Aussie Bank Asks "Will Bitcoin Replace The Dollar?"

Tyler Durden's picture

Bitcoin is rapidly becoming part of the everyday lexicon. Following David Woo's investigation, National Australia Bank's Emma Lawson looks at its creation, use, and quality as "currency," and find that Bitcoin meets most, but not all the conditions required to be a currency. Lawson concludes Bitcoin may not be the most efficient monetary system, given the costs to create, and that the supply set-up can be seen as both an advantage (hyperinflation is not possible) but also a disadvantage (there are conditions which may create deflation). But, if enough people believe in it, and use it, it may be here to stay as a payment system. Simply put, its success (or failure) will depend on establishing trust and adoption.

Via National Australia Bank's Emma Lawson,

The Rise In Crypto-Currency

What are Bitcoin?

Definition of a currency:

Noun: a system of money in general use in a particular country: the fact or quality of being generally accepted or in use.

“Bitcoin” has entered the popular lexicon, challenging our idea of what makes a currency, currency. The definition of currency above does not mention the physical characteristics of the same but that it must be generally accepted.

There have been different forms of currency over the centuries, but what is important is that users believe it to be currency. Banknotes themselves were introduced in China in 118BC as a promissory note. Marco Polo, in the 13th Century recorded that paper bark was used in the place of gold or silver. The first colony in New South Wales used rum for currency, in the absence of printing presses. These examples show that currency or money can be different things, they are not static and they do not have to be physically valuable in themselves (like gold).

As such, Bitcoins can indeed be currency, as could anything labelled as such. As long as you believe it is.

Firstly, what are crypto-currencies? Bitcoin is one of around 50 crypto-currencies, albeit the most well-known, traded and first established in 2009. These are de-centralised digital (or electronic) medium of exchange. They are not backed by physical assets but rather peer security.

Primary issuance of Bitcoin is determined by computer algorithms which require large amounts of computer power, to validate sequences (blocks) and proof-of-work. As more “miners” participate in calculating blocks, the required computer power and sequence of blocks increase; thus not allowing an increase in the speed of Bitcoin issuance despite more mining. Participants become Bitcoin miners to claim transaction fees and initial Bitcoin.

Indeed one claimed benefit of Bitcoin is that in a world of quantitative easing, this alternative is designed not to increase above the scheduled path. Bitcoin are created at a “decreasing and predictable rate…issuance halts completely with a total of 21 million Bitcoins in existence."

The secondary market for Bitcoin is where most participants will acquire them for their digital “wallets” i.e. accounts. The price is determined on exchange via demand and supply, similar to the broader FX market.

At present there are eight dominant exchanges but there have been more and the number changes (Chart 1). In a study of 40 Bitcoin exchanges, 18 were found to have closed and taken customer accounts. Popular exchanges were also found more likely to experience security breaches2.Prices may also vary between exchanges. The most popular in the USD market is Mt Gox, which constitutes 52% of USD volume (based on the latest month average volume); closely followed by Bitstamp at 46%.

Trading of Bitcoin is most popular in CNY, at 46% of the total Bitcoin market by currency, closely followed by USD at 45%, EUR takes up a small percentage at 4%. This makes the China Bitcoin exchange the largest available; it makes up 47% of total Bitcoin trading (Chart 1).

The price on a singular exchange has been particularly volatile recently (Chart 2). There have been calls of a bubble in the Bitcoin price. The price tracked an average of $5.44 in 2011 and $8.29 in 2012 but has risen exponentially from October 2013. It peaked at $1200, and has dropped back to $575 more recently, after regulatory changes in China.

The fact that there are multiple exchanges but only 1723 registered businesses worldwide advertised as using Bitcoin (no doubt there are more in reality), suggests there may be something in the idea that there is currently more people buying Bitcoin in anticipation of an increase in Bitcoin value, rather than buying Bitcoin in order to use them as a payment method. That strongly suggests a bubble in the present value of Bitcoin.

Be that as it may, it does not discount the idea of Bitcoin as a currency or payment system, albeit a presently volatile one.

