This evolution will take decades to fully play out, - historical transitions take their time. But, it’s most definitely underway, with an increasing number of market pilots and research studies taking place around the world.

Just about every aspect of the world’s economy is involved. Over time, mobile devices will truly become our personal windows into an increasingly global, digital economy. And, because continuing technology advances are now enabling us to bring the empowerment benefits of the digital revolution to just about everyone in the planet, digital money is a truly inclusive innovation with no apparent digital divide . Mobile phones and Internet access have gone from a luxury to a necessity that most everyone in the planet will soon be able to afford.

The evolution to a digital money ecosystem involves a lot more than the transformation of money - cash, checks, credit and debit cards, etc, - from physical to digital objects that we will carry in our smart mobile devices. It encompasses the whole money ecosystem, including the global payment infrastructures , the management of personal identities and financial data, the global financial flows among institutions and between institutions and individuals, the government regulatory regimes, security and privacy issues, and so on.

Ever since I joined Citigroup as a strategic advisor in March of 2008, I’ve been spending a lot of time thinking about the ongoing transition toward a global digital money ecosystem . For over 2,500 years , money has played a central role in the rise of civilizations and in human affairs of all kinds. As a result, the historical transition to digital money is among the most exciting and important societal challenges in the coming decades. Its impact might well be up there with that of other major technology-based societal transformations, including electricity, radio and TV, and the Internet and World Wide Web.

When discussing digital money, I often get asked my opinion of Bitcoin. My answers have not been all that good because I honestly don’t know what to think of Bitcoin. I usually tell people that the development of digital money ecosystems is such a complex undertaking that it’s best, at least for now, to stick to traditional currencies, e.g., $, £, €, ¥,₩, that all the parties involved understand. Introducing new cryptocurrencies into the mix at this time adds all kinds of additional complications which we might be better able to deal with once the evolution is well underway.

Bitcoin is both a digital currency and a peer-to-peer payment system. Introduced in 2009, it uses cryptography to control the creation and transfer of money. It’s not backed by central governments or banks. Its standards, protection and promotion are governed by the Bitcoin Foundation. Having been implemented in open source software, Bitcoin’s sophisticated protocols are widely available, which has helped bring it increasing usage and prominence.

The last few months in particular have seen a flurry of articles on Bitcoin by a number of highly respected technologists, economists and journalists. Some, like my friend and former IBM colleague John Patrick, feel that “Bitcoin has all the trappings of the early days of the web.” Others are pretty negative.

So, I decided that it’s time for me to look deeper into Bitcoin, read a number of these recent articles, see if a consensus about its future is beginning to emerge, and try to form my own opinion. Based on the articles I read, no consensus is at hand, their titles ranging from Why Bitcoin Matters to Why I Want Bitcoin to Die in a Fire. I did find the articles quite instructive in helping to shape my own opinion, which I summarize at the end of this blog. Let me explain how I got there.

Why Bitcoin Matters is one of the most prominent recent articles, published in the NY times by technologist, entrepreneur and investor Marc Andreessen. Andreessen compares Bitcoin in 2014 to personal computers in 1975 and the Internet in 1993. His VC firm, Andreessen Horowitz has invested close to $50 million in Bitcoin-related start-ups, and continues to actively search for additional such investment opportunities. In his column, Andreessen points out that there is an enormous gulf between what the press, economists and others believe Bitcoin is, and what a number of technologists and entrepreneurs like him are so excited about:

“First, Bitcoin at its most fundamental level is a breakthrough in computer science - one that builds on 20 years of research into cryptographic currency, and 40 years of research in cryptography, by thousands of researchers around the world. . . Bitcoin gives us, for the first time, a way for one Internet user to transfer a unique piece of digital property [e.g., money, signatures, contracts, stocks and bonds,] to another Internet user, such that the transfer is guaranteed to be safe and secure, everyone knows that the transfer has taken place, and nobody can challenge the legitimacy of the transfer. The consequences of this breakthrough are hard to overstate.”

He particularly values Bitcoin as a new kind of peer-to-peer payment system, “a way to exchange money or assets between parties with no pre-existing trust. . . the first Internet-wide payment system where transactions either happen with no fees or very low fees (down to fractions of pennies). Existing payment systems charge fees of about 2 to 3 percent - and that’s in the developed world. In lots of other places, there either are no modern payment systems or the rates are significantly higher.”

