Bitcoin: Marketing gimmick or next global currency?

As Canada’s second bitcoin machine is installed this week in Toronto and its virtual value continues to amaze, a new study looks at the promise and peril of the controversial currency that is quickly gaining popularity.

The Montreal Economic Institute says the so-called “crypto currency” has some promising attributes, but needs more clout before it can potentially go mainstream.

The biggest hurdle for bitcoin is that it operates in a legal “grey zone,” says the report titled “Bitcoin: More Than a Currency, a Potential for Innovation.” Central banks in countries such as China and France are criticizing bitcoin for its risk as an unregulated payment system. It's also more susceptible to fraud, the report argues.

"While it represents a fascinating innovation with a good potential for success, an appropriate legal and regulatory framework will need to be adopted,” writes Montreal Economic Institute CEO Michel Kelly-Gagnon.

“Its wide-scale use depends on the reinforcement of investor confidence in order to mitigate remaining risks and concerns.”

For some, it’s the risk that makes bitcoin so attractive.

A number of investors have lost faith in the regulated banking system, particularly after so many banks around the world failed during the 2008-09 global financial crisis. Many bitcoin advocates believe they’re getting in on the ground floor of what could become the next global currency.

Others are simply in it for speculative bet. Bitcoin’s value soared from $140 (U.S.) in early October to a record $1,242 in late November, before falling to around $600 a few days later. It’s currently trading just under $1,000.

Some high-profile bitcoin investors to date include the Winklevoss twins, known for their involvement in Facebook. Vancouver-based junior mining company Alix Resources Corp. also made headlines when it said in November it plans to pay a contractor with bitcoin. However, plans to also set up its own bitcoin exchange were scrapped, at least temporarily.

The world’s first bitcoin-enabled bank machine opened in a Vancouver coffee shop last fall, and another was set up near King and Spadina in downtown Toronto this week.

The currency is also starting to be accepted across a number of industries. B.C. developer Quantum Properties has started accepting bitcoin for deposits on homes, according to Business in Vancouver, while beverage company Clearly Canadian said last month it too would start accepting the currency. Clearly Contacts recently became the first major Canadian ecommerce retailer to accept bitcoin, says the Vancouver Sun.

While skeptics might look at the growing bitcoin bandwagon as a marketing tactic, the Montreal Economic Institute study says the currency could eventually gain credibility.

For example, consumers and merchants could continue to be lured by lower transactions costs and fees. Banks might offer it as a way to lure more customers.

“The bitcoin infrastructure could serve as a technological platform for many banking products and services, thereby allowing financial institutions to improve their service offerings," says the study’s author, David Descôteaux.

The report predicts more consumer-protection services will be offered for bitcoin users in the future, to minimize the risk of fraud.

Still, the currency has a long way to go before becoming widely accepted, and must pass a number of legal and regulatory leaps.

The report doesn’t rule that out.

“Such a framework could strengthen consumers’, retailers’ and investors’ confidence in bitcoin, and hence encourage its use on a large scale,” it says.

After all, most change begins with a healthy dose of pessimism.

Remember when we thought ATMs and online banking were a risky way to handle our money? Of course, some still do.