dna edit: Mining for gold

Watching the Reserve Bank of India (RBI) scratch its head over how to deal with bitcoins has been instructive in just how potentially disruptive the digital currency could be. The advisory it issued earlier this week is interesting in that context — a cautious attempt to hedge its bets by warning against the use of the currency while still not attempting to ban its use by the general public. This is more or less in keeping with broader international reactions. The French central bank and the European Union’s banking watchdogs have both issued similar warnings, while China has banned its banks from providing bitcoin-related services. Germany is something of an outlier in legalising it in order to be able to better regulate and tax it. But the most interesting reaction, perhaps, is from US Federal Reserve chairman Ben Bernanke who said such digital currencies hold “long-term promise”. There is a whiff of recognising the inevitable in his comment, and with good reason.

The bitcoin, after all, is not the first digital currency to have gained relatively widespread use. It is simply the first to have gained the profile it has. The first digital currencies came about as far back as the early 1990s; it’s a different matter that they didn’t survive. As of now, litecoin, peercoin and namecoin, all established after bitcoin, are in use. Venture into the realm of virtual currency — slightly different from its digital cousin in that it refers to the currency used in virtual online worlds, whether multiplayer games such as World of Warcraft and EVE, or sandboxes such as Second Life — and it get even more complicated. There is a complicated interplay of in-world and real world currencies at work here, with sophisticated marketplaces where virtual assets are traded. At its pesk, Second Life in particular had everything from companies like Dell setting up virtual shop to Reuters establishing a virtual bureau.

Underpinning this rise in digital currencies is a simple fact: currency is an idea; it is a shared fiction based on trust. Given this, many of the warnings that are being heard now with relation to digital currencies were also heard when countries went off the gold standard in the last century.
And to be fair, the extreme volatility that we see now in the value of the bitcoin — it was worth around $200 in 2011 and is now worth over $1,000 — its anonymity that enables it to be used for illegal purposes, money laundering and the like and the lack of a sovereign guarantee backing it are all serious problems.

But that anonymity is also one of the main draws of digital currencies. It shouldn’t come as any surprise that the bitcoin was established in 2009, the year after the global financial crisis.
Cynicism about — and lack of trust in — established financial systems has been trending high ever since. A digital currency that takes the individual off the grid as it were might come with its own risks and currently be the preserve only of a handful of people including everyone from speculators to enthusiasts. But whether it is the bitcoin or other currencies that rise in its place, odds are digital currencies are here to stay. The RBI might have sidestepped the core issues of regulation as of now, but sooner or later, it — and other central banks — will have to take a deep breath and plunge in.