Bitcoin: A potential for innovation in need of a legal framework

MONTREAL, Jan. 15, 2014 /CNW Telbec/ - Bitcoin digital currency is attracting increasing attention from Internet users, retailers, researchers, central banks, and of course, speculators. Since its launch in 2009, the value of a bitcoin has fluctuated considerably, reaching a peak of over a thousand US dollars in the fall of 2013 before dropping back down in the month of December. Is Bitcoin here to stay and become an integral part of our economic lives? The Montreal Economic Institute presents some of the answers in a new Economic Note published today.

Bitcoin is both a payment system and an electronic currency that is now accepted by a growing number of retailers and businesses of all kinds. In Canada, the first Bitcoin ATM has seen the light of day in Vancouver, and a second was installed in Toronto this week.

The enthusiasm for cryptocurrencies is growing. In addition to allowing people to save on transaction fees, it has some very promising features for banks and the financial sector in general. "The Bitcoin infrastructure could serve as a technological platform for many banking products and services, thereby allowing financial institutions to improve their service offerings," explains David Descôteaux, the study's author.

Bitcoin could be developed further, but it still suffers from some major shortcomings that are holding it back commercially speaking. So far, it is difficult—even impossible—to have any legal recourse in cases of fraud. Once confirmed, transactions are irreversible. The volatility of the value of bitcoins also entails costs and risks. This volatility will tend to decrease with the expanding use of bitcoins as a medium of exchange, which will reduce the influence of speculators.

However, the biggest obstacle remains the fact that Bitcoin operates in a grey zone. The reserves expressed about it by several central banks, like those of China and France, have not boosted its credibility. "While it represents a fascinating innovation with a good potential for success, an appropriate legal and regulatory framework will need to be adopted. Its wide-scale use depends on the reinforcement of investor confidence in order to mitigate remaining risks and concerns," concludes Michel Kelly-Gagnon, President and CEO of the Montreal Economic Institute.

The Economic Note entitled "Bitcoin: More Than a Currency, a Potential for Innovation" was prepared by David Descôteaux, associate researcher with the Montreal Economic Institute. This publication is available on our website.

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The Montreal Economic Institute is an independent, non-partisan, not-for-profit research and educational organization. Through its studies and its conferences, the MEI stimulates debate on public policies in Quebec and across Canada by proposing wealth-creating reforms based on market mechanisms.

SOURCE Montreal Economic Institute

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