The legal status of cryptocurrencies (particularly Bitcoin) varies substantially from country to country and is still undefined and evolving. Although a large majority of countries do not make the use of Bitcoin illegal, its status as money (or as a commodity) varies, with differing regulatory implications.
Some countries have explicitly allowed its use and trade; others have banned or restricted it. Likewise, various government agencies, departments and courts have classified Bitcoin differently.
Cryptocurrency’s volatility is a major barrier to adoption, not least in the corporate sphere. And while the question is increasingly being asked: would you ever hedge against cryptocurrencies, given the legal and volatile trading backdrop, can treasurers really afford to embrace it?
Wild fluctuations in the price of Bitcoin have been driven by supply and demand, and its perceived scarcity as a store of value versus fiat currencies. Bitcoin was on average 10 times more volatile than the S&P 500 and 15 times more volatile than the USD:EUR currency pair.
Bitcoin has properties that make it similar to gold as a commodity, such that it is being touted as potential medium of exchange. But it is questionable whether the characteristics of Bitcoin make it truly compatible with existing currencies – in terms of portability, divisibility, resilience to counterfeiting, stability and general public acceptance.
Economist Milton Friedman, when discussing legal tender, said: “People… accept these pieces of paper because they are confident that others will. The pieces of green paper have value because everybody thinks they have value. Everybody thinks they have value because in everybody’s experience they have had value.”
Bitcoin has properties that make it similar to gold as a commodity, such that it is being touted as potential medium of exchange
Interestingly, the UK and other EU governments are planning a crackdown on Bitcoin amid growing concerns that the digital currency is being used for money laundering and tax evasion.
Sir Jon Cunliffe, deputy governor of the Bank of England, said digital currency was too small to pose a systemic threat to the global economy.
He also cautioned that Bitcoin users needed “to do their homework”. So we’re at a stage when risks are still taken as a given, while the benefits have yet to play out. Given the pace of technological change, however, treasurers will be keeping an eye on developments.
Dee Kothari is principal consultant at Kothari Partners