Despite the huge potential of the segment, digital currencies remain some way from providing major exits. There are still many risks associated with the industry that established players and investors are unlikely to take on. However, as regulation and legislation becomes more straightforward, business transfer agents will likely see growing demand for digital currency operators, as well as associated businesses.
Legality and security major obstacles
The relative youthfulness of digital currency has meant that governments are yet to develop significant regulation for it, while security has been evidenced as a major flaw:
- A number of digital currencies have emerged from the underground of the online domain, and, as a fringe payment tool. have been widely used in semi-legal activities. As a result some, such as Bitcoin, have been embroiled in money laundering allegations. The currency’s mantra of keeping transactions anonymous has led governments to take a tough stance on Bitcoin practices, hurting its acceptance by the mainstream;
- The US government ruled in March 2014 that Bitcoin, and by extension all digital currencies, will be treated as property rather than currency. In essence, this means that it is liable to taxes and regulations for any forms of transactions, lessening its appeal as a money transfer tool. With the USA one of the world’s largest Internet and finance markets, home to almost 300 million mobile Internet subscriptions in 2013, this is a significant blow to digital currency expansion;
- Weak investments in security and the storage of digital currency within an Internet-based environment have exposed the segment to large-scale intrusion and theft. According to trade sources, Bitcoin to the value of US$1.0 billion had already been reported as lost to cyber theft in the first half of 2014, with Bitcoin “banks” such as Flexcoin and Mt. Gox folding as a result. Consumer confidence in digital currency as a space for monetary safekeeping is extremely weak.
Improving security is vital to the future prospects of digital currency, and industry insiders suggest that the segment is currently experiencing a clear-out of the weakest entities. It is hoped that only serious institutions survive and are then able to build the necessary framework for digital currency, and especially Bitcoin, to thrive. With the world’s Internet users growing rapidly, more consumers are likely to be attracted by a currency that is affordable to transfer. Vital to the survival of digital money could be the crossing of the digital divide by the low-income, emerging-market, foreign labour segment, which is usually slow to adopt new technologies.
Businesses willing to bet on the success of digital currency can also succeed in attracting more consumers. Online firms including eBay, PayPal, WordPress and Reddit accept Bitcoin for example, and international consumers are likely to be attracted by the savings to be made from frictionless payments. State acceptance is likely to be one of the primary challenges for digital currencies, as traditional entities such as central banks and financial regulatory boards view the segment with suspicion. Working with governments to gain entry to new markets will be especially crucial for digital money exchange platforms, which will increasingly rely on mobile-based transactions.
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