Professor Jon Rushman believes that in the long term cyber currencies like Bitcoin could see the end of central banks and foreign exchange and so it is understandable governments are nervous about it.



The new virtual currency has become progressively more popular since the financial crash and its proponents say it will revolutionise banking. Its main exchange, Mt Gox, was raided by the US Department of Homeland Security, who usually deal with terrorist threats, last week.



Rushman (pictured), a former managing director at BlackRock, says: “You can understand why governments are nervous about Bitcoin.



“It is fascinating. I think Bitcoin or something like it has a real place in the future. Imagine a world where foreign exchange doesn't exist, monetary policy doesn’t exist, and there is no inflation. Society would be free to use all the talent currently directed to these issues elsewhere. Meanwhile, governments could still raise taxes and borrow but without uncertainty as to the unit of account.



“That seems far-fetched at the moment, but in an ideal world it could happen. Bitcoin is just another medium of exchange. In the same way that the Euro crosses national boundaries and greatly simplifies real trade in continental Europe, cyber currencies like Bitcoin can do the same globally, without the need for a central bank.



“Profits and losses in foreign exchange are made ultimately because of uncertainty around the value of different accounting units. They exist purely because we have structured our affairs into different currencies tied to different governance structures. In an idealised world, governing multiple currencies and running a foreign exchange market is unnecessary and wasteful. A global currency managed without a central bank could allow society to do something more productive instead.”



For Bitcoin to take hold in the world permanently, Rushman believes it has to tackle the thorny issue of regulation.



“None of the US regulatory authorities have figured how to regulate Bitcoin, as it breaches barriers in our understanding of what a currency is,” says P Rushman. “It is certainly tainted by some speculation that it is used by the criminal underworld, but it is hard to find any evidence that criminals use it more than any other currency.



“Bitcoin needs to work harder on explaining its philosophy and on regulation, they need to do a bit of a charm offensive with the regulators and make them comfortable with it while being true to their principles.”