There is a race to determine the rules of the virtual currency. But is it too soon? the consultancy firm Deloitte wonders.
Bitcoin has captured the imagination of consumers and businesses around the world as one of the greatest advances in exchanging shares. Blockchain technology has been a major IT breakthrough that seems to solve what seemed unsolvable: ensuring that a digital transaction occurs only once. However, there is a fundamental question that looms over Bitcoin, which could slow the pace of innovation and its adoption, and that is what its regulation will be, as highlighted by this report by Deloitte.
There are three reasons, says the consultancy firm, why the authorities and regulators should consider delaying the regulation of Bitcoin, to give more time and freedom to blockchain to explore its full potential. Deloitte emphasizes the following points:
1. Bitcoin is still very small compared to traditional transaction systems Bitcoin receives considerable attention and scrutiny from politicians and regulators, far beyond what its current size and its impact on the market seem to justify.
Currently, the total global value of Bitcoins is less than US$ 4 billion, which pales in comparison to the nearly US$ 1.36 trillion in circulation. Similarly, the penetration of Bitcoin in the market as a method of payment is almost nil. With the power of the Internet, it's true that many Americans have heard of Bitcoin, but very few have bitcoins or used them for a transaction. Many of those few users are just experimenting with the new technology, and not necessarily as a method of payment for goods and services.
Moreover, while it's true that venture capital investments with bitcoins in startups have increased a lot in the last year (US$700 million since 2014), we are far from actual products that could generate a real demand for bitcoins related with services to the general public.
2. Other key innovations had more time to develop before being regulated. Looking back history of innovation, other technologies that have transformed our society had more time to develop before being seriously regulated. Some notable examples are the following:
- Phone: invented in 1876, regulated in 1913 (37 years later).
- Aircrafts: invented in 1903, regulated in 1938 (35 years later).
- Radio: invented in 1907, regulated in 1927 (20 years later).
- Cell phones: invented in 1965, the first FCC wireless spectrum bidding process focused on mobile data in 1989 (24 years later).
- Internet: invented in 1969, it has only become an area with intense regulatory focus in recent years, nearly 46 years after its development.
The open code software program that is Bitcoin was first launched in 2009. It has only been six years since Bitcoin was developed that is very far from the time in which other technologies were adopted by the general public in the past.
3. Other, more valuable and important, possible uses of Bitcoin have still to be invented. Bitcoin a breakthrough that could potentially transform and improve the way the public around the world carries out financial and non-financial transactions. However, it is much more than digital money. More broadly, the protocol capacity of Bitcoin to give confidence to parties that do not know each other could change the way people live and interact.
The list of cases in which Bitcoin and blockchain can potentially be used is growing every day, and although it is in its infancy, some of its emerging uses are very interesting. From allowing more efficient banking networks to providing the application that will promote banking services to the billions of people living in the Third World, they are great ideas.
Like others before it, it is likely that Bitcoin will move from one innovation to another, and finally develop products, services and capabilities previously unimaginable that will become needs in our daily lives.
Considerations for policy makers and regulators
Deloitte argues that Bitcoin was consciously designed to be a source of digital currency and open public accounting, beyond the control of any government or company. At least on the surface, it looks like Bitcoin and blockchain have solved a major problem by allowing trade to evolve through the Internet, i.e. by making it possible to carry out publicly-verifiable transactions without having to exchange increasingly- vulnerable personal financial information. It's a bold experiment.
As Bitcoin aims to change something so fundamental to our economy and, ultimately, so important to our personal lives, it may indeed cause some fear. However, in seeking to protect the public from misuse, could policy makers and regulators not eventually drown from the possible capabilities that could potentially change our life for the better? In many ways it is the classic challenge that policy makers and regulators always face: how to react to something that is so different to what existed before?
It's a difficult dilemma, but the actual market can provide the best guidance on when and how regulators should step in. On the one hand, innovations are massively adopted only if they are useful and create value, and most of the time their greatest value appears in ways never imagined before and we did not know we wanted or needed. On the other hand, if a new technology cannot reach the critical masses, it often disappears as suddenly as it appeared. The same can happen to Bitcoin. It's like the "chicken and egg", i.e. will the adoption of Bitcoin and blockchain drive the pace of regulation, or will the regulation help to achieve wider adoption?
What the future holds remains to be seen, but some important questions remain, as with the Internet. Must the United States provide the enabling environment for the incubation and maturation of Bitcoin-related innovation? Or should we wait and see the attitude of others and let them capture most of the new value, which could be important in the coming years? Given the potential of this technology to disrupt both financial services and technology industries, it is desirable that industry groups as well as policy makers and regulators encourage collaboration and dialog at national level, the consultancy firm concludes.