Bit-coin; the Emperor’s new clothes?

Bit-Coin; the Emperors New Cloths?

I have been maintaining a passing interest in the development of the Bit-Coin phenomenon but I must say my initial interest essentially began with the usual disbelief.  However over the last few months there has been an increasing amount of media relating to various aspects of the phenomenon, it is this ongoing analysis that I am now beginning to find somewhat intriguing.

I remember many years ago chatting to one of the very senior partners of Andersen’s who was located in Chicago and was describing the work of some financial “whizz-kid’s” that were located downstairs in the same building.  His amazement had grown from the fact that these people were effectively creating money from nothing more than a pen and paper.  These were the creators of new financial instruments that would become the foundation of many new financial transactions the world over.

It is fair to say that quite a number of these documents have done much to make working in the new financial age both easier and more efficient, providing products that fit the specific needs of modern financial situations that had previously not been able to be squeezed into the standard rack of products that financial institutions had been offering to that point.

Whilst I do proffer the positive side of this period one must not lose sight of the Sub-Prime Loan debacle that saw these same “whizz-kid’s” creating something from nothing that was in fact ultimately to prove that it was in fact actually nothing!  The aftermath of this is still not quite over as actions continue to endeavour to recover losses from advisors insurance policies.  Discuss it with almost any number of Local Councils, but I digress.

My current spark of interest in Bit-Coin has resulted from the various machinations that the Australian Taxation Office (ATO) is having over both their status and their use.  From one perspective they could be considered to be some whimsical web idea that has no revenue issue at hand, much akin to the many loyalty style points that web games can accumulate as they spend copious hours entertaining themselves on the web.  As such, to the extent that they may be used to transfer real value that would ordinarily be taxable if done with real money, then the processes relevant to bartering may well suffice.  However if it is a true “currency” then those same provisions would not apply and revenue would potentially be lost on a technicality.

The ATO, and I’m sure the problem is also of concern to a number of other national revenue bodies, therefore must decide whether it is going to declare that Bit-Coin is actually a currency, even if only a virtual one?  Sounds strange doesn’t it?  If the ATO make such a declaration then is it legitimising something that may otherwise be considered a myth, or are they in reality just ensuring that the revenue base and grab are responsibly thorough?

If we go back in our own history you will discover that the first sugar cane in this country was actually grown in Point Clair on the Central Coast.  It was not done as the foundation of the sugar industry in this country, no, it was actually grown for its by-product, rum!  Rum was of course a “currency” at that time in this State.  Put simply it was growing money!  As the real economy took over and rum was left behind its value was lost and no doubt the land turned to alternate uses or crops.

In the Andersen Fairy Tale of the ‘Emperors New Clothes’ it was the fear of not wanting to contradict the ruler that had everyone agree to the magnificence of his new outfit even though he stood before his subjects stark naked.

So too, will it be the ATO, and other similar regulatory authorities, that will give that final point of credence, and having done so will such credence provide Bit-Coin with long term value?

I’m not really sure but for me for the moment I think I might remain both fully clothed and sticking with investments and currencies that retain a genuine credence, just in case.