Virtual currency Bitcoin is the trigger that will set off a flood of private money projects, predicts think-tank the Institute of Economic Affairs.

Bitcoin has been steeped in controversy since hitting the world wide web in 2008.

Governments have accused users of involvement in organised crime; drug dealing and illegal arms sales while struggling to come to terms with how to tax treat the currency.

Bitcoin only exists in an electronic format and users have been prone to hacking attempts, fraud and birth pangs and hitches in the system.

Key to Bitcoin is the currency exists away from the control of any central bank and the value is not aligned to a default currency, like the US dollar.

The institute says this freedom will drive other financial players into the arena and will lead to rival private money set ups.

Governments should not stifle competition

This rush for private cash is fuelled by a desire for privacy and to escape from financial restriction, says the report New Private Monies: A Bit-Part Player? by Kevin Dowd.

Dowd argues that central banks should embrace competition rather than try to suffocate private currencies at birth as users have more choice.

One of the main issues highlighted by the report is because governments do not have any input to the management and generation of private money; they struggle to come to terms with how to tax them, which is an attraction for users.

As tax networks like the US Foreign Account Tax Compliance Act (FATCA) start restricting offshore investors, Bitcoin and other private currencies are likely to gain a foothold as an alternative to former tax shelters.

Bitcoin lets users ring fence their wealth, invest free from government control and maintain privacy. The value of a Bitcoin has rocketed from 2 pence in April 2010, when the currency was first traded, to £530 in January 2014.

Financial freedom

Dowd reckons Bitcoin will likely be replaced by improved private money. He points out the competitors like Litecoin, Namecoin and PPCoin are already in existence and gaining ground and credibility with users worldwide.

Mark Littlewood, director general at the Institute of Economic Affairs, said: “Individual freedom will benefit from governments encouraging private currencies rather than trying to restrict them.

“Bitcoin is leading the way as an alternative currency and giving back financial freedom to people. Now the door is open, a surging demand will drive the development of other new currencies that will build and improve on Bitcoin’s success.

“Governments must know this is a movement that will not go away.”