Bitcoin essentials: payments, accounts, and regulation

What is Bitcoin?

Bitcoin is the most well-known cryptocurrency, the most stable and has by far the largest market cap valued at USD 130 billion (45% of the market cap of all cryptos) at the moment. It is called the digital gold, as it is used more wildly as a way of storing wealth than as a means of payment.

Always keep in mind, the Bitcoin was the first cryptocurrency and it is still very young, it’s only 9 years old, and in 2013 it was worth just 100 Dollars. Many people around the world are working on this project, and on other digital, encrypted currency projects. I find it extremely exciting to analyse and to discuss what might come out of all these.

Can I use cryptocurrencies to make payments?

At this moment, Bitcoin is not widely used as a payment method. But it is gaining traction: I have a Bitcoin wallet on my phone and I make sure I always have about a tenth of a Bitcoin on it. There are many wallet providers that include Bitcoin payments, and I am currently using TenX. Revolut is another one. The provider gives you the best Bitcoin/local currency quote of that moment and the product will be paid in the local currency while my Bitcoin balance decreases. The service comes with a card that can be used at any ATM in the world. While it is true that you are able to pay anywhere in the world with a credit card too, the transaction fees of Bitcoin payments are far lower when paying for goods abroad. If cash is really disappearing, Bitcoin might have an absolute advantage when it comes to payment methods.

Is it possible to create a Bitcoin account?

A Bitcoin account is very similar to a bank account: you have a public key, which is your account number, and a private key, which is your PIN code. The private key is a 64 digit number, but you never need to type it in. The difference with a normal account is that there is no bank. Or more precisely: there is no SINGLE bank. Instead, there is a network of computers, all of which independently perform the work that a single bank would do: check the PIN codes and check if there are sufficient funds before allowing a transfer.

Our current banking system has some flaws: it is slow, it is expensive, it is not safe and it needs central banks which are both political and undemocratic, plus unpredictable; they can decide to print an extra 400 billion Euros every month for a few years, with the predictable outcomes of ‘a bull market in everything’ (the economist, October 2017) and inflation. 

Despite these flaws, and the occasional near-collapse, this system has served us, in the West, pretty well. But now we have an alternative, and we don’t need to abandon banking, as the old and the new system can coexist.

What problems within the financial system is Bitcoin trying to solve?

Cryptocurrencies have a huge impact on eliminating cash. Although we cannot tell whether cash will really disappear, I think we can all agree that card payments, mobile payments, etc. are superior to cash when it comes to merchants and consumers’ preferences. Moreover, about 40 % of all adults world-wide don’t even have a bank account. For them too, this could be a great solution, a way to safely store money and pay.

In the Netherlands for example, cash is disappearing, you don’t really need it, and in some cases, like at my tennis club, cash is not accepted anymore. The number of ATMs in Amsterdam is declining, and I haven’t been to one for a long time. For the acceptance of Bitcoins, the diminishing role of cash is important, because a big difference between Bitcoins and Euros is that you can physically hold the latter. But maybe not for much longer.

Will cryptocurrency use, ICOs (Initial Coin Offerings) be regulated any time soon?

In the US, the Securities and Exchange Commission (SEC) is looking at regulating ICOs (initial coin offerings), and might declare within a few months that crypto currencies are securities, with the same supervision and tax treatment of stock and bond - holdings, and of course with the same means of prosecution for any wrongdoing. This would be good news, as potential (including institutional) investors are still on the side-line because of the regulatory uncertainty. A logical consequence would be, regulated exchanges, with KYC and AML in place, informing the Internal Revenue Service (IRS) about crypto currency-holdings, just like banks do with other assets.

In Asia, where Bitcoins became popular first, more regulatory steps have been taken. In India, ICOs are under supervision, while in China and South Korea ICOs have been banned. Japan announced severe regulation, and has recently declared 16 exchanges to be regulated. And in Europe, Switzerland is very interested about attracting Bitcoin exchanges and traders.

The cryptocurrency market fluctuates a lot; every time regulation is mentioned, or supervisors announce they are looking into it, prices go down. However, I think that with the right regulation in place, Bitcoin usage would attract a much larger group of consumers.

About Marc Meuwissen

Marc worked for international trading company IMC for 16 years in various roles ranging from market maker on the trading floor of the Options Exchange to CEO, and he founded the Sydney and Hong Kong offices. He holds master degrees in economics (University of Amsterdam) and mathematics (Vrije Universiteit).