Bitcoin's rise to more than $260 and cyber attacks on Mt Gox designed to cause panic selling did little to generate confidence in Bitcoin as a true currency. However, the drama that accompanied the bubble - Bitcoin's second since 2011 - did offer many non-geeks a first glimpse at the experimental currency. It boldly has two aims: to enable direct online payments unmediated by financial institutions, and provide a means to protect the digital currency's integrity without a trusted third party, such as a central bank. Satoshi Nakamoto, Bitcoin's attributed creator, described the electronic cash system in 2008 as "fully peer-to-peer, with no trusted third party". Despite Bitcoin's bubbles, bursts and dire predictions for its future, the currency is showing signs of maturing by way of associated services such as BitPay, which offers merchants a fee-based "Click to Pay" processing service with some protection against its volatility. There are a clutch of Australian merchants that also accept Bitcoins, such as Patchd and honestbeef. Berlin-headquartered start-up 9flats, an online service for short-term accommodation seekers, began accepting Bitcoin at the height of the latest bubble and uses BitPay to lock in the exchange rate at the time of transaction.

Despite these signs of growing acceptance, Bitcoin still lacks the trust consumers have in other payment services and, in turn, transaction volumes that might attract financial industry support. Trust may be its biggest issue, says Chris Hamilton, chief executive of the Australian Payments and Clearing Association, the bank and credit union-owned company that clears payments between Australian financial institutions. "All payment systems are fundamentally about trust," Hamilton tells IT Pro. ''The system needs to be widely accepted by market participants, and backed by a belief the currency can't be devalued by someone printing cash or falsifying it,'' he says. Bitcoin's finite and controlled supply, and its cryptographic protections may partly satisfy doubters, but, Hamilton says, ''at the end of the day … the conceptually difficult thing about Bitcoin is 'who is that?'" Interestingly, despite several hacks against Bitcoin exchanges and thefts from personal Bitcoin e-wallets, the underlying system that ensures the currency's integrity - for example, to prevent the double-spending risk peculiar to digital cash - has never been hacked. But Bitcoin's foreignness does not mean it lacks value to commercial banking, according to Bitcoin Foundation board director and vocal proponent of the digital currency, Jon Matonis.

"Bitcoin is not the enemy of banks; bitcoin is the enemy of central banks, which bestow unsanctioned privileges on the banking system via the fractional reserve system," Matonis tells IT Pro. "At the core of the banking business is depositing and lending which can be a legitimate business function with Bitcoin. On the other hand, central banks are made irrelevant by Bitcoin so they will attempt to hamper Bitcoin's growth." It could, for example, provide banks foreign exchange, transaction escrow and merchant payment revenue streams, while providing Bitcoin additional liquidity and conversion options. However, viewing Bitcoin through the banking business model could also steer banks away from it, according to Australia-based financial cryptographer Ian Grigg. "Banking converts deposits into loans. Banks gain money on loans, so they pay money to get deposits. Any use of the Bitcoin unit will reduce the need for deposits. Therefore Bitcoin is [counter] to the interests of banking and of banks," Grigg says. Perhaps the most immediate obstacle to banks' direct involvement with Bitcoin is compliance.

"There are massive anti-money laundering concerns about this virtual currency. Currently it appears that some if not most of the demand at the moment is for illegal activity. Fraud is another significant issue," OzForex chief currency strategist Jim Vrondas says. Banking veterans agree. Simon Lelieveldt, a Dutch payments and banking consultant believes the likelihood of banks directly accepting Bitcoins is "close to zero". "The whole banking sector is filled with know-your customer and ID-requirements," he says. "The rules against money laundering may be interpreted in such a way that being involved in anonymous payment schemes without ID-check constitutes 'assisting in money laundering'." The one place banks may find a place in Bitcoin is supporting exchanges like Coinlab, which in February announced a partnership with Mt. Gox that would see it take over the Japanese exchange's North American accounts and hold those deposits with Silicon Valley Bank.

A fortnight after the partnership was sealed, the US Financial Crimes and Enforcement Network issued guidance clarifying that miners who sold Bitcoins and exchanges that facilitated their conversion to US currency would need to adhere to anti-fraud record keeping requirements that other money service businesses are required to. IT Pro asked Australia's Commonweath Bank which is at the forefront of technological developments whether it was considering accepting Bitcoins as part of its electronic payment options. It declined to comment Follow IT Pro on Twitter

