Wall Street Doesn't View Bitcoin As Currency

Bloomberg

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The U.S. Internal Revenue Service hasn't offered guidance on Bitcoin beyond saying it's working on the issue and that it has been monitoring digital currencies and transactions since 2007. The IRS should give taxpayers clear rules on how it will handle transactions involving digital currencies, Nina Olson, the National Taxpayer Advocate, said Jan. 9.

Senate Candidate

Bitcoin is gaining traction in the face of the official criticism. The virtual money is being accepted for donations by Texas Senate candidate Steve Stockman. Online retailer Overstock.com's chief executive office Patrick Byrne said in a Jan. 9 statement that he finds the virtual currency appealing to him because "no government mandarin can will it into existence."

The value of the world's reserve currencies has been called into question since the 2008 financial crisis, spurring demand for everything from gold and art to digital money. The response of central banks of flooding the financial system with unprecedented amounts of cheap funding debased their currencies, helping send the Bloomberg Dollar Spot Index tumbling 20 percent from March 2009 to August 2011.

"There is definitely a temptation to find assets that are in limited supply," Eswar Prasad, a professor at Cornell University in Ithaca, New York, and former International Monetary Fund economist, said Jan. 14 in a phone interview. Investors have sought Bitcoin "on the belief that assets in limited supply are likely to maintain their value more than assets that can be produced at the whim of a central authority."

The Federal Reserve's balance sheet has quadrupled to more than $4 trillion since 2008 as it sought to drive down interest rates and prop up asset prices. Japan is doubling its money supply to ward off 15 years of deflation. The European Central Bank holds $3 trillion of assets, down from a peak of $4.2 trillion in June 2012.

As recently as 2012, ECB President Mario Draghi was forced to battle speculation that the currency union would unravel. He warned markets that July that he'd do "whatever it takes" to protect the euro, which survived to welcome Latvia as its 18th member on Jan. 1.

Avoiding Volatility

Some companies that accept Bitcoin for payment have avoided price volatility by using a third party. Consumers can buy a $58.49 Beautyrest mattress topper from Overstock.com using the digital payment system. The payment is processed by Coinbase, which eliminates foreign-exchange risk for the retailer and provides local currency to Overstock.

"Most businesses that accept Bitcoin do not hold it," Citigroup's Englander said. "So they're now using it simply for transactions and not as an asset."

Bitcoin the currency can't be separated from Bitcoin the payment system, Barry Silbert, the founder and head of SecondMarket Inc., a New York brokerage that runs a virtual currency fund, said Jan. 14 in a phone interview. Without having the virtual currency as an asset, the system would be reliant on trust in a third-party, he said. His fund invests in Bitcoin.

"There is very little debate, I think now in Wall Street, and certainly as it relates to Silicon Valley and venture capital, that Bitcoin technology, Bitcoin the protocol, has the potential to radically disrupt and transform the financial-services space," Silbert said.

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