A published report by Goldman Sachs on digital currencies proclaims that even though bitcoin cannot be considered a form of currency, the core ledger technology holds potential promise.
The extensive report labeled ‘All About Bitcoin’ appears in the wake of the recent infamous collapse of Mt. Gox bitcoin exchange. Aided by statements from critics and supporters, the report describes the ins and outs of the digital currency while explaining its advantages and disadvantages.
For those unacquainted with the digital currency known as Bitcoin, the Goldman Sachs report explains that, it is a peer-to-peer network that allows for the proof and transfer of ownership without the need for a trusted third party.
According to Goldman’s Dominic Wilson, chief markets economist at Goldman Sachs and Jose Ursua, a global economist with the company, the main problem bitcoin faces is the idea that it is not a good store of value. This poses a barrier in its implementation as a vehicle of exchange.
“We would argue that Bitcoin, and other digital currencies, lie somewhere on the boundary between currency, commodity and financial asset. Our best definition would be that it is currently a speculative financial asset that can be used as a medium of exchange,” wrote Wilson and Ursua.
According to the economists, an effective digital currency needs to have a fixed exchange rate for it to be successful. They believe that bitcoin seems more likely to have an impact on “payment technology” instead of being used widely as an alternative currency.
Bitcoin a Commodity or a Currency?
Additionally, the Head of Goldman Sachs Commodities Research Jeff Curie holds the opinion that the characteristics of bitcoin make it a commodity instead of a currency. Furthermore, he stated that even if bitcoin meets the standards of a commodity, it still does not rival the standard of commodities like gold.
Currencies are vehicles that are insured by either a commodity or a government’s capability to tax and protect it. On the other hand “A commodity is any item that ‘accomodates’ our physical wants and needs. And one of these physical wants is the need for a store of value,” wrote Currie. With that said, a commodity, it seems from Curries explanation, become displaced when a better commodity happens along.
For Currie the question is whether bitcoin solves an economic problem that already exists with gold. He does not think it does. He comments,
“Gold is not failing as a store of value as wood failed as a sources of energy in steam engines. Steam locomotives could go farther and faster on coal. But Bitcoin does not improve upon gold.”
Eric Posner, Professor of Law at the University of Chicago, deems bitcoin as unable to be a substitute for fiat currency. The reason being that under governmental rules, the need to control the money supply is alive and present.
“One of the most appealing aspects of a decentralized currency for some people – and even perhaps a motivation for its creation – seems to be freedom from government or central bank control, as reflected in the libertarian mindset,” he explains.
Posner argues essentially that monetary policies in the wrong hands can be abused. This obviously removes any misuse on the part of the governments.
Potential of Bitcoin
Wilson and Ursua explain that bitcoin shows more potential in regards to its payment technology than as a store of value. They stated that the innovation in the digital coins payment system may force other institutions to conform to its standard or even choose it.
Even though Goldman does not believe in Bitcoin being used as a form of currency, it does see potential in the technological aspect of this new innovation.
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