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Bitcoin roundup: bitcoin could replace cash, says BoE chief economist

When the chief economist of the Bank of England muses on the abolition of cash and its possible replacement by a digital currency, you know that bitcoin has made the big time, although probably not in a manner envisaged by its inventors.

Add to that the revelation that nine major banks have joined forces to exploit the blockchain public ledger technology behind bitcoin and the direction of travel becomes even clearer. From central bankers to investment bankers, far from bitcoin usurping their power it looks more likely to be a way of enhancing it, or at any rate changing the way they do business.

Despite the blue-chip interest, however, much to the chagrin of industry participants, the criminals are still, unfortunately, attracted to bitcoin, which does nothing to enhance the cryptocurrency’s reputation, as hacks and extortion enabled by the currency continue.

And speaking of currencies, a US regulatory body begs to differ in describing bitcoin as a currency and has designated it a commodity that can be traded in the same way as gold or oil, despite its seemingly ephemeral digital nature.

Meanwhile, small investors looking for a less risky route to investing in bitcoin without having to buy the currency directly, can now opt to put their cash into an exchange traded fund (ETF) that has started investing in bitcoin.

BITCOIN COULD BE ALTERNATIVE TO CASH

Andrew Haldane, one of the Bank of England’s interest rate setters and its chief economist, is worrying about the next recession. Instead of responding with more money-printing, known to central bankers as quantitative easing, he suggests moving to negative interest rates.

However, this has its own problems, notably creating a disincentive to save. Savers would be pushed into hoarding cash.

One way round this he suggests is to effectively abolish cash and replace it with a digital currency such as bitcoin. ‘What I think is now reasonably clear is that the payment technology embodied in bitcoin has real potential,’ Haldane explained in a speech delivered on 18 September.

As you would expect from an economist, his discussion was highly technical in nature. He observes that low interest rates are not always an effective way of warding off recession and, given that rates in the advanced economies are effectively at zero, a future possible recession might require negative rates to be introduced.

However, although it is possible to set negative rates on bank reserves it cannot be applied to currencies – the so-called Zero Lower Bound (ZLB) problem. ‘A more radical proposal still would be to remove the ZLB constraint entirely by abolishing paper currency,’ Haldane proffers.

He continues: ‘One interesting solution, then, would be to maintain the principle of a government-backed currency, but have it issued in an electronic rather than paper form.

‘This would preserve the social convention of a state-issued unit of account and medium of exchange, albeit with currency now held in digital rather than physical wallets. But it would allow negative interest rates to be levied on currency easily and speedily, so relaxing the ZLB constraint.’ Here is a transcript of Haldane’s speech.

BITCOIN IS A COMMODITY, SAYS US REGULATOR

On 17 September the US Commodity Futures Trading Commission (CFTC), in a case it had brought against bitcoin trading platform Coinflip, decided that bitcoin digital currency is in fact a commodity. Because the CFTC considers bitcoin to be a commodity it meant that the firm should have registered its platform with the regulator.

‘While there is a lot of excitement surrounding bitcoin and other virtual currencies, innovation does not excuse those acting in this space from following the same rules applicable to all participants in the commodity and derivatives markets,’ said Aitan Goelman, the head of the CFTC’s enforcement division.

Coinflip, the company at the centre of the case, has agreed to comply with the ruling. Coinflip’s chief executive Francisco Riordan said the ruling was fair and no penalties were imposed on the company or any individuals.

ETF STARTS TO INVEST IN BITCOIN

Investors considering investing in bitcoin but who would prefer not to directly buy the currency have up until now been short of options in the collective investment space.

This month that changed for the small private investor when US-based ETF provider ARK Investment Management announced that its ARK Web x.0 ETF will start buying the publicly traded shares of the Bitcoin Investment Trust (BIT) set up by Barry Silbert, founder of the Second Market private share dealing platform and of Grayscale, the company behind BIT.

In addition to bitcoin, the new ETF invests in other technology sectors, ranging from cloud computing and big data to social media and wearable technology. The ETF trades under the symbol ARKW.

Chief executive Cathie Wood said: ‘We’re believers in bitcoin, the currency, and bitcoin the technology platform. We also believe that current prices present an attractive entry point for our customers.’ The bitcoin price at the time of writing is trading at $232, according to the Coindesk Bitcoin Price Index.

BANKS TO DEVELOP BLOCKCHAIN TECHNOLOGY

Momentum continues to build for blockchain development among the world’s banks. As we have previously reported, many banks are looking at how they can implement the technology, but this work is being conducted in different silos, thereby undermining the ultimate usefulness of the decentralised, secure and immutable public ledger if the various systems being developed can’t work with each other.

With that drawback in mind, nine of the world’s largest banks have come together in a partnership aimed at creating a common standard so that the various banking networks would be able to plug into a common system.

The banks involved in the partnership, which is led by tech startup R3 are: Barclays, BBVA, Commonwealth Bank of Australia, Credit Suisse, Goldman Sachs, JPMorgan, State Street, Royal Bank of Scotland and UBS. Wall Street insider David Rutter heads up the R3 operation, which has offices in New York and London.

Rutter has been negotiating with the banks for over a year and it is believed that more than the nine named so far are involved in the project.

Rutter said: ‘I think broadly speaking we’ll be able to demonstrate within one to two years that the technology is fit for purpose. How long it will take to roll out and integrate into existing systems is not something I know enough about to comment on. Our goal is to have some real examples of how this could work within the next year.’

EXTORTIONISTS DEMAND RANSOMS PAID IN BITCOIN

Criminals are threatening financial companies with cyber attacks that would take down their customer-facing websites using distributed denial of service attacks (DDoS). DDos attacks flood servers with requests that can result in websites becoming slow and unresponsive to requests and in the worst case scenarios become inaccessible.

The cybercriminals, who go by the name DD4BC – the acronym stands for DDoS for Bitcoin – have been targeting the companies since mid-2014 according to Bloomberg. Instead of going for top flight institutions, DD4BC focuses on second and third tier firms that may not have as robust defences as larger organisations.

The criminal enterprise launches small attacks initially which it then follows up with an email threatening to escalate the action unless a ransom is paid. The group typically demands a payment of 25 to 100 bitcoins. The criminals use bitcoins because of the anonymity that is a key feature of the system.

PAYMENT PROCESSOR BITPAY HACKED

It was revealed this month that leading bitcoin payments processor BitPay was hacked in December 2014. The US-based company had 5,000 bitcoins stolen when hackers hijacked the email account of David Bailey of digital currency publication yBitcoin and sent a bogus request to BitPay chief financial officer Bryan Krohn requesting comment about a supposed industry story.

The email directed Krohn to a website controlled by the hackers. The criminals then used Krohn’s email account to contact BitPay chief executive Stephen Pair asking him to transfer bitcoins to a non-existent customer’s wallet.

MARK KARPELES CHARGED WITH EMBEZZLEMENT

Prosecutors in Japan have finally charged Mark Karpeles, former chief executive of the Mt.Gox bitcoin exchange that collapsed in 2014 after it ‘lost’ by its own admission 850,000 bitcoin, with embezzling funds from the company.

Karpeles is accused of tampering with data and siphoning off client deposits into accounts he controlled. The exact whereabouts of the lost or stolen bitcoins still remains a mystery. At its height Mt.Gox was responsible for an estimated 80 per cent of all bitcoin exchange business worldwide.

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