As a digital currency, Bitcoin has been quite volatile, with large fluctuations in value over days, weeks and months. Most recently, the exchange rate of a bitcoin has been fluctuating between $600 and $900. Its volatility is largely due to speculation and relatively low payment volumes. Despite its positive qualities as a highly secure digital payment system, many believe that the currency’s volatility will likely drive away the vast majority of individuals and merchants. Andreessen disagrees:



“The criticism that merchants will not accept Bitcoin because of its volatility is also incorrect. Bitcoin can be used entirely as a payment system; merchants do not need to hold any Bitcoin currency or be exposed to Bitcoin volatility at any time. Any consumer or merchant can trade in and out of Bitcoin and other currencies any time they want.”

A few weeks ago, technology journalist Glenn Fleishman wrote an article refuting a number of Andreessen’s arguments. The article starts out by agreeing that Bitcoin represents a major innovation in payment systems:



“I agree with Andreessen that Bitcoin is the first practical, large-scale mechanism to deal with the problem of decentralizing trust - no parties need know each other nor trust each other for transactions to complete successfully, verifiably, and irrevocably. . . I also agree completely with Andreessen that Bitcoin can be used for an enormous number of non-currency related purposes in which permanent, irreversible proofs of transactions are required.”

But he then goes on to argue with many of the points made by Andreessen, including Bitcoin’s liquidity and low fees, and its advantages related to fraud, theft and other illegal activities. This past November, Fleishman published an article in The Economist, Bitcoin under Pressure, where he notes in the tag line: “It is mathematically elegant, increasingly popular and highly controversial. Bitcoin’s success is putting it under growing strain.” He goes on to explain his concerns:

“Bitcoin’s success has revealed three weaknesses in particular. It is not as secure and anonymous as it seems; the mining system that both increases the Bitcoin supply and ensures the integrity of the currency has led to an unsustainable computational arms-race; and the distributed-ledger system is becoming unwieldy. Will Bitcoin’s self-correcting mechanisms, and the enlightened self-interest of its users, be able to address these weaknesses and keep Bitcoin on the rails? . . . Perhaps Bitcoin, like the internet, will smoothly evolve from a quirky experiment to a trusted utility. But it could also go the way of Napster, the trailblazing music-sharing system that pioneered a new category, but was superseded by superior implementations that overcame its technical and commercial flaws.”

Fleishman believes that Bitcoin offers an opportunity to reimagine how the financial system can and should work in the Internet era. But he makes a distinction between its future as a technology and its future as a currency. “Bitcoin shows a path for massively more secure, reliable, and sensible ways to store value and move it around. As a currency, I have little faith that it will become a replacement for dollars, euros, or renminbi. As a model for a future payment and transaction system, I believe it’s already shown its value.”

Fleishman’s conclusion, which I agree with, is similar to Karen Webster’s, a top payments expert, who wrote in Looking Ahead at the Close of 2013: “Our prediction is that those who are in the best position to exploit bitcoin’s success will be those who recognize that there’s a difference between the technology that enables bitcoin and bitcoin the currency and will invest in perfecting the former and not the latter.”

A number of the articles were quite negative. At a panel in the 2014 World Economic Forum in Davos, Yale economist and Nobel Laureate Robert Schiller said that Bitcoin “is just an amazing example of a bubble.” As reported in Business Insider, Schiller said that while he finds Bitcoin to be an inspiration because of the computer science, he does not think of it as an economic advance and views it as a return to the dark ages. Schiller, an expert on economic bubbles, believes that much of its fascination is due to its extreme volatility.

Another Nobel Prize winning economist, Paul Krugman chose the title Bitcoin is Evil for one of his recent NY Times columns. Krugman’s main reason for his negative views is similar to that of author Charlie Stross, who wrote a strong critique of Bitcoin in Why I want Bitcoin to die in a fire:

“Like all currency systems, Bitcoin comes with an implicit political agenda attached. Decisions we take about how to manage money, taxation, and the economy have consequences: by its consequences you may judge a finance system. . . Bitcoin looks like it was designed as a weapon intended to damage central banking and money issuing banks, with a Libertarian political agenda in mind - to damage states ability to collect tax and monitor their citizens financial transactions.”



Finally, there is the question whether Bitcoin and other virtual currencies should be subject to financial regulations, similar to those currently in place for existing currencies. Anti-money laundering is one such regulations enforced by governments around the world to curtail illicit activities like the flow of money from the drug trade and the financing of terrorist activities. Bitcoin has been linked to such illicit activities, which has led to a few recent arrests. Governments have started looking at how to regulate Bitcoin and similar digital currencies.

“The days of anonymous transactions in Bitcoin and operating an exchange with no outside interference are over,” was the concluding paragraph in this article on the subject. “As virtual currencies develop, firms devoted to aiding trading, and perhaps even their users, will encounter greater government regulation, along with the costs that come with compliance.”

So, after reading and reflecting on these various articles, here is how I would now summarize my views on Bitcoin: