Bitcoin at the crossroads
There is a race to regulate Bitcoin. Is it too soon?
Bitcoin has captured the imagination of consumers and businesses around the world as a major breakthrough in how value is exchanged. The Bitcoin “blockchain” is a fundamental breakthrough in computer science that solves what seemed to be an unsolvable problem: how to ensure that a digital transaction happens only once. Yet there is a critical question that is hanging over Bitcoin, potentially slowing the pace of innovation, and adoption i.e., how will Bitcoin be regulated?
Three reasons why global policy makers and regulators may want to consider giving Bitcoin more time to develop
Here are three practical reasons why policy makers and regulators may consider slowing down the pace of regulatory intervention-thus giving bitcoin and blockchain more time and freedom to explore its potential.
Reason #1: Bitcoin is still very small compared to traditional currency systems and transaction platforms
Bitcoin is receiving a remarkable amount of attention and scrutiny from policy makers and regulators all around the world-far beyond what its current scale and market impact would seem to justify. In fact, by any relevant benchmark, the value currently at risk with Bitcoin is just a drop of water in the ocean that is the financial industry.
At the moment, the total value of all Bitcoins globally is less than $4 billion, which pales in comparison to the nearly $1.36 trillion in US currency physically in circulation today.1 Similarly, Bitcoin’s market penetration as a method of payment is almost non-existent. For example, the highest daily dollar volume for Bitcoin transactions globally in February 2015 was less than $57 million,2 which is less than 1 percent of the average daily transaction volume for credit card platforms as measured in 2012.3 With the internet’s power to rapidly disseminate information, many US consumers may have heard of Bitcoin, but very few actually own Bitcoin or have conducted a Bitcoin transaction. Individuals who have used Bitcoin are very early adopters and most are only experimenting with it as a new technology, not necessarily as a way to pay for goods and services.
Additionally, while it cannot be denied that venture capital investment in Bitcoin related start-ups has gone up tremendously within the last year (close to $700 million since 2014),4 we could be cycles away from real products that can generate true demand for Bitcoin related services from mainstream consumers.
Reason #2: Other key innovations had more time to develop before being regulated
Looking back at the history of innovation, other technologies that transformed our society were given much more time to develop before coming under serious regulatory supervision. In fact, serious efforts to regulate disruptive technologies have traditionally been a function of the technology achieving mass adoption.
Here are a few noteworthy examples:
- Telephone: invented in 1876, regulated in 1913 (37 years later)
- Airplanes: invented in 1903, regulated in 1938 (35 years later)
- Radio: invented in 1907, regulated in 1927 (20 years later)
- Mobile phones: invented 1965, first targeted wireless spectrum auction by the FCC focused on mobile phones, 1989 (24 years later)
- Internet: invented in 1969, only becoming an area of intense regulatory focus over the last few years, close to 46 years into its development
The open source software platform that is Bitcoin was first released in 2009. We are a mere six years into the development of Bitcoin and a long way away from the time it has typically taken for new technologies to achieve mass adoption in the past.
Reason #3: Bitcoin's most valuable and important uses may have yet to be invented
Bitcoin is a breakthrough that could potentially transform and improve how people around the world conduct both financial and non-financial transactions. It is, however, much more than just digital money. In broader terms, the Bitcoin protocol’s ability to establish trust between parties who don’t know each other may very well change how people live and interact.
While the list of potential use cases for Bitcoin and blockchain technology is expanding every day, it is still in its early days and some of the emerging use cases are tremendously exciting. From enabling new efficiencies in existing banking and fund transfer networks to providing the state of the art app that can finally bring banking services to billions of people living in third world economies, the ideas are big.
Like others before it, Bitcoin is likely to follow a path where one innovation leads to another and ultimately, the very products, services, and capabilities that were once difficult or impossible to imagine, become necessities in our daily lives. Similarly, it is quite remarkable that internet enabled capabilities no one anticipated have now become essential components of both our economy as well as shared culture.
Considerations for policy makers and regulators
Bitcoin was consciously designed to be a truly open source digital currency and public ledger, beyond the control of any single government or company. At least on the surface, Bitcoin and the blockchain appear to have solved an important problem in enabling the continued evolution of internet commerce i.e., how to conduct publically verifiable transactions without the exchange of increasingly vulnerable personal financial information at extremely low costs. It is a bold experiment.
As Bitcoin takes aim at changing something so fundamental to our economy and ultimately so central to our personal lives, it certainly can seem a bit scary–what is a more fundamental enabler to our way of life than money? However, in looking to protect the public from all of the bad outcomes we might anticipate today, could policy makers and regulators end up stifling the myriad (as yet) unimaginable capabilities that could potentially change the world for the better? In many ways it is the classic challenge that policy makers and regulators have always faced–how do you react to something that is fundamentally different from all that has come before?
It is a challenging dilemma, but the market itself may provide the best guidance in regards to the question of when and how regulators should intervene. On the one hand, new innovations only achieve mass adoption if they are useful and create value and more often than not, their greatest value is created in ways we never imagined and didn’t know we needed or wanted. On the other hand, if a new technology fails to reach critical mass it often disappears as abruptly as it appeared. The same could be true for Bitcoin. This is akin to the typical “chicken and egg” situation i.e., should the adoption of Bitcoin and blockchain technology drive the pace of regulation or will regulation help with broader adoption?
What the future brings is yet to be seen but some important questions still remain–like in the case of the internet, should the United States be the country that provides the most supportive environment for incubating and maturing Bitcoin-related innovation? Or should we take a wait and watch attitude and let others capture the lion’s share of value creation, which could be significant in the years to come? Given the potential of the technology to disrupt both the financial services and technology industries, a case can likely be made for industry groups, policy makers and regulators to drive collaboration and a unified dialogue at the national level.