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Virtual Money

By Temenos reporter 14 Oct 2015

What pops into your mind when you think of virtual currency? For me, it is the Jetsons, the first family of the future. I used to dream of the day when we could blast around town in our pod car and take the air tubes up to our futuristic condos in the sky. It cracks me up that the family of the future only had one car. But, even George Jetson had cash and carried a wallet his wife could swipe. Virtual money has gone viral, and part of the excitement is in the anonymity of the users.  It is also very attractive to the black market, criminal and terrorist type activity, and for transactions in which one is looking to fly under the radar. These are all great reasons that help to explain our government’s fascination with this new form of currency.

Until 2013, another attractive feature of virtual currency was the stability of the currency.  Previous fluctuations in the currency were minimal. This was ideal for international trading. However, in 2013, the economic theory of supply verses demand caught up with the currency.  Bitcoin saw two significant price increases during this time. Interestingly, after the collapse of one of the large virtual wallet/exchange companies, and a few other black eyes along the way, bitcoin has managed to survive. The bitcoin currency is currently trading around the $250 mark for a single bitcoin. This is an enormous jump from the penny value it had when it first appeared in 2009/2010. 

In addition to the anonymity and previous stability of the value, there is a bit of mystery that surrounds bitcoins. How does this really work? Who is behind all of this? How is it funded? Is this a scam? Is this backed by the government or protected in any way from loss? Hours of research will help you unwind some of these questions, but the true question, which remains unknown, is whether or not bitcoin will remain a part of our currency options for years to come.

So how does virtual money work? 

Bitcoins are earned and traded by those who are willing to accept them for payment.  Interestingly, a virtual wallet ID number is the only owner-tracking mechanism in place for this currency. The transactions themselves are tracked to show movement of the currency from one owner to another. This would be comparable to a complicated G/L. The tracking is vital to show who, or which wallet, owns the coin at the current time and keep track of legitimate coins.This is where the “mining” comes into play. Miners work to complete complicated mathematical equations that help to “secure” the currency. The first miner to solve the equation to lock in the security for the G/L wins. The winnings are in the form of bitcoins; currently 25 bitcoins are awarded for each win. At the current price for a bitcoin, this would be a nice paycheck at the end of a very short day. However, the computer strength needed to complete the calculations is significant and costly. Because of the high cost for powerful computers, miners have banded together and formed “mining farms.” Mining farms are also independently operated, but can take up small warehouses to generate the computer power needed to solve the equations. 

Where do the regulators and the government stand on virtual money?

Well, let’s just say…they don’t love it. They don’t love it because they can’t currently control it. The owners of the bitcoin currency are much like those with cash stuffed under their mattresses or in jars in their backyards. Owners of bitcoins are pretty much anonymous. This exposes the currency to be used for criminal activity without the potential for being traced. In addition, the virtual currency world is ever changing. Players have collapsed; the value is now fluctuating significantly from its early beginnings, and there is no overseer of this master plan. However, unlike other countries, the U.S. government is exploring opportunities to work with those facilitating the virtual currency industry. The New York Department of Financial Services was the first to jump out there and accept applications for those operating exchanges for virtual currency. The financial protection agencies appear to be on board with keeping the currency; however, the major concern will be the protection of the U.S. economy against financial threats. The fight will revolve around the anonymity of the user, virtual currency’s most attractive element.

What are the dangers and pitfalls of virtual money?

History is making itself as we go with virtual currency. We don’t know if this will become the wave of the future or just a passing moment of currency excitement. Many seem a little afraid to speculate due to the rapid rate of change that we have seen over the past few years. The level of risk for a bitcoin owner remains significant as the currency is currently unregulated, uninsured, and is not backed by anything of value. Wallet companies can pop up overnight and disappear just as easily. As with cash, the bitcoin is susceptible to being lost, be it from hackers hacking into owner’s wallets or the owner accidentally deleting a file. 

Who was it that said they didn’t think the internet would last?  Will virtual money be around forever? Only time will tell. But, if you look to the Jetson family for clues to our future, there will always be physical cash around for a loving wife to snatch.

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