The split of Bitcoin was big news in the summer of 2017, but it was managed without much disorder and, in fact, followed by an increase in value. The market shows more companies implementing Bitcoin payments on trial and higher expectations towards virtual currencies, represented by Bitcoin. Nevertheless, virtual currencies still entail a substantial degree of uncertainty and lack of regulations. We talked with Daisuke Tanaka of the ICT & Media Industry Consulting Department at Nomura Research Institute (NRI) about the potential of virtual currencies, the buzz surrounding the split, and the outlook going forward.
What was all the uproar about the Bitcoin split?
—— Bitcoin attracted some attention with the news of its split. To start with, how is it used around the world?
In Japan and across the world, it is gaining attention as an investment opportunity. They say some people in China and other countries use Bitcoin for everyday things, but that type of usage is still very limited.
—— So, the investment boom stimulated a sudden increase in circulation, which caused problems, and there was some dispute about how to solve them?
Yes. Bitcoin uses blockchain technology, which records past transactions. Procedures like sending money require the process of adding records. However, the sudden increase in circulation caused delays and other problems—for example, sending money would take a very long time. If it had been a new virtual currency, they could have put in a new system from scratch, but with Bitcoin they had to figure out how to deal with the problem using the existing system. Opinions separated into two opposing groups: one opting to maintain continuity with past records, and the other pushing to move away from compatibility. In the end, Bitcoin had to split up: Bitcoin Cash was created and moved on as a separate virtual currency. I think they settled on the solution causing the least confusion.
However, the virtual currency industry is full of other possible developments, and there is even talk of another split for Bitcoin. Because of the crossing of information, to accurately understand the state of a virtual currency, one must verify multiple sources of information including the applicable exchange service as well as other exchange services.
Whether Bitcoin offers value or not is up to each person's judgment
—— What should anyone interested in virtual currencies be careful of?
Bonds and stocks are issued after numerous prior examinations, but virtual currencies can be issued by anyone, even without solid verification. Yet, the issuance of virtual currency can lead to the acquisition of an enormous amount of money, and dome instances almost resemble fraud.
In April 2017, the Payment Services Act was revised with new regulations on virtual currencies, for example, regulations that obligate exchange services to preserve funds, protect consumers, and establish measures against money laundering. The revisions designate "virtual currencies handled by exchange services (legally, Virtual Currency Exchange Service Providers)," so a good starting point for people who would like to try using a virtual currency is whether or not the exchange service is authorized. Of course, this does not guarantee value, so you will have to shoulder that risk yourself.
A new system utilizing virtual currencies by "circulating from one person to another"
—— Ultimately, will virtual currencies be used only as investment?
If virtual currency is considered as "data with value," this could broaden its usability. Proofs of transaction are recorded in the blockchain, so you can tell who has how much authority. This can offer an efficient and transparent transaction system. For example, it could be used in place of stocks and debentures, or it could be circulated from one person to another as proof of ownership of a painting or real estate or the right to use a room for a certain amount of time. The problems are now being worked out as various services are being tested. I think they will spend the next several years identifying where they can optimize and where they can apply blockchain technology, pinning down the appropriate format and designing regulations and systems accordingly.
That said, too much regulation inhibits innovation, and to allow circulation in society, virtual currencies will need flexibility in their compliance, including in the existing systems, laws and regulations. One company cannot achieve this alone, so the discussions must include the government and industry.
—— Will Bitcoin be the chosen virtual currency at these discussions?
The foundation of globally used virtual currencies is blockchain technology. There are many blockchains in operation, but Bitcoin has proved to be relatively stable even when attacked from external sources. Ethereum may be another option. Unfortunately, neither are sufficient to be considered a social infrastructure. We will need to solve the problems one at a time, from security to governance and data management, and, if necessary, consider the adoption of a new blockchain.
Nomura Research Institute, Ltd.
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Jul. 17, 2018