Bitcoin as a desirable currency

There are a number of qualities that a currency must have to be effective and sustainable. The NSW colony’s use of rum fit the bill by being recognisable but it arguably wasn’t durable when holders got thirsty! Bitcoin has certainly captured the attention of markets and the media, but if it is to have longevity, these tried and tested qualities must be in existence. These are necessary but not sufficient conditions to qualify as currency.

Durability: the unique feature of Bitcoin is that they are electronic, and not physical money. The concept of electronic funds has grown, and examples of electronic units of exchange have been around for some time in the shape of, arguably, credit cards, but also PayPal. Stories of throwing the hard-drive at the local tip aside, crypto-currencies are durable in their electronic records. Computer back-ups are recommended.

Portability: similar to durability, with an electronic version of currency, the portability of Bitcoin is less of an issue. As long as you have a smart-phone. Clearly there are some issues here, with access to smart phones or portable technology not universal. There may be restrictions on use by age or location for example. Anyone trying to just make a mobile phone call in a remote area in Australia could perhaps attest to that.
Fungibility: or the ability to exchange Bitcoins for other Bitcoin without cost. For example, swapping a $10 note for two $5’s. Bitcoin are fungible, although as they come in only one denomination it is less of a concern.

Divisibility: the ability to split a whole Bitcoin. This is possible. It is this ability to split into fraction of Bitcoin that the proponents of the crypto-currency believe will solve the problem of there being a finite amount ever minted. They believe that when there is expanded use and demand for Bitcoin, combined with a limited supply (at 21 million), that Bitcoin will become increasingly divided or fractionalised.

The clear flaw of that plan is the concern regarding deflation. If one Bitcoin can provide the owner with increasingly more goods or services over time (ie. demand outstrips supply for Bitcoin, not goods and services), that means the price of goods and services are falling. This tends to dampen consumption. This may occur only when the final Bitcoin is minted and if demand for Bitcoin use continues to rise.

Scarcity: Bitcoins are scarce as they require expensive and time-consuming computing resources to create. Hacking or counterfeiting is claimed to be prevented by peer pressure or game theory to prevent an invalid increase in minting. This has not been entirely successful, with breaches in June and August 2011 and April 2013. The security features are being adapted over time to address problems as the system matures.

The scarcity can also be considered a flaw. The supply of Bitcoin is inelastic. There are periods of time at which an increase in the money supply is warranted, to meet demand and then cyclically reduced. Bitcoin does not allow for that. The current spike in Bitcoin is an example. Demand for it has risen (arguably on speculative grounds), and supply cannot match it; hence the rise from $100 to $1200 over four months.

One factor is that there are a number of alternative crypt-currencies. Bitcoin is the dominant system now but that is not to say that it will remain that way. Crypto-currencies may stay around and thrive as a payment system but not Bitcoin.

Recognisability: there is a growing awareness of Bitcoin as a payment system. But, its use is limited. Some might suggest that its recognisability at present is concentrated on its own price, rather than a medium of exhcange.

The Bitcoin website shows 1723 sites worldwide that advertise their use. In Australia, there is a café in Adelaide, a website services firm in Melbourne, a juice bar in Sydney and a currency exchange on the Gold Coast. There are likely to be more than that and it is growing. But it is not yet universal.

Mention Bitcoin at present and many would discuss its use as a store of value before its use as a medium of exchange. And this takes us to the other properties of being a currency.

Trust and Adoption are Critical

“Bitcoins have value because they are useful as a form of money”

In a discussion about Bitcoin with a computer engineer I asked “how is it created?” and had the spiel about computing power, energy and the resources needed to identify prime numbers. Ok, that’s great, I may never understand the maths but I get that it requires substantial resources to compute. The next question “so what does it produce that is valuable?” answer – nothing.

Bitcoin are valuable because they exist, because people believe that it may be so. It’s a self-fulfilling prophecy. There must be trust in the system, for Bitcoin to retain any value. This is how it differs from other payment methods like credit cards and PayPal, which have a pool of funds backing them. Crypto-currencies may be cheaper as a payment method because they do not have that asset backing, but it thus relies more on trust than alternatives.

