The Bitcoin frenzy seems to have reached new heights lately, spurred by a growing user base, price volatility, and the rapidly evolving network of Bitcoin-related companies.1 Reports of big investments in "mining" equipment and the expanding ecosystem supporting the protocol remind us in many ways of a gold rush — an analogy made easier by Bitcoin's other similarities to the precious metal. It's hard to say whether this excitement is warranted, but it's equally hard to deny Bitcoin's increasing relevance to businesses and the broader economy. Bitcoin, along with other cryptocurrencies, may have implications not only for the technology industry, where much of the current action is concentrated, but also other industries from retail businesses to financial services. View our infographic to learn about Bitcoin in the context of the financial services industry, particularly payments and banks. What is it about this cryptocurrency that is inspiring such attention and what might the future of cryptocurrencies mean for traditional financial services? 1Ashlee Vance and Brad Stone, "The Bitcoin-Mining Arms Race Heats Up," Bloomberg BusinessWeek, January 9, 2014, http://www.businessweek.com/articles/2014-01-09/bitcoin-mining-chips-gear-computing-groups-competition-heats-up.

1. Risk and compliance
Bitcoin raises many concerns from a
compliance and risk perspective. Risk
governance and internal controls may need to
be developed or updated to account for
Bitcoin and other cryptocurrencies.
Tax and accounting
The adoption of Bitcoin may carry
numerous tax and accounting implications,
among them revenue recognition,
mark-to-market valuation, the characterization
of profits and losses for tax purposes,
the applicability of barter transaction rules,
basis tracking, and hedging considerations.
Operations and technology
Software and other IT investments
may be needed to integrate
alternative digital currency
platforms into infrastructure
and product offerings.
Bitcoin
The new gold rush?
Bitcoin basics
Bitcoin is a cryptocurrency, a digital alternative to traditional money relying on
cryptography for its operation. The Bitcoin protocol, a system of open source
processes, governs the currency and is primarily supported by a peer-to-peer
network. This design also makes Bitcoin a payment network, one that exists
outside the traditional payments system.
Conditions for
mainstream adoption
Pros
• Low transaction costs
• International transferability and convertibility
• Protection from some political risk and inflation
• Basic alternative digital currency problems of supply
growth and double payment/verification solved
• Operation is outside the banking system — immune to
bank failures, but not protected by deposit insurance
Cons
• Currently volatile value
• Limited adoption by retailers
• Combined with other software, anonymity can be
used for illegal purposes
• Lack of trusted intermediaries to challenge fraud
• Potential to expose users’ transaction history to the public
• Uncertainty about security and operational resiliency
• Inadequate mass-market understanding
Stability
Trust
Acceptance
• An increasing number of
businesses accept bitcoins,
but the currency still remains
a niche phenomenon
• The lack of acceptance by
traditional financial institutions
limits Bitcoin’s use
• Without price stability,
widespread adoption
appears unlikely
• Trust may be a challenge
given Bitcoin's complexity,
decentralized system,
operational issues, volatility,
and association with illicit uses
• Lack of consumer protection
may further inhibit trust
• Bitcoin's volatility needs to
moderate in order to enter
the mainstream
• Bitcoin's utility as a medium
of exchange, unit of account,
and store of value will
be limited until stability
is reached
Business
implications
Hedging and
investment services
Firms may consider creating
new investment offerings focused
on Bitcoin, such as index funds
and exchange-traded funds.
$ Business and institutional implications
for financial services companies
Retail and
investment banking
These firms may begin looking at
the acceptance of bitcoins as deposits,
the use of bitcoins as collateral, the
pursuit of business with Bitcoin-related
companies, and Bitcoin trading.
Payments
Transfers between individuals
via Bitcoin are faster, simpler, and less
expensive than those offered by many
financial services companies. Companies
may need to innovate to retain their
dominance in this space.
For more information and to download the full report, please visit www.deloitte.com/us/cfs/bitcoin.
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Institutional implications