“A few weeks ago you suggested that the current experiments with BitCoin were "nothing but a fad". At the time I was prompted to disagree but got diverted with other things.

“Now I see the interesting initiative today from the Canadian Mint http://business.financialpost.com/2013/09/19/canadian-mint-pushes-ahead-in-murky-world-of-crypto-currency-with-mintchip-project/ which I thought you might want also to comment on.

“I have been interested in this area for about 10 years, when I got involved with some of the cryptographic theory which underpins real "bitcoin" developments (though I hasten to add I am no cryptographic expert). You were right to caution that BitCoin is competing against governments. Despite all this, I believe this form of digital; currency will happen. One really important reason is that true digital currency eliminates transaction settlement - a process that is hugely costly to banks and other financial intermediaries. Just consider what the cost of cheque settlement is (it's physical paper) and how these unnecessary costs distort the real cost of doing business. Digital currency is the equivalent of real coinage - when I give you a £ or a $ - it's over, done and dusted. No settlement.

“With kind regards”

Eoin Treacy's view Thank you for this informative email which highlights the on-going discussion about the nature of money and financial system more generally. The attached article and particularly the associated comments make for interesting reading.

There are two issues that seem to be conflated when talking about Bitcoin. These are whether Bitcoin is a currency and its use as a medium of electronic exchange. Let's look at this topic from first principles. Money is a store of value, a medium of exchange, a benchmark against which value can be ascertained and a reflection of confidence in government.

Fiat currencies represent the most accepted forms of money. Gold and the precious metals, diamonds, fine art, rare stamps and coins can all also be exchanged for goods and services but might be considered a first order derivative since not all institutions will accept them. Bitcoin's then can be considered a second order derivative in terms of its currency credentials because its supply is not as constrained as other “valuable” items.

Bitcoin's strength is in its ability to make paperless transactions across borders without incurring banking fees. This feature ensures that a place for some iteration of Bitcoin will inevitably evolve over time. However, the weight of regulatory burden that weighs on financial transactions, in order to protect consumers, represent a challenge for virtual currencies. Accurate record keeping and “know-your customer” rules all represent challenges for these types of crossing networks evolving from a niche to the mainstream. Tax is also an obvious issue and is why governments are traditionally hostile to competing currencies.

At present, Bitcoin might be compared to a backyard sale when compared to the high street in terms of its size and influence on the wider economy. Some major innovations, not least in the regulatory framework, will be required to change that.

This chart of the price of Bitcoins may also be of interest.