BERMEYA

Th ere are diff erent reasons why people use bitcoins: the fi rst one rests on ideological behaviour and is a rather weak motivation to investigate the future perspectives of the scheme. Libertarian users prefer a medium of exchange not fostered by the state, and, in particular, a payment sys-tem where banks or other fi nancial intermediaries are not engaged at all;

this position, certainly a minority, can be considered as a consequence of a general criticism, following the crisis of 2008, towards banking and fi nance operators as representatives of a disruptive fi nancial world, in confl ict with a sound real economy.

One can devote more relevance to the second category of motivation:

the illegal one. Illegal activities such as money laundering, trading weap-ons and drugs, or terrorism fi nancing are globally widespread and cer-tainly could take advantage from a peer-to-peer procedure such as the Bitcoin scheme that allows a high degree of anonymity. Another Bitcoin activity, even if not considered illegal, is online gambling. According to a recent estimate by the Federal Reserve in mid-2014 ³⁴ almost a half of all transactions in bitcoins could originate from that. ³⁵

33 At the end of 2014 the whole of daily gross revenues from mining activity has been estimated about 1 million US dollars.

34 See Anton Badev and Matthew Chen, “Bitcoin: Technical background and data analysis”, Federal Reserve Board Finance and Economics discussion series , 2014-104, October 2014.

35 According to Anton Badev and Matthew Chen, “Bitcoin: Technical background and data analy-sis”, Federal Reserve Board Finance and Economics discussion series , 2014-104, October 2014, p. 19,

2 Economic Issues on M-Payments and Bitcoin 43

Th e third category of motivations invoked in using bitcoins refers to individual economic convenience. Th is has to be distinctly consid-ered from demand and off er sides: individual users of the new payment scheme (consumers and merchants) are pushed by a reduction in costs and time requested in transferring money, easy access to the payment system and the global reachability; fi rms off ering bitcoin correlated ser-vices—or virtual currencies payment products and services, according to Financial Action Task Force’s (FATF) defi nition—are more interested in easier way to make business, selling everything related to the innovative process. Furthermore, as stated in the introduction, many other sectors consider as the true innovation of Bitcoin its record system, that is the cryptographic method to build the public ledger. Th e joint use with a mobile device fosters Bitcoin’s diff usion among non-banked or under- banked people that frequently transfer small amounts of money, even across countries: in this sense the Bitcoin scheme can help fi nancial inclu-sion. Th e lack of regulation, the absence of third parties and of exchange rate fees lessen the total cost of the payment; foreign remittances are usu-ally charged for a fee of 5 % on average, when money transfer operators’

services are used, while the average voluntary fee applied in the bitcoin scheme is about 1 %. ³⁶

Traditional banking operators have tried to compete on this aspect, off ering easier access to payment instruments, like various solutions of home and phone banking. Furthermore, further competitive pressure could come from the expected rapid growth in instant payments, also coming from non-bank payment service providers with a bitcoin system.

Users exhibit their preferences on the conviction that all diff erent instruments are equally safe and unaff ected by security, privacy or fraud problems; when alternative payments instruments and procedures are provided by non-bank operators coming from diff erent business activi-ties, one can wonder if all these aspects are fulfi lled in a convenient man-ner, in the way that banks usually do. ³⁷

a large volume of small value bitcoin transactions originate from the online gambling service Satoshi Dice.

36 Remittances are globally growing, so this will be an attractive business in the future.

37 On this topic see European Central Bank, Recommendations for the security of mobile payments , Frankfurt, November 2013.

So far we have considered only benefi ts in using bitcoin, without dis-cussing the potential risks users will be exposed to. A report published by the European Banking Authority in 2014 ³⁸ listed all the possible risks aff ecting individual positions and systemic aspects: individual risks refer to users, merchants and other market participants; systemic risks can arise from default of payment system providers, due to interdependen-cies between schemes where fi at curreninterdependen-cies are used and virtual currency schemes. ³⁹ A general condition regards correct information about risk:

this function is provided only in an informal way by diff erent agents and that prevents users from understanding all the features of the schemes.

As a “digital representation of value”, bitcoins are obviously exposed to operational risk; due to hardware malfunction or software collapse, bitcoins stored in a personal wallet or in external accounts may van-ish completely. In case of fraud there is no form of legal protection or jurisdiction that a user can invoke, so it is impossible for any form of reimbursement. For the same reason, in absence of regulation, fraudu-lent events or closing activity of exchange platforms or wallet providers can cancel customers’ bitcoin balances. Furthermore, since bitcoins are considered “private money”, that is voluntarily accepted, there is not an absolute guarantee that one can use the amount received with other people; so the bitcoin cannot be a widely accepted medium of exchange.

Even in respect of another traditional monetary function, that of store of value, the bitcoin seems inadequate, due to the high volatility of its exchange rate with other fi at currencies. Holding bitcoin as a possible use of personal fi nancial wealth is hazardous, since the user is exposed to high capital losses. ⁴⁰

38 See European Banking Authority, EBA Opinion on virtual currencies , 4 July 2014.

39 See European Banking Authority, EBA Opinion on virtual currencies , 4 July, 2014, p. 35. Issues in the following text are reported from a Bank of Italy warning. See Banca d’Italia “Avvertenza sull’utilizzo delle cosiddette valute virtuali”, Rome, 30 January 2015.

40 Th e main reason is the high volatility on bitcoin exchange rate: its value in terms of US Dollar was about USD 0.001 at the launch of the scheme on 2009; USD 0.10 on October 2010. On December 2013, 1 bitcoin was exchanged with over USD 1,200.

2 Economic Issues on M-Payments and Bitcoin 45