Will Hong Kong trust Bitcoin?

By J. Bradley Hall

China has informally restricted Bitcoin (BTC) exchanges from accepting new inflows of Yuan, attaching a question mark for the virtual currency in one of its biggest markets. However, some exchanges are finding ways to work around the controls including transferring trades to Hong Kong.

In Washington, bankers lobby group the Institute of International Finance (IIF) is focused on the disruptive role of technology and the disintermediation challenge for banks, although they cast doubt on BTC’s ability to function as a medium of exchange given the volatility and the lack of an institutional backstop.

Norway classifies BTC as an asset subject to capital gains and in Germany it is a “Unit of Account” which means it can be used for tax and private trading. Denmark and Singapore are currently taking a laissez-faire approach while just on 9 July 2014 Poland confirmed that under the country’s existing financial regulations, BTC can be considered a financial instrument.

Consumers are voting with their money as noted by Jana, a mobile-payments company with 2 billion customers in emerging markets recently reporting that China, India, and Brazil have the highest growth in BTC last year. In fact 58% of those surveyed said they would feel comfortable investing in a virtual currency, and this number rose to 75% in Kenya where the M-Pesa network was launched.

Vodaphone recently announced that it would be also launching the M-Pesa payment system in Eastern Europe. In some countries, as many as 20% of respondents claimed that virtual-currency investments were a safer long-term bet than stocks and property.

If new digital currencies are offering competition in the payments market and growing distrust of fiat currencies as a store of value, then have reserve managers in emerging markets already begun acquiring digital currencies as an alternative to the USD$?

Currently, trust in centralised payment and banking systems is achieved through access control, encryption, firewalls, strong authentication, and careful vetting aimed at excluding bad actors from gaining access. The result is that such systems tend to be closed.

In contrast, BTC has implemented a trust by applied math computation model, requiring participants to solve increasingly difficult calculations utilising the cumulative computing power of thousands, accumulating over time in a chain of increasing-difficulty proofs. This ensures that no actor(s) can cheat, as they lack the computation to override the consensus trust. There is no central authority or trusted third party administrator.

In order for Hong Kong and ultimately billions of potential users around the world to establish Trust in BTC, it is important to understand that it represents a change in how we perceive wealth including how it is created, traded, and stored. It will likely happen in response to the loss of trust in existing fiat currencies currently backed by the full faith and credit of incumbent issuers.

A new Hong Kong-based BTC exchange is offering its customers automatic proof-of-reserves tests that can be executed by customers with data that is refreshed every half hour.

It appears a real solution to the trust issue on the horizon, marrying the utility of BTC which the Chicago Fed noted “provides an elegant solution for regulating its issue, defeating counterfeiting and double-spending and ensuring that it can be conveyed safely – without relying on a single authority” with gold, the most trusted store of value for over 6000 years.

Billions of new global users can begin to establish trust in computational-based distributed networks as they transition from dying fiat currencies backed by nothing to secure and discrete digital currencies backed by gold.

We already know that China trusts gold and it appears that the transition into digital gold is well underway with Hong Kong embracing a facilitator role not unlike it does it the physical gold trade between Hong Kong and China.

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