Bitcoin comes about as a response to quantitative easing and concern regarding central banks’ printing money. But what it cannot replicate is the revenue generating abilities of central banks and the governments that control them, or their inflation fighting credentials. Neither does it have the centuries of history that gold is backed by.

Bitcoin will work as a medium of exchange as long as participants believe in the security of the triple-counting system and peer-to-peer security. But this takes time. Given this, we shall likely not know for a prolonged period of time how successful the crypto-currency experiment will be.
The other condition that Bitcoin needs to be successful is adoption. It needs to become broadly used and accepted. Its (short) history so far has mostly encapsulated illegal activity characterised by the deep-web site Silkroad; subsequently shut-down. As already noted, there are only four businesses in Australia registered on the Bitcoin User site showing they accept it as a medium of exchange.

The connection between Bitcoin and illegal activity will have to be broken before it becomes widely trusted and accepted. Again, this takes a long time to establish. So while we cannot say that Bitcoin will definitely not become a medium of exchange, what we can say is that it will take a prolonged period of time to prove.

The Regulatory Environment

The increased focus on Bitcoin has led to a wealth of commentary and legal stance on its use from central banks and regulators. A few are outlined below, no country has wholeheartedly adopted its use:

Australia – RBA’s Stevens: “maybe there will be a world in which currencies based on some computer algorithm to limit supply as opposed to physical gold or something. There have been many such currencies through the ages…the ones that will survive will be the ones that hold their value which is why we have an inflation target which we’re hitting.”.

China’s PBoC have banned the use of Bitcoin by commercial banks and the clearing of payments in Bitcoin by third-party providers. China has been the most vocal and proactive in preventing the use of Bitcoin as an alternative to local currency in the major nations using (or investing in) Bitcoin. With the Chinese market for Bitcoin the largest so far, this may be a natural response to protect the central bank’s authority on the money system. Needless to say, the price of Bitcoin in CNY fell sharply on the latest announcement (18 December 2013).

The Swiss have taken a slightly different tack, by preparing to declare Bitcoin as a foreign currency. This ensures that it is not a domestic alternative but that it can be tracked and must be declared so as to meet tax and money-laundering laws, but not banning it altogether.

Germany has acknowledged its existence by declaring it a “unit of account” for tax purposes. It is not a foreign currency but “private money.” It now attracts a 25% capital gains tax.

The EU banking regulator has warned on the use of Bitcoin, in regards to theft, price fluctuations and the lack of central bank backing or security on the same. This has been followed by the French Central Bank which said its use is highly speculative and poses a financial risk to users. Dutch Central Bank President Wellink noted that Bitcoin hype was akin to the 17th century tulip bubble (but didn’t result in a flower at the end of it). The Dutch central bank has warned against their use as they are not regulated and there was no underlying liability. There is no deposit guarantee scheme.

Most jurisdictions treat Bitcoin as assets and require tax to be paid on capital gains. The Norwegian government said that Bitcoin were not considered money or currency and will tax it as an asset, similar to Germany, at 25%,

Thailand was the first country to ban its use as it was ruled not to be a currency.

In November, the US held a Senate hearing on the use of crypto-currencies. Much of the discussion was positive and upheld their use as “legal means of exchange’” There are ongoing concerns about its use in illegal activity.

In a world that is used to being bailed out when the financial system fails, Bitcoin’s decentralised system is a benefit to those in favour of limited government control, but is a distinct disadvantage to those who are used to the final bill being picked up by governments. If the present leap in Bitcoin price proves to be a bubble, it will be the individuals picking up the tab, not governments. There is no deposit scheme or any “too big to fail.” While investment in Bitcoin is small, that poses individual risk. If Bitcoin use becomes much broader, that becomes a risk to financial stability. Caveat emptor.

Bitcoin to replace the AUD? Not Now

We have established that Bitcoin meet most, but not all the conditions required to be a currency. The rest may follow, but that it will take a very long time to be proven. Its success (or failure) will depend on establishing trust and adoption.

Bitcoin may not be the most efficient monetary system, given the costs to create, and that the supply set-up can be seen as both an advantage (hyperinflation is not possible) but also a disadvantage (there are conditions which may create deflation). But, if enough people believe in it, and use it, it may be here to stay as a payment system.

