Is Bitcoin The New Euro?

Originally dubbed ‘the single currency,’ the euro has been around for a decade and was in the works for another decade before it entered circulation in 2002. At the time, it was something revolutionary, a bold initiative that could have failed multiple times along the way.

Yet, it hasn’t become the universal currency and the European Central Bank is now testing the boundaries of the euro. Bitcoin could be the surprising and beautifully designed world cryptocurrency that will take the euro’s dreams to the next level. We will discuss this at Disrupt Europe later this month.

Bitcoin Is The True Single Currency

There are a few reasons why the euro will always stay limited in scope. As one can read in 1992′s Maastricht Treaty (the Treaty on the European Union), the euro is “a single and stable currency,” nothing fancier than that. In other words, its creation mechanisms are similar to those of any other modern currency. There is a central bank, there are interest rates.

Moreover, stating that the euro is a “stable currency” is already very political. It refers to Germany’s old traumatism of hyperinflation — at all times, the euro has to avoid inflation. This is probably the most important way the European Central Bank differs from the U.S. Federal Reserve — price stability comes first in Europe. Even though politics and monetary policies are supposed to be separate, this rule proves that it’s not the case.

These days, as everyone can see with Greece’s economic troubles, the only adjustment variable is jobs. When a eurozone country is no longer as competitive as its neighbors, prices stay the same. Consumption falls and the unemployment rate rises. To fight unemployment, many have to accept pay cuts. European governments would rather create a giant help fund than endanger the euro’s stability.

For all these reasons, the euro is just another traditional currency used in a few countries. It shares all the same weak points.

By definition, Bitcoin is apolitical. It is its greatest strength and weakness.

Bitcoin is nothing like that. It was born on the idea that nobody could regulate it. Instead of having a central bank, Bitcoins are just a chain of characters defined by algorithmic rules. Anybody can try to find new Bitcoins and anybody can verify if it is indeed a real Bitcoin or not. All of this is handled by open-source Bitcoin applications and a few proprietary variants.

By definition, Bitcoin is apolitical. It is its greatest strength and weakness. As long as you have access to the right technological tools (a computer, internet access…), you can make transactions in Bitcoins. When the economy thrives or stagnates, Bitcoin will have its own separate trend. As the great crash of April 2013 shows us, it is as volatile as it can get. While it is still early to see significant mainstream Bitcoin use cases, the story of this new currency is a fascinating one.

And we’re excited to reveal that we will hold a panel at Disrupt Europe in late October in Berlin with Shakil Khan (CoinDesk) Pamir Gelenbe (st-ART/Bitcoin London) and Nejc Kodric (Bitstamp). Khan is an expert when it comes to Bitcoin news, while Gelenbe has successfully organized the Bitcoin London conference. Finally, Kodric is the co-founder and CEO of the largest European Bitcoin exchange, and the second one in the world behind Mt. Gox. They will all have interesting thoughts to share on the future of Bitcoin, its caveats and more.

Bitcoin’s Weaknesses

What happens when your Bitcoin wallet value in euros falls by 50 percent in a day? If your company pays you in Bitcoins, it sounds like bad news. The future of Bitcoin as a mainstream currency is unclear. Make no mistake, the euro will remain the dominant currency in eurozone for now.

To avoid disastrous news like that, many countries, including the U.S. and Germany, are trying to regulate Bitcoins. If you really want to use Bitcoins, you’ll have to prove that you’re ready to handle the financial risks.

Back in August, a federal judge in Texas has declared that Bitcoin was a currency and should be regulated just like euros or U.S. dollars. This decision threatened Bitcoin’s utopian concept.

“The only limitation of Bitcoin is that it is limited to those places that accept it as currency,” wrote Judge Amos Mazzant. “However, it can also be exchanged for conventional currencies, such as the U.S. dollar, Euro, Yen, and Yuan. Therefore, Bitcoin is a currency or form of money,” the judge continued.

Bitcoin won’t be able to remain an unregulated currency for long

Similarly, New York’s financial services stated that Bitcoin companies should respect the current financial regulatory guidelines. Making sure that these companies are all on the same page when they operate in the U.S. is necessary to protect customers. Moreover, New York’s top banking regulator wants to write a new set of rules to decrease illegal Bitcoin activities.

“We have also seen instances where the cloak of anonymity provided by virtual currencies has helped support dangerous criminal activity, such as drug smuggling, money laundering, gun running, and child pornography,” Financial Services superintendent Benjamin M. Lawsky said in a statement. ”Taking steps to root out illegal activity is both a legal and business imperative for virtual currency firms,” he added.

Finally, following a parliamentary inquiry, Germany stated that Bitcoin should be considered as “private money.” It has many implications, starting by paying sales tax (VAT). While the conclusions are simple, the execution is more complicated as Germany is a mere member of the eurozone. If Germany really wants to pursue this further, it will probably have to lobby European institutions to change the rules on a European level.

All these rulings prove one thing: Bitcoin won’t be able to remain an unregulated currency for long. It won’t work similarly in every country of the world. Soon, Bitcoin users and companies will have to find a way to avoid tax, and authorities have a say in what you are doing with your Bitcoins.

It is not necessarily a bad thing as using a totally unregulated currency is unsustainable for many industries and use cases. But Bitcoin’s true purpose is not what everyone originally expected.

Bitcoin Is The First Meta-Currency

The Bitcoin network is a peer-to-peer payment network, you don’t need any banking institution to make large transfers. Instead of replacing the euro, the cryptocurrency could become the first meta-currency, a new currency that sits on top of traditional currencies for very specific use cases.

With the euro, European Union member countries wanted to create a second world currency to compete with U.S. dollars. Having a dominant currency has many advantages. According to French historian Jacques Rueff, countries (such as the U.S.) who use a major currency can sustainably keep a negative balance of payments — he calls that the “deficit without tears.”

Bitcoin could become the first meta-currency that sits on top of traditional currencies

In many ways, the European Union was successful with the euro. While it hasn’t become the universal currency, no one can deny that the euro is a major world currency. But now that two different currencies matter on a global scale, economic agents need a tool that sits between U.S. dollars and euros. Currently, about 100 percent of foreign exchange transactions involve dollars (out of 200 percent because forex transactions involve two currencies) compared to 64 percent for euros.

Bitcoin can become the common language between USD and EUR. To use Bitcoins in Italy or Ecuador, you don’t have to pay any fees. Moreover, you can exchange some Bitcoins in dollars when you’re investing in Ecuador, or exchange some Bitcoins in euros when you’re investing in Italy. Bitcoin is a money transfer protocol as much as a currency. For now, this aspect is underused but could actually become Bitcoin’s most interesting future prospect.

(Image credit: Zach Copley)