Bitcoins and a regulated market

Despite the ECB definition of Bitcoin as a virtual currency, the regulatory position of Bitcoin is far from being clear.

In October 2012, the ECB defined Bitcoin as a virtual currency with a bidirectional flow. That means that Bitcoin has a buy and sell exchange rate, determined by demand and supply in the Bitcoin market. Subsequently, Bitcoin can be used for buying goods and services in both virtual and real economy. The ECB investigated Bitcoin in relation to risk for price and financial stability in the Euro zone. However, it underlines the reputation risk of Central Banks, if security incidents involve virtual currencies. For this reason, according to the ECB, transactions with virtual currencies should be under Central Bank responsibility. 

Despite the ECB paper, legislation involving Bitcoins is still far from clear. The major concerns of Financial National Institutions appear to be the possibility that Bitcoin, due to its anonymous nature, can be easily used for money laundering. Countries like the United States or Germany have declared that Bitcoin exchange platforms are to be submitted to the Anti Monetary Laundry laws if Bitcoins are changed into FIAT money.

The existence of a legal framework gives the boundaries where an enterprise can legally operate. It can create monopolies or it can set the entry rules for markets. For Bitcoins it could mean that, due to Anti Monetary Laundry acts, currency exchanges will have to meet specific, by law settled requirements, if they want to be an active player on Bitcoin market.

Depending on the nature and the costs of such legislation, this could act as a (high) barrier for market entry and thus introduce monopolistic forces in the Bitcoin landscape. On the other hand, the uncertainty caused by political indecision, keeps potential capital investors out of Bitcoin market due to the difficulty evaluating legal risks.

In conclusion Bitcoin is reaching financial maturity. It is growing from a merely Internet phenomenon to a recognized carrier of value for the real economy. Because of the nature of its network, it is nearly impossible to shut down the system. Therefore completely outlawing Bitcoin cannot be enforced. If it was feasible for policy makers to ignore Bitcoin until now, it will become soon necessary to define a regulatory framework.