However, there is a large red flag saying buyer beware at current levels of price and use. With no macroeconomic backing, it is impossible to determine fair value for Bitcoin aside from demand and supply – but the chart of AUD/BTC (Chart 3) above shows, BTC’s trajectory is not one of a stable currency.

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Bindar Dundat's picture  The war is starting in 2014 and we will see where Bitcoin is next year.

Jumbotron's picture

In a

Bitcoin is not tied to is is transported over an entirely captured internet.

Once this truly threatens the dollar it will be shut down or taxed out of existence.

zaphod's picture

It can't be shutdown without effectively turning off the internet. It is also, so far, proven to be completely unhackable, the only examples of people losing their bitcoins are those who did not manage their keys well or trusted them to 3rd party websites. If I trust my PMs to 3rd party websites and my PMs disappear I wouldn't say that PMs are hackable or insecure, I'd say that I was an idiot for trusting website xxx.

Fully agree they can tax it into oblivion. If bitcoin becomes successful, and there are a ton of "Bitcoin billionaires", you can be sure the public will be OK with the government taxing those who speculated and won.


CH1's picture

Wait... I thought Bitcoin was dead.

Haven't there been 5 or 6 deaths now?

fonestar's picture


nmewn's picture

Damn...another porn thread.

Prisoners_dilemna's picture

"Divisibility: It is this ability to split into fraction of Bitcoin that the proponents of the crypto-currency believe will solve the problem of there being a finite amount ever minted.
The clear flaw of that plan is the concern.... This tends to dampen consumption."

Should we shit in our own playpen?
Are we going to get off shaceship earth or do we need to let the market help us find solutions for the long haul?
A life well lived doesn't revolve around consumption does it?

I saw "porn" and divisibility/reproduction entered my mind?!

nmewn's picture

One runs into the strangest people on these threads ;-)

"Should we shit in our own playpen?"

Like creating "money" from thin air without ever questioning the true motives of those from whence it came?

"Are we going to get off shaceship earth or do we need to let the market help us find solutions for the long haul?"

Getting off this rock is inevitable, we are not immortal. The market is not my body or soul.

"A life well lived doesn't revolve around consumption does it?"

Consumption of what? No one can live without consuming, something.

"I saw "porn" and divisibility/reproduction entered my mind?!"

The idea of alchemy has been around for centuries, so far, a complete waste of time & resources.

Scarlett's picture

I am angry, and bitcoin pisses the control freaks off.  Henceforth, I'm buying.

TeMpTeK's picture

Bernard Von Nauthaus pissed em off too...

XitSam's picture


"It is a violation of federal law for individuals, such as von NotHaus ... to create private coin or currency systems to compete with the official coinage and currency of the United States."

“Attempts to undermine the legitimate currency of this country are simply a unique form of domestic terrorism,” U.S. Attorney Tompkins said in announcing the verdict. “While these forms of anti-government activities do not involve violence, they are every bit as insidious and represent a clear and present danger to the economic stability of this country,” she added. “We are determined to meet these threats through infiltration, disruption, and dismantling of organizations which seek to challenge the legitimacy of our democratic form of government.”

Take aways: The government does not acknowledge that Nothaus' currency was actually money (bullion). And if you provide an alternate currency, you are a terrorist.

Yen Cross's picture

 Just take some time and listen. We're not faulting your encription, or devotion.  

   Please, just sell a small portion of your holdings, and buy back in at better levels.

goldflows's picture

Noooo you have to buy the dip!


Let em lose their shirts

Jumbotron's picture

Uhhh....ask Megaupload how that's working out for him.

TheHound73's picture

They were centralized just like e-gold and liberty reserve.

Al Gorerhythm's picture

I assume that the writer and bitcoin/currency supporters have been schooled using the same maths curriculum used world wide. That being the case, it was therefore the same one used to school the rest of us non-currency heretics. We were all versed in the magic of compounding interest with the wild claim that if we saved our currency, we would all, one day, be rich!!. We were schooled to believe in currencies growing in number by magic. We could all get richer if we only believed.

