The online currency bitcoin has shown unexpected success, but its future as a broadly accepted exchange medium is limited, according to a report by a global banking group on Thursday.
The report by the International Institute of Finance, which represents more than 450 banks and financial institutions, said more regulation of bitcoin exchanges and transactions could strengthen its legitimacy among consumers and ease regulators’ doubts about it.
However, for the moment, bitcoin faces significant resistance in countries like China, the institute’s report said. And because most of the market is dominated by speculators rather than users, bitcoin’s value in other currencies is particularly volatile.
In a market worth about US$12 billion, the institute said, “It is estimated that 50 to upwards of 90 percent of bitcoin owners are speculators — thereby contributing to the substantial price fluctuations seen recently.”
It pointed to the sharp fall of bitcoin from a high of US$1,240 to US$576 in just three days last month after China banned its financial institutions from using the currency.
Since then bitcoin has rebounded, topping US$1,000 earlier this week before falling to US$915 on Thursday.
“If it persists, this remarkably high volatility will compromise bitcoin’s capacity to function as a medium of exchange, as it deters most large companies from accepting the digital currency as a form of payment,” the institute’s report said.
Unlike other currencies, bitcoin does not have the backing of a central bank or government. Instead, the units are generated by a complex computer algorithm designed by one or more anonymous people in 2009.
Because of that, the report said its functionality and ultimate success “is determined by programmers — and their goodwill is taken for granted.”
Thus the institute characterized bitcoin as effectively a “fiduciary currency” with no intrinsic value of its own and dependent on trust that it can be exchanged for a more common currency like the dollar.
That makes it “inherently fragile,” the institute said.
“Despite bitcoin’s ‘ingenious features’ it cannot provide a currency of stable value and its use as a broadly accepted medium of exchange appears limited,” the report said.
Meanwhile, the US Internal Revenue Service should give taxpayers clear rules on how it will handle transactions involving bitcoin and other digital currencies, National Taxpayer Advocate Nina Olson said on Thursday.
Olson, who runs an independent office within the IRS, listed digital currency as one of the 25 most serious issues encountered by US taxpayers.
Additional reporting by Bloomberg