that some workers who currently process settlements on the ASX may lose their jobs. Some financial companies that currently benefit from the slow settlement process, such as brokerage firms, will also lose out.

But the ASX’s move is just scratching the surface of what blockchain technology can do to the Australian financial sector.

The same argument that applies to the ASX – that the blockchain is more efficient and productive than existing record-keeping and transaction processes – can also be extended to other exchanges, such as bond markets.

In other words, the ASX’s blockchain is just the beginning of a technological transformation of Australia’s financial markets.

Blockchains will also make these exchanges more attractive to build services on, such as for managing wealth. This is a further benefit for consumers and the broader finance industry, not purely from lower prices also from the possibility of new products and services.

But how is any of this even possible in the first place? Part of the credit must go to Australian regulators. They created the environment for this huge shift in technological practice.

Australia is now leading the adoption of the blockchain, despite it being a US-built technology. It is similar to how African telecommunications companies are leading the way in mobile payments, even though Finland created modern mobile phones with companies like Nokia.

Even if you’re not excited about new technology in the Australian finance industry, its global competitiveness, or even our regulatory agility, the ASX announcement is a harbinger of what adoption of blockchain technology will increasingly look like.

Author Jason Potts , Professor of Economics, RMIT University

Payments startup Sniip announces national Australia Post partnership

Mobile payment technology company Sniip, a disruptive force in the payment space, is today announcing a new nation-wide partnership with Australia Post to explore the use of Sniip to enable consumers to pay bills using the Post BillPay barcode anytime, anywhere.

Founded in 2013, Sniip (www.sniip.com ) is Australia’s first completely integrated and agnostic payments and billing solution. Its app-based functionality allows users to pay their bills in seconds using just their smartphone, while companies can seamlessly transition to paperless billing. It is the first payments solution in Australia designed around the needs of the customer, instead of a bank or payments brand. It is also the only payments solution in Australia to contain a real-time, peer-to-peer functionality for consumer and business use.

Co-founder and Chief Executive Officer of Sniip, Damien Vasta, said the company was excited to be working with Australia Post to provide greater choice to consumers in how they pay their bills.

“Working with Australia Post presents an exciting opportunity to bring the benefits of speedy and secure bill-payment to the vast network of Post Billpay users Australia-wide,’’ Mr Vasta said.

“This partnership is truly a breakthrough in customer service delivery, meeting the needs of the modern customer by catering for today’s mobile-centric society.”

As a stand-alone offer, Sniip offers substantial benefits to billers including cost savings over incumbent payment methods, quicker payments and conversion to paperless bills via an in-app notification to users now.

By using Sniip Post Billpay customers will be able to use the app as an additional way to scan and pay their bills within seconds using barcode technology, eliminating the need to enter a long account or payment reference number or bank details or waste time paying over the phone.

“Mobile payments have become a hugely popular method of making both discretionary and non-discretionary payments.”

“The Sniip integration makes payments easier and safer on a mobile, allowing customers to manage their bills more efficiently in-app and simply reducing instances of misplaced bills, forgotten emails and late payment fees,’’ Mr Vasta said.

Mr Vasta said that with an estimated 80% of Australians owning a smartphone, and people using them for almost everything they once did on a desktop, mobile bill paying and receiving was the way of the future.

“There is a consumer expectation that everything can be accessed on a mobile, and everything should be easy to use,’’ Mr Vasta said.

Sniip is already a payment option for some of the largest billers in Queensland, including Brisbane City Council and Queensland Urban Utilities.

“We are delighted to be working with Australia Post to extend our service to Australians on the go through this exciting partnership.

Crowd-sourced equity funding regulations for proprietary companies

The Government has released exposure draft regulations providing further detail on the extension of the crowd-sourced funding (CSF) framework to proprietary companies. This is the next step in enabling proprietary companies to access equity crowdfunding, and follows the legislation introduced to the Parliament on 14 September 2017.

The draft regulations also make refinements to the existing CSF regime for public companies, to add flexibility to the structure and contents of CSF offer documents in addition to requiring disclosure relevant to the proprietary companies, and make other minor changes to clarify the operation of the existing rules.

In relation to proprietary companies, the draft regulations provide that the exemption from the takeover rules for CSF proprietary companies will be limited to companies that are still eligible to make a CSF offer, as it would be inappropriate for proprietary companies that out-grow the CSF framework to continue to be exempt from the takeover rules in perpetuity. The draft regulations also modify the unsolicited offer provisions in the Corporations Act, which apply to all companies, to make these more flexible for proprietary companies with CSF shareholders.

All interested parties are invited to lodge a submission by Friday 2 February 2018. More information on the existing CSEF regime for public companies is available on the Australian Securities & Investments Commission website.

ASX ‘Monopoly’ Tipped to Continue Thanks to Blockchain

From Investor Daily.

According to Morningstar analysts, the ASX’s decision to move its cash equities clearing and settlement system (CHESS) to distributed ledger, or blockchain, technology would further strengthen the exchange’s “strong competitive position”.

“Although DLT has enormous potential, few real-world examples of DLT use have emerged which makes ASX somewhat of a leader in the space, being the first stock exchange to commit to DLT in a meaningful way,” the report said.

The new system would have a number of benefits for stakeholders and stockbroking firms in the form of administrative savings as well as “richer, more timely and more accurate data”.

“ASX currently generates around AUD 100 million or 13 per cent of group revenue from clearing and settlement of cash equities which we expect to benefit from the new system via the monetisation of new functionality and services.”

The adoption of blockchain technology would further cement the ASX’s protection against competition, identified as “regulation and network effects”, the report said.