We did not inherit this belief system of money through gift of genetics. It was implanted, as gathered knowledge and passed on from parent to child, both at home and school (in loco parentis). We were schooled into believing that this paradigm had justification through algabraic certainty.

The author claims that to justify currency as being money, it just simply has to be believed in. That is all!

Just believing in something for the sake of believing, doesn't create its bone fides. Belief systems based on faith don't prove validity of argument. You are simply a believer. 

The fulfillment of the properties of money by comparison, requires a complete level of authentic and verifable claims to back its promise, standards such as weights and measures used to denude it of deception and fraud.

Currency true believers, simply haven't discovered the massive store of research and philosophy that describes the differences between currency and money, that knowledge of which is necessary to change their belief system. They can't see the harm in the deception of fiat currency with its innate time-decay value destruction, the saved tokens of labour losing value through inflation of supply with the destruction of the value of a man's labour being the utltimate deception. 

Currency is similar to an option. You have the right to buy or sell something but not the obligation to settle.

malikai's picture

Queue incessant ignorant arguments against bitcoin.

SWRichmond's picture

Cue shameless bitcoin pumping by fonestar.

fonestar's picture

Bitcoin is invincible, deal with it.

akak's picture

Bitcoin's value is invisible, deal with it.

TheHound73's picture

Oh, how cute. You just realized Bitcoins are intangible?  Pretty late to the party but better late than never.

caShOnlY's picture

the governments would love a digital currency. They have it now, don't they?  Create all the digial currency they need while collecting the taxes on all former cash businesses (restaurants, bars, tips, etc....). 

They also can track every puchase made.  No black market, no drug sales, no more smuggling - just complete control.  

You are so very right, it is invincible.  Buy some.

fonestar's picture

The gov cannot track Bitcoin users and they do not want a digital currency they cannot control, your arguments are stupid.

akak's picture

If it is done online, it can be Iand most likely already is being) tracked.

Fonestar, for you to suggest otherwise proves you to be either a woefully naive idiot or else a shill for the Establishment power structure.  Possibly both.

1835jackson's picture

It's more about humans than the "soundness" of  bitcoin. Bankers do not like it, ergo bitcoin is fucked. 

CH1's picture

Bankers do not like it, ergo bitcoin is fucked.

The cartel is NOT God.

Harbanger's picture

Can you use Bitcoins to get money out of a Capital-controlled country like Argentina?  No.  I have a friend how sold a property there and is trying to get his money out of the country.  If the banks don't play, you're not moving money anywhere.

fonestar's picture

Of course you can use Bitcoins to get money out of Argentina or anywhere else.  By "you" I am of course talking about your average sixteen year old internet user and not the "metals only" Zerohedge commentator.

Harbanger's picture

How do you do that when they limit and control your withdrawls and transfers?  He doesn't want to buy 1 bitcoin a month for 30 years.  Yes when you sell a house they write you a check.

fonestar's picture

Well I guess that's a problem in his particular case if he is trying to make on large transfer from his account to another account selling Bitcoin.  Hopefully people learn from their mistakes and never use a bank again.

Harbanger's picture

If I write you a $500,000 Check who's going to cash it for you?  Your thinking very small potatoes, that's not how the World works.  Capital controls would freeze Bitcoin use except for completely illicit trade.

Prisoners_dilemna's picture

We can go here and see the largest 100 transactions out of the last 50,000.

This is real time and 50,000 transactions occur every 24 hours at todays usage rates.

So for those too lazy to learn about bitcoin...  the lowest transaction in the top 100 list for the last 24 hours is 897BTC, the highest is above 1000, I stopped scrolling down once I saw 1000.

$775*1000=3/4s of a million dollars.  At least 100 transactions around that average occured in the last 24 hours. EVeryday the bitdoin network handles 100 transactions of over half a million dollars.

I can't teach you how to move this kind of money using bitcoin. But it appears its being done.


For those who refer to bitcoin as skynet. I think its neat we can see these things about our money...

yet no one right now can say anything about the people involved in the top 100 transaction of the last 24 hours.

only that mone moved. I dont see this changing in my lifetime and for that I love bitcoin.

