How will Bitcoin affect the financial institution industry?

As online merchants increasingly accept Bitcoins as a form of payment, it’s making lawmakers and financial institution regulators nervous.

Bitcoin advocates concede that while they will not replace the dollar, the euro or gold, virtual currencies will certainly be disruptive. Anthony Gallippi, co-founder and CEO of BitPay — a Bitcoin payment processing company — said, "Banks charge many fees to consumers. With Bitcoin, users can handle many of their daily payment needs themselves and avoid bank fees, so banks relying on fee revenue could be impacted the most."

Bitcoins are virtual. Bitcoin information is decentralized and stored in the cloud. No government or financial institution controls it. Instead, ledgers are distributed to Bitcoin users globally via “blockchain” technology to keep track of who owns what through identical copies of database information, such as the value, ownership and complete history of each Bitcoin. Information can never be deleted from the ledger, and the network of blockchain participants have to reach consensus before ledger changes are made, creating transparency, security and reliability.

Bitcoin relies on direct payments between two parties. The anonymity of Bitcoin is the key to its true value: You don’t need to “know your customer” because the reliability and accuracy of the blockchain stands in for the credit-worthiness of an individual.

Bitcoins were invented in 2008 when a Florida programmer paid 10,000 Bitcoins to get two pizzas delivered. In August 2010, its value was about 6 cents. The value has soared to more than $1,000 and settled back to around $586 in August 2016. It works like any other currency and individuals can accept it as payment, making the international exchange of “money” easy, fast and low cost since no banks, fees or exchange rates are involved. Today, businesses like Microsoft, Dell and PayPal accept Bitcoin.

How to get Bitcoins:

• Mining. Solve complicated cryptographic puzzles using specific software and hardware.
• Buying. Using your bank account, credit card or debit card to buy Bitcoins online through various exchanges, such as Coinbase or Indacoin. The Bitcoins are sent to a Bitcoin wallet that stores the digital information you need to be able to spend them.

If it sounds revolutionary, simple and consumer friendly, that’s because it is. Advocates also say it is safe; there is a limit to the amount of Bitcoins that can ever be produced so there is no possibility of a central bank or government printing money when they get into trouble, and, therefore, there is no risk of Bitcoins becoming devalued.

But virtual currency is not without concerns. Although legal in the U.S., the FBI and other agencies scrutinize its use. Since there is no independent intermediary to securely process a payment, its lack of regulatory oversight fosters an atmosphere that is ripe for money laundering, national security and tax evasion, among other anonymous, untraceable and illegal activities.