Virtual Currency: The Currency of the Future?

By Shawn Dougherty June 16, 2014

Shawn DoughertyI first learned about bitcoins last year and talked about the topic in my post, “A Bitcoin for Your Thoughts,” on September 12, 2013. I’m still not a bitcoin user, but I have to say that virtual currencies continue to provide a fascinating study of how technology can change the world. Imagine if you could purchase goods in any country without converting currencies or worrying about exchange rates. Imagine the power that could be provided to people under tyrannical regimes that use the national currency as a tool of oppression. The political and economic potential for digital currency extends as far as the imagination. However, the potential pitfalls of non-state-supported currencies extend just as far.

Just this year, the Internal Revenue Service (IRS) issued guidance that digital currency be treated as property and its value tied to the exchange rate at the time of the transaction. In addition, if the currency increases in value, it will be taxable income.

Virtual currency is not recognized as legal tender anywhere in the United States. The guidance that the IRS provides allows businesses to use virtual currency but doesn’t extend any legal oversight.

The European Banking Authority (EBA) has issued a consumer warning that virtual currencies are not protected by any regulations and the value of virtual currency has no guarantee. Further, the warning states that people who use sites that store or exchange virtual currencies have no legal or regulatory protections should those sites fail or go out of business.

The potential pitfalls and lack of state or regulatory currency support are significant hazards preventing the widespread acceptance of virtual currencies. But with the global proliferation of data access and smartphones extending to places where banks and other merchant solutions don’t exist, virtual currencies could be the building blocks of economies in struggling nations throughout the world.

Imagine a farming community in Uganda able to trade directly with distributors anywhere in the world. A virtual currency could eliminate many of the middlemen who do little more than siphon funds away from those who need them most. Imagine charities channeling funds directly to local groups, avoiding corrupt government agencies.

But a virtual currency such as bitcoins has its own risks. All one needs to do is look at what happened with the bitcoin exchange Mt. Gox or the black market website Silk Road to get a sense of those risks.

I think it’s safe to say that virtual currency is certainly in its infancy and much needs to be done to build the trust and stability necessary to obtain wide acceptance. For now, though, we’ll just have to take a wait-and-see approach.

If you have any questions about cyber risk or cyber insurance, please feel free to e-mail me at sdougherty@iso.com. You can also follow me on Twitter @doughertyshawn.


Shawn Dougherty

Shawn Dougherty is the assistant vice president of ISO's Specialty Commercial Lines Division. He is responsible for providing the overall direction, leadership, and client service for ISO's cyber liability (e-commerce), D&O (management protection), businessowners, crime and fidelity, financial institutions, employment-related practices liability, and professional liability (other than medical) insurance programs. He is also the ISO product manager for the Lloyd's Wordings Repository, an electronic database of policy wordings and clauses regularly used within the London market. Mr. Dougherty has worked at ISO since 1988.