Fuck you Bernanke!

Harbanger's picture

Where there are no capital controls, genius.  I bought 100k @495 a couple of weeks ago.  What's your point?

TheHound73's picture

The problem is with the banks (aka the government), not bitcoin per se.  If your friend can actually take possession of his funds and locate a bitcoin seller, his problems would be solved.

Prisoners_dilemna's picture

I lack stats on how much cash is moved worldwide so I can't compare the two.

Can anyone cash that guy out?

I cant.


It appears it was worth the effort to someone or some people because in the last 24 hours someone moved some serious funds, funny money unicorn electron thingy or not. Someone moved big money and believes they can either use it, hold it, or transfer it into a currency somewhere.


@Hardingle My point is that fonestar may not be moving millions daily... or ever...    but someone is using bitcoin for what you suggest theyre not.

So shut the f*ck up and let the adults talk.  :)

Harbanger's picture

Maybe you can tell me how to find Bitcoin seller that accepts cash for Bitcoins.  That would at least partially help him.

goldflows's picture

Hey kid.. LeRn a thing or 2 about liquidity.

If anything the sheer ridiculousness of the size of those "transactions" combined with the fact that it's difficult to trade BTC for cash .. At least I don't see Nyone pulling out 10mil from iit..

But yea, keep buying.. Bitchez

Pseudonymous's picture

Capital controls would freeze Bitcoin use except for completely free trade.

Fixed it for ya.

TheHound73's picture

I think it is time Bitcoin starts picking fights with smaller countries.  I would like to see a bitcoin duel with Iceland's capital controls.  Iceland is reasonably small, reasonable amounts of personal wealth, reasonably technologically advanced.  Argentina might work.  Ukraine is probably not technologically advanced enough yet.  China is probably too big to tussle with at Bitcoin's current (2013) level of maturity, but give it time.  

IridiumRebel's picture

The cartel is NOT God, but they'll work to let you meet him/her earlier than desired. They are evil motherfuckers. Repeat that until it sinks in. I'd love to see a gold/bitcoin tag team bankster fuck, but they will nuke us from space before that is allowed.

Pseudonymous's picture

If you are willing to apply such a logic for Bitcoin, then shouldn't you expect others to apply a similar logic about you and about what you have to say? With respect, could you tell us what makes you believe we should care about what you have to say?

Yen Cross's picture

    Good lord ! Stevens(RBA) will do anything to avoid lowering rates.  Stevens pulled a couple of Nowotnys' this month to jawbone down the aud.

   Stevens seems to think "terms of trade" are closer to aud/usd .8500. Perhaps before the global central banking cabal injected $15 trillion+. Stevens should be proud of his country. They have the lowest deficit of the G-20.

  Get used to aud/usd on the 90-100 handle Glenn. Your bonds are a hell of a lot more attractive then the pigs in 2014.


  Australia 10-Year [4.296] 4.281 4.316 4.261 0.015 0.35% 27/12
Kina's picture

With NBA 6 mos I get 3.35%

Kirk2NCC1701's picture

If you trade it with Aussie Gold, it sure as hell will: 

[1] AU + BTC = FRN_killer

Repeat equation [1] 3x/day for next 3 weeks, or until it truly sinks in.  Gold = Store of Value, BTC = universal crypto-currency.

What one won't do for you, the other one will.

Yen Cross's picture

 I've seen some unique posts from your handle in the past. Are you sure that you want to take credit for the above post?

   I think I hear O'Hara and Bones calling?

disabledvet's picture

It's Uhura And if i could post pictures here i'd be a lot more fun. As far as bitcoin i would be very wary of that thing heading straight to zero right now. I think the Dutch view is spot on: "at least tulips bloom." Other than that...there is no "intrinsic" or "banking" risk.

Atomizer's picture

Will the encrypted Bitcoin currency follow the Federal Reserve Note? This Bitcoin currency is legal tender for all debts, public and private [See one dollar bill, upper left hand section]. Success depends if the old legacy continues with a new debt relief digital currency.  Re-read that last sentence until it sinks in.