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28 December 2017

What's the Future for Bitcoin?

What's the Future for Bitcoin?

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Alexandra Cain

Writer, Cain Creativity, Inc.

Summary

The introduction of a digital Australian dollar could assist mid-market businesses to be more globally competitive.

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The digital currency Bitcoin has hit the headlines recently as its value has skyrocketed – and then plummeted.

Meanwhile because of technical issues, and to improve speed and scalability, Bitcoin has been split into at least three new currencies.

Amid this noise, calls are emerging for the creation of a digital Australian dollar. The question for CFOs is whether they should plan to accept digital currencies as a form of payment.

Price volatility has been a major concern with Bitcoin. For example - in December 2016 one Bitcoin was worth around US$800. But by the end of 2017, it was trading at ten times that amount at about US$8,000, having recovered after dropping to about US$6,000 in November 2017.

Bitcoin is created using a technology called blockchain. This is a publicly available digital ledger that records every transaction using the currency.

And recently, to improve its performance, the Bitcoin community facilitated a 'split' of the currency, which occurred several times.

Adrian Lee is a senior lecturer in the finance discipline at the University of Technology, Sydney. He suggests the recent split is problematic.

“The first split was because of capacity constraints. There were too many transactions on the main block so they decided to split it into another one, which processes faster," he says.

“But its price is still lower than the main Bitcoin, so it hasn't taken off as well as the original Bitcoin," he says.

These events can be viewed as technicalities that will be worked through as the currency develops. Although given how new it is, it's impossible to really say whether this will be the case, according to Lee.

This is something CFOs could take into consideration when forming their views on the currency.

Bitcoin's value this year has partly been driven by these splits. But other supply/demand dynamics also move its price.

“People who buy it are gambling on it being useful to others," explains Lee, who says it's not really used for anything other than as a speculative investment at the moment.

His research shows a third of people hold Bitcoin just for investment, not for transactions. While it's easily assumed it's the currency of choice in the black market, its traceability means its use for this purpose is limited.

Renowned investor and philanthropist Warren Buffett agrees with Lee's assessment that Bitcoin has been negatively impacted by speculative trading. “You can't value Bitcoin because it's not a value-producing asset," he said in a MarketWatch interview in October 2017. More recently, Buffett told the Washington Post that the currency's volatility was problematic for investors. "I will say this," Buffett said, "it will come to a bad ending."

Geographic concerns

“People have polar opposite views on digital currency," says David Knowles, a partner with accountancy firm Pitcher Partners' International Institute of Entrepreneurship.

“The tax office originally treated it as a commodity and thought if you bought and sold digital currency it attracted GST. Now the view is: it is money and there's no GST on the transfer of money. This highlights that we don't really know where it's going to land," he says.

Additionally, different countries take different approaches to Bitcoin. China and South Korea have banned residents from certain uses of digital currencies. Conversely, Japan has now recognised Bitcoin as an official currency.

In Australia, the Reserve Bank's Head of Payments Policy Tony Richards recently said there was application for digital currencies.

He said the central bank was exploring the potential for a digital Australian dollar, and cites two elements that are required for a successful currency.

“One is trust, so that if somebody gives you a dollar, you've got confidence someone else will take the dollar. It's also got to be easily dealt with and transportable," Richards says.

“The beauty of Bitcoin is it's relatively easy to move and because it's underpinned by a blockchain it carries trust with it that it's not counterfeit."

It's also harder to perpetrate fraud using digital currencies because there are multiple copies of the single ledger.

But there's a big downside: digital currencies like Bitcoin have traditionally been very volatile. For this reason, Knowles wants the government to consider the potential for a digital Australian dollar.

“The technology is there and other countries are exploring the potential for their own digital currency," he says.

“Australia should be among that group, because we have advanced standing in fintech. There's a lot of people interested in this space and we need the government to examine this because it could make sense for the economy."

To overcome the price volatility of digital currencies such as Bitcoin, he suggests a digital Australian dollar be pegged to the standard Australian dollar.

Its price would move in tandem with the Aussie dollar, effectively mimicking the exchange rate.

CFO thinking

Whatever happens, digital currencies may be an emerging area in finance and it's important for CFOs to think through how to prepare their operations for their potential, more widespread use.

“CFOs should be exploring how digital currencies work, and whether they should accept them as a form of payment," says Lee.

“That is hard for Bitcoin, because it is so volatile. If companies accept it as a payment then the price of goods sold in Bitcoin would fluctuate. CFOs would have to accept this volatility or try to manage it," Lee says.

Until the emergence of this suggested digital Australian dollar, however, tools are emerging to do just that.

For instance, The Chicago Mercantile Exchange has announced a futures market in Bitcoin. This instrument could help protect against exposure to Bitcoin. But Lee says there are potential risks involved.

“If you write futures on Bitcoin, there must be more futures exposed than the Bitcoin available, which is an unstable market," he says.

Legal frameworks for digital currencies are required before digital currencies become used as standard legal tender.

“Government controls are something to consider because if it's regulated by countries in different ways, CFOs have to consider this," Knowles says.

If the RBA and government were to introduce a digital currency, it would simply be another payment option for CFOs to integrate into their systems.

There would be a role for traditional banks to facilitate payments. But it's also likely this would be an opportunity for banks, fintechs, governments and regulators to work together to develop the digital Australian dollar.

If such a currency were created, Knowles says the mid-market would benefit more than large or small businesses.

“They will be more globally competitive because it will allow them to more easily transact. There would be a big pay-off for the Australian economy from that."

Digital currencies are still just in their infancy and much work needs to be done before such currencies are accepted as a standard legal tender.

However, these currencies may offer huge advantages and could become ubiquitous in time - so CFOs may find it useful to keep a watchful eye on this fast-moving space.

Key Takeaways

  • Bitcoin's value remains volatile.
  • Despite this, digital currencies have useful features, including a reduced risk of counterfeiting and ease of use.
  • Governments could explore digital currencies to take advantage of these benefits and reduce price volatility.
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