Out-Law News 2 min. read

'High volatility' of Bitcoin value hindering its emergence as major means of online payment, says US bank

The significant fluctuation in value of Bitcoin is acting to constrain the widespread acceptance of the digital currency by online retailers, according to Bank of America Merrill Lynch (BAML).

The institution said that Bitcoin had the potential to "become a major means of payment for e-commerce" but said that the "high volatility" of its value "is hindering its general acceptance as a means of payments for online commerce".

Bitcoin is a digital asset with a monetary value but which is currently not recognised as an official currency anywhere in the world. Some retailers accept payment by Bitcoin for goods and services, but most traders, especially in the EU, have not yet put systems in place to accept Bitcoin transactions.

In a new report into Bitcoin, BAML said that the digital assets offer some advantages over traditional means of payment, including "low transaction costs". This is because the system through which the assets are exchanged is not reliant on "a central clearing house or financial institution to act as a third party" to those transactions, it said.

"Using a decentralised, peer-to-peer network, transactions are verified independently by network users (i.e., miners) who are rewarded for their work with newly minted Bitcoins," the report said. "[Bitcoin] provides an alternative payment method to users who may not have access to credit or debit cards, or, other forms of electronic payments."

There have been fears that Bitcoin can be traded on the black market and used to conceal money laundering and other illicit activities. However, BAML said that the openness of transactions made, despite the fact they can be made anonymously, "may ultimately limit its use in the black market/underworld".

"Bitcoin also offers the benefit of being easier to track than cash given that each coin contains an electronic record of each transaction that coin has gone through since it was created," BAML's report said. "Not only is each transaction recorded on each Bitcoin, but all transactions are recorded in an online public ledger, offering a level of transparency that is not available with cash. Such transparency offers regulators means to track potentially illicit activity."

However, BAML identified potential issues in regulating Bitcoin.

"Regulators are currently thinking about how Bitcoin will fit into the broader payment and tax system, and what makes sense in terms of regulation," it said. "The bottom line is any new regulation will raise Bitcoin’s transaction costs, offsetting and/or eliminating one its main benefits. In addition, the ease with which Bitcoin can be used internationally increases the need for international regulatory coordination. While coordination raises the risk of an uneven regulatory landscape for Bitcoin, stringent regulation by a few large countries/regions would significantly increase the costs of using Bitcoin, thus limiting its usefulness as a medium of exchange."

BAML's report follows a separate statement on Bitcoin by the People's Bank of China (PBC) earlier this week. The PBC, China's central bank, banned financial and payment institutions from providing or accepting Bitcoin.

"Bitcoin is a specific virtual goods, does not have legal status and monetary equivalent, can not and should not be used as currency in circulation in the market," according to an unofficial automated translation of the PBC's statement. "However, Bitcoin transaction as a commodity trading behavior on the Internet, ordinary people have the freedom to participate in the premise own risk."

The trading of Bitcoin is not regulated within the UK or broadly across the EU currently, but technology and payments law specialist Angus McFadyen of Pinsent Masons, the law firm behind Out-Law.com, said last week that proposed new EU laws on payment services leave open the possibility of Bitcoin being regulated in future.

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