California dreaming (Bitcoin isn’t a currency)

The citizens of California find themselves in the vanguard of a new economy, the epicentre of a monetary revolution and so on and so forth.

The citizens of California find themselves in the vanguard of a new economy, the epicentre of a monetary revolution and so on and so forth. I wonder if they’ve noticed?

Well, it’s a new dawn in California, as a raft of nearly a thousand new laws come into effect for 2015. These include banning state entities from selling Confederate flags, mandatory breast-pumping stations at major airports and

“Digital currencies including bitcoins will be legal for transactions in California.” [From New California laws for 2015: Frogs, drones, Confederate flags – LA Times]

Wow. That sounds cool. It will transform the business landscape in California since until now businesses have been unable to accept  digital currencies (whatever they are — I imagine it will take a thousand pages of legislation to define them) and this has held them back. Naturally, this has been picked up and reported on in the context of Bitcoin.

“Fletcher Starkey, owner of CDXX, a San Francisco based bar and grill that’s been accepting Bitcoin since it opened in 2014, has greeted with enthusiasm the new bill taking effect.” [From California Governor Approves Bitcoin for Transactions]

Wait, what? So you could already accept Bitcoin for transactions in California? So that would mean that the impact of the new legislation is… beats me, but then I am not a lawyer. Not being a lawyer, as I mentioned last year, makes it impossible for me to understand what the point of the California law is.

“Businesses were free to accept to Bitcoin in payment before, just they were free to accept wampun or used tea-bags, since it’s a matter of private contract. What you couldn’t to is force a business to accept Bitcoin, and you still can’t. But then, you can’t force a business to accept US dollars either, as I mentioned here eight years ago.” [From It is meaningless to say that British government will “legalise” Bitcoin. Oh, and wrong, too.]

I firmly predict that the new law in California will have absolutely no impact on the use of Bitcoin for commercial transactions using digital currency. Apart from anything else, it isn’t a currency. On my last plane ride I read Gandal and Halaburda’s “Competition in the Cryptocurrency Market” (CES ifo Working Paper 4980, Sep. 2014). This is an economists’ perspective on Bitcoin, and it concludes that, essentially, “If the main driver of demand was currency adoption, network effects would be dominant and we would see clear winner-take-all dynamics. The lack of winner- take-all dynamics in the later period indicates that the financial asset function becomes more prominent.”

To a lay person, this seems to say that Bitcoin does not behave as a currency at all, but as speculative financial asset. If this is indeed the case, then I agree with the authors that we are a long way from seeing a “winner” in the cryptocurrency market.

It further warms my heart to see economists coming to a similar conclusion from their perspective as I have from a more technological perspectives, which is that we are moving to an era of more currencies not fewer.

Gil Luria (who I saw give an excellent talk about decoupled debit at the BAI Payments Connect conference in Las Vegas) and his colleague Aaron Turner make an interesting observation about Bitcoin (actually, they make several interesting observations about it) in their research note on the subject. They say that: “We do believe there is a meaningful probability Bitcoin (the specific currency/conduit) may not succeed, but this will most likely be a result of the emergence of a better crypto currency.”

I think I might even go with a stronger statement than that: Bitcoin the specific currency probably won’t succeed but someone will almost certainly create a better crypto-currency. But what would “better” mean? This will be just one of the cryptocurrency issues that will be discussed in depth at the 2015 Tomorrow’s Transactions Forum in London. Following on the from the success of last year’s “deep dive” into mobile money, this year we will be having two deep dive sessions running in parallel to the main Forum talks and panels. One will be on financial inclusion and the other will be on cryptocurrency. Mark March 18th-19th in your diaries right now!

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