To Be-tcoin or not to Be-tcoin!
On December 19th, 2013, the Lebanese central bank issued a public warning against the use of the digital currency, Bitcoin. Banque du Liban will not recognize transactions that have used Bitcoin and this makes the use of the currency within the region all the more unstable. Instead of being verified by a central bank, Bitcoin transactions are regulated by “miners,” or individual users within the Bitcoin exchange system. They ensure that the transaction goes through and legitimize the individuals involved in the transaction. The value of Bitcoin is determined by pure supply and demand. At present, 1 Bitcoin is equivalent to $457 USD. A few months ago, Bitcoins were valued at over $1000! This shows that the volatility of the currency is very extreme. Lack of recognition by the central bank amplifies the risk associated with this volatility even further.
Ironically, the most appealing aspect of Bitcoin for most of its users is the lack of authoritative control over the currency. Identities do not need to be disclosed when a transaction takes place. Banque du Liban claims that this type of currency structure only elicits risk, facilitates money laundering and finances terrorist activities. Indeed, Bitcoin does generate many risks for its holders, especially for Lebanese residents now that it is officially not recognized as legal tender. This implies that any losses generated through Bitcoin transactions cannot be backed by the Lebanese government. In other words, the central bank cannot insure Bitcoin losses if the transactions do not follow through. Other risks include that, firstly, any incorrect transactions issued by Bitcoin, or any other digital currency for that matter, cannot be reversed. Secondly, Bitcoin is vulnerable to speculative attack. Speculative attack implies that if investors and large holders of Bitcoins suddenly lose faith in the currency, and decide to relinquish their holdings back into the market, then the supply of Bitcoins will surge. Since Bitcoins are based on pure supply and demand, the rise in supply will immediately drop the price of Bitcoins. Lack of authority to regulate the bitcoin supply (as is typically the role of a central bank) is a major drawback. Any holders of Bitcoins will immediately have deposits that are worth less than they were before. Also, the collapse of the Mt. Gox Bitcoin exchange a few months ago does not signal positive prospects for the digital currency. Digital currencies are not a safe haven for investors or savers in Lebanon. The use of e-money is already prohibited for Lebanese financial institutions and exchanges. However, the use of Bitcoins by private citizens is more ambiguous under the law.
The Lebanese banking system is one of the most secure and successful banking systems in the Middle East. The economy should work on strengthening its own currency, the Lebanese pound, before moving on to Bitcoin transactions. Anarchic systems and almost always hard to regulate, let alone currency systems. Combining the two would only lead to disaster. Entrepreneurs, investors and the regular consumer are fallible. Sometimes transactions don’t go through and incorrect amounts are transferred. Without the support of a legal authority, it would be hard to rectify these kinds of simple issues that you can otherwise avoid by simply using legal tender.
N.C
On December 19th, 2013, the Lebanese central bank issued a public warning against the use of the digital currency, Bitcoin. Banque du Liban will not recognize transactions that have used Bitcoin and this makes the use of the currency within the region all the more unstable. Instead of being verified by a central bank, Bitcoin transactions are regulated by “miners,” or individual users within the Bitcoin exchange system. They ensure that the transaction goes through and legitimize the individuals involved in the transaction. The value of Bitcoin is determined by pure supply and demand. At present, 1 Bitcoin is equivalent to $457 USD. A few months ago, Bitcoins were valued at over $1000! This shows that the volatility of the currency is very extreme. Lack of recognition by the central bank amplifies the risk associated with this volatility even further.
Ironically, the most appealing aspect of Bitcoin for most of its users is the lack of authoritative control over the currency. Identities do not need to be disclosed when a transaction takes place. Banque du Liban claims that this type of currency structure only elicits risk, facilitates money laundering and finances terrorist activities. Indeed, Bitcoin does generate many risks for its holders, especially for Lebanese residents now that it is officially not recognized as legal tender. This implies that any losses generated through Bitcoin transactions cannot be backed by the Lebanese government. In other words, the central bank cannot insure Bitcoin losses if the transactions do not follow through. Other risks include that, firstly, any incorrect transactions issued by Bitcoin, or any other digital currency for that matter, cannot be reversed. Secondly, Bitcoin is vulnerable to speculative attack. Speculative attack implies that if investors and large holders of Bitcoins suddenly lose faith in the currency, and decide to relinquish their holdings back into the market, then the supply of Bitcoins will surge. Since Bitcoins are based on pure supply and demand, the rise in supply will immediately drop the price of Bitcoins. Lack of authority to regulate the bitcoin supply (as is typically the role of a central bank) is a major drawback. Any holders of Bitcoins will immediately have deposits that are worth less than they were before. Also, the collapse of the Mt. Gox Bitcoin exchange a few months ago does not signal positive prospects for the digital currency. Digital currencies are not a safe haven for investors or savers in Lebanon. The use of e-money is already prohibited for Lebanese financial institutions and exchanges. However, the use of Bitcoins by private citizens is more ambiguous under the law.
The Lebanese banking system is one of the most secure and successful banking systems in the Middle East. The economy should work on strengthening its own currency, the Lebanese pound, before moving on to Bitcoin transactions. Anarchic systems and almost always hard to regulate, let alone currency systems. Combining the two would only lead to disaster. Entrepreneurs, investors and the regular consumer are fallible. Sometimes transactions don’t go through and incorrect amounts are transferred. Without the support of a legal authority, it would be hard to rectify these kinds of simple issues that you can otherwise avoid by simply using legal tender.
N.C