Beginning on the 13th of September, a French court will start working toward an important legal decision on Bitcoin, with the goal of answering the question, “is Bitcoin a virtual currency?”
At present, there is nothing inherently illegal about accepting Bitcoins. When questions arise in the community about such issues as income-tax implications, it is oft-quoted that trading in Bitcoins falls under the laws that govern bartering. So what’s the difference between trading in Bitcoins and trading in bananas? Really, it comes down to the potential for money-laundering (bananas are an inefficient medium for laundering money), which is why it’s essential that a legal framework be put in place to govern businesses that facilitate Bitcoin transactions, like the exchanges.
As far as merchant risk is concerned, the legal status of Bitcoin is a non-issue, as it really is nothing more than a new type of payment processor, like Visa or PayPal, only cheaper and more efficient to use. Worst case for most merchants, if there was a legal problem with Bitcoin, they could instantly remove the functionality and carry on with business as usual.
The likely outcome of the court ruling will be that Bitcoin exchanges and banks, at first those doing business in France and then eventually elsewhere, will be required to have their customers and transactions documented to satisfy the laws to which fiat currencies are bound. While this might come as a blow to those who bank (excuse the pun) on the pseudo-anonymity of Bitcoin, it actually represents the next step toward its legitimization and mainstream acceptance. It is likely that many businesses are currently reluctant to dabble in Bitcoin due to its disproportionately reported association with the drug trade and money-laundering, however, if the currency is given billing as a legitimate currency, albeit virtual, it will surely mark the kick-off of the inevitable next phase of significant growth in the Bitcoin economy.
Ahh, but you ask, "why is it inevitable that the Bitcoin economy should grow?" The answer is simple: efficiency.
We now live in a globalized economy with ever-expanding free-trade agreements and reduced trade tariffs, yet moving money internationally is still slow and wrought with fees, and that's for your average business, let alone an individual.
The adoption of almost every major technological development, from the telephone to computers to email, has been driven by one common goal: increased economic efficiency. Any business that uses new technologies will have an advantage over its competitors. This advantage gives early adopters of these technologies the choice to increase profits or to pass savings to their customers, both being good for business. Those who don’t adopt new technologies will not be competitive.
At present, the efficiency gains are there, but have not been completely realized; merchants still need to convert Bitcoins to local currency to pay their bills and re-stock their shelves, with typical currency conversion fees on Bitcoin exchanges in the range of 0.6%. Volatility risk and currency exchange fees can be absorbed by payment processors like bit-pay at a cost of two percent, which still beats services like square, who charge 2.75% for processing credit-cards. That fee, however, does not take into account charge-backs. For merchants, Bitcoin has a major advantage over its competitors in that transactions are non-reversible. For consumers, the finality of a Bitcoin payment is not a show-stopper, as long as they're dealing with reputable merchants. When dealing with merchants of questionable integrity, services such as ripple will eventually fill the gap.
Imagine Bitcoin tomorrow: merchants will be able to keep their money in Bitcoin as they become able to pay their suppliers, anywhere in the world, without converting currencies. Volatility risk will subside as the economy grows and the Bitcoin production rate drops; efficiency gains will be fully realized.
We can share any piece of information with anyone in the world, instantly, yet financial transactions lag behind. This post is actually being written by two people at the same time. We live in different countries, and I can see his typing and he can see mine, yet before Bitcoin, I would not have been able to share money with him (not that I'm making any money with this post!) without losing a significant portion of it to a middle-man (likely PayPal) in both transaction fees, currency exchange fees, or both.
Using PayPal, assuming no transaction fees and only exchange fees, if I sent 10 USD (worth 9.97 CAD at current exchange rates) to a person who wanted CAD, they would receive 9.70 CAD on their end, after fees were deducted, resulting in a 2.8% charge.
Bitcoin is, quite simply, a more efficient way of moving money than has ever existed before, and with the growth of the Bitcoin economy and the adoption of some of the enhancing applications that are soon to come, like Open-Transactions, its efficiency will only improve.
It will be interesting to see how the French court words its ruling, but the fact that they're even speaking the word "Bitcoin" is significant. This important step toward realizing mainstream legitimacy, combined with already existing and ever-improving efficiency gains, will accelerate growth of the Bitcoin economy, propelling it toward inevitable wide-spread adoption.