“The federal government and regulators have sought to increase competition for nearly a decade, but the process of regulatory reform is slow and still has many obstacles to overcome.

“A government report found that even if competition were allowed in cash equities clearing, competitors are unlikely to emerge, as the regulatory requirement to maintain operations and regulatory capital in Australia reduce potential synergies for overseas clearinghouses.”

And even if the regulatory barriers were removed, a ‘network effect’ would still provide the ASX protection against competition, the report indicated.

“Competitors can easily create the technology required for a rival exchange, but investors are unlikely to switch to a less liquid market.”

The report pointed to the attempt of the “sole viable alternative exchange to the ASX”, Chi-X, to launch a rival equities exchange in 2011, which only attracted market share of 10 per cent and “appear[ed] to plateau due to a lack of market depth”.

Furthermore, the technical aspect of integrating local market participants such as stockbrokers would then create “switching costs”, which would also dissuade them from moving to another securities exchange.

However, the report also signalled that lack of competition had served to somewhat “undermine” the ASX as it led to “a culture that lacks innovation and efficiency”, and that blockchain could serve to pose a “material threat”.

Nonetheless, the ASX’s willingness to explore the implications of new technologies, capital-light business model, high dividend payout ratios, lack of appetite for acquisitions, debt-free balance sheet and strong cash conversion all meant it had secured a “monopoly in the Australian primary listed equity market”.

Bitcoin isn’t a currency – and unless it becomes one it could be worthless

From The Conversation.

Bitcoin is in decline. Not its price, which has increased 900% this year and (at the time of writing) stands at over US$12,000 per unit, but its actual use as a currency. And this makes its rapid appreciation all the more puzzling.

A few years ago, enthusiasts triumphantly shared announcements from businesses that had started accepting Bitcoin. Over the last couple of years, such announcements have become scarce. Instead, businesses that once accepted the currency have begun to drop it.

The BBC contacted ten businesses in London that once advertised accepting Bitcoin. Four no longer accepted it, and two that did said they hardly ever received payments in Bitcoin. The same is even true online. The Wall Street Journal, citing a report by Morgan Stanley, recently reported that Bitcoin is now accepted by just three of the top 500 global online merchants, down from five last year.

If growing adoption as a currency can’t justify Bitcoin’s rapid appreciation, what can? Many enthusiasts have started to promote the idea of Bitcoin as a store of value. In economics, this is usually defined along the lines of “an item that people can use to transfer purchasing power from the present to the future”. In simple terms, it’s somewhere safe to invest your wealth that won’t lose its worth over time.

Apples can be used to barter services from a neighbour while they’re still fresh, but their purchasing power will disappear as they rot. The purchasing power can be retained into the future by exchanging the apples for money, gold, government bonds or some other store of value.

Some items have attributes that make them better stores of value than others, whether we are talking about physical items or digital objects. Gold is a good store of value because it’s durable. Electronic bond certificates are also durable as long as banks’ systems don’t fail, and have the added benefit of being easier to secure than physical valuables. Money, both physical currency and digital bank money, has the advantage of being very liquid, so it’s easy to convert into a purchase when needed.

Bitcoin does share many of these attributes of a good store of value. It also offers potentially high levels of financial privacy, somewhat similarly to the offshore banking system. This is an important attribute of a store of value for some people, although it also creates a lack of accountability and the potential for tax evasion.

But the most important attribute of a store of value is that it’s valuable. Gold is valuable because it has many industrial and decorative uses. Its price can fluctuate because of speculation on financial markets, but it can never fall to zero. There will always be someone willing to accept gold because it’s a useful commodity.

Similarly, US government bonds are ultimately valuable because they entitle the owner to a relatively secure flow of interest payments. Dollars and euros are valuable because they are widely accepted as a means of payment, and will continue to be so in the foreseeable future. In contrast, the future acceptability of the Venezuelan bolivar is in doubt, so people are desperately trying to exchange it to better stores of value.

Is Bitcoin valuable? It has no industrial or decorative uses, and it doesn’t entitle the holder to receive interest. It was intended to be valuable as a currency that is accepted the world over, but that doesn’t seem to be happening. The only major value that Bitcoin has now is its exchange value. Many people are willing to pay a lot of money today to get hold of some Bitcoin.

But what they are getting for their money is simply the hope that another buyer down the line will pay even more money for the coins. Once the music stops, there is no fundamental value to prevent the coins’ price from falling close to zero, save for their tenuous position as the currency of choice in the online drug trade and grey-area gambling.

Beanie Babies lessons

The idea that Bitcoin is valuable because it’s a store of value is upside down. In reality, something becomes a store of value because it’s valuable. In the 1990s, people started to trade Beanie Babies on eBay. Prices of these limited-edition plush toys rose to thousands of dollars, and by 1997 they made up 6.6% of the entire site’s transaction volume.

Some people invested their life savings into Beanie Babies, fully expecting their value to be preserved and more. But eventually people came to their senses and the market bombed. Beanie Babies are useful as toys and collectables, but that doesn’t justify thousand-dollar valuations.

My advice to individuals and institutions tempted by the headlines is to keep their savings away from Bitcoin and other cryptocurrencies and “initial coin offerings” (ICOs). I know serious blockchain developers won’t mind me saying this, because they see speculative bubbles and bursts as a distraction. For Bitcoin to truly function as a store of value, it first has to gain acceptance as a currency.

Author: Vili Lehdonvirta, Associate Professor and Senior Research Fellow, Oxford Internet Institute, University of Oxford