US Senate boosts bitcoin prospects

Craig O'Callaghan examines the impact of the recent committee hearing into virtual currency

A US Senate committee hearing into the promises and risks related to virtual currency has boosted the prospects of bitcoin and similar cryptocurrencies becoming more widely accepted. Although fears remain about the use of virtual currencies by criminal organisations, the committee on Homeland Security and Governmental Affairs (HSGAC) heard testimonies stating that a balance can be struck if the correct laws and regulations are in place.

Regulation required?

Bitcoins may have come to prominence through their use in anonymous transactions on the "dark web", but they are increasingly being used for legitimate purchases. The fact bitcoins are immune to government interference makes them particularly appealing to the developing world where billions of people lack access to traditional financial services.

Recognising a need to get to grips with virtual currency, HSGAC has been preparing materials for a hearing since April this year. Should regulation be introduced, bitcoin consumers should benefit from an increased level of protection. Recent high-profile bitcoin thefts have left many users wary; a bitcoin "bank" in Australia announced more than four thousand bitcoins had been stolen from their website earlier this November, a loss which is irretrievable in the current system.

However, any heavy-handed attempts at US intervention in the currency are likely to be met with resistance, which could drive bitcoin abroad. Those giving testimony to the US Senate were keen to avoid that possibility. About a third of all bitcoin transactions already flow through an exchange in China, and US senators fear that harsh legislation could lead to Chinese dominance in bitcoin trading.

The solution would appear to be to fit virtual currencies into the existing financial regulatory system. Patrick Murck, the general counsel of the Bitcoin Foundation, responsible for overseeing the currency's software program, told the Senate committee that "applying consistent rules and regulations that encourage technological experimentation is critical."

Novelty value

Understandably, the cautiously optimistic mood of the hearings had a direct impact on the bitcoin market. At one point during the hearings, the price of one bitcoin rose to over $900 (£558) before settling in the range of $500-$600 (£300-£400).

While this could be seen as proof the currency is on the up, concerns have been raised that such wild fluctuations are unlikely to make bitcoins viable in the long run. After all, why use it to buy something if the value is going to nearly double within 24 hours? Retailers will also be unwilling to accept a currency which could deplete in value within weeks.

Nothing demonstrates this better than the tale of the bitcoin pizzas. In May 2010, a Jacksonville, Florida resident paid someone 10,000 bitcoins (roughly £15.50 at the time) to order him two pizzas. The current bitcoin price means each of those pizzas now cost him more than £3.7 million.

For now, bitcoins are perhaps best seen as an investment closer to gambling than anything else. One investor, William Bravin, told us how he recently sold three bitcoins in a row. By the time he got to selling the third one, the price had leapt up to £700, £155 more than the price of the first two. Moments later, the value plummeted back down to £425.

"It's worth noting that the going rate for bitcoins is significantly higher when you're trading privately during periods of high, new demand," explains William. "People read about bitcoins in the news and don't want to miss out so it can cause a frenzy. Even when I sold at £700, the market price was only £550." Such volatility suggests bitcoins have some way to go before they become a truly world-changing digital currency.