Business Insider exaggerated when it announced that Goldman completely obliterates Bitcoin in a new report. The report includes interviews with Bitcoin supporters. And while the Goldman analysts are skeptical that Bitcoin could serve as a currency—the view of nearly everyone nowadays—they do not rule out a role in the payments system. Currently, merchants pay 2-3 percent of purchase price to accept electronic payments. Bitcoin service providers charge 1 percent. But as the Goldman analyst notes, much of the cost of the current payment system is attributable to security and legal requirements that Bitcoin providers will eventually need to confront. Merchants who use bitcoin pay an additional 1 percent to exchanges in order to avoid exchange rate risk. Traditional payments system will also reduce costs in response to competition from Bitcoin. However this all works out, the long-term effect of Bitcoin will not be anarchist utopia but slightly lower prices—you may end up paying $100 rather than $101 for an item you buy over the web.
Bitcoin miners with 51 percent of the computer power over the Bitcoin network control the supply: they can decide to increase it. Question: don’t they have strong incentives to undersupply bitcoins—that is, to vote against increasing the supply to the social optimum while hording bitcoins—in order to maximize their profits, like De Beers?
Bitcoin’s legal problems are just beginning. An interview with a pair of lawyers reveals a potentially huge regulatory web that legitimate bitcoin institutions will need to navigate. Once bitcoin futures come into existence in sufficient volume, the CFTC will step in. We already know about money laundering laws, which require bitcoin services to keep tabs on customers and report suspicious transactions. The SEC has gotten into the act because of efforts to combine Bitcoin and securities. State regulatory agencies may require Bitcoin-related companies to obtain licenses akin to those that money transmitters like banks must obtain, which are costly. It also seems likely that Bitcoin services will, like existing money transmitters, be required to keep funds on hand to compensate customers if their bitcoins are lost—a further cost. Not discussed, but also worth considering, is the possibility that people will try to manipulate the bitcoin market—as I suggested above—necessitating another layer of regulatory scrutiny.