Bitcoin Friend or Foe

Posted on January 22, 2015

IFA Jonathan Beardmore gives his views on the future of Bitcoin

A couple of years ago I was alerted to a phenomena called Bitcoin. Bitcoin for those of you who don’t know, is a crypto currency and was originally utilised by the online gaming community.

Even with it’s somewhat nerdy origin the fundamental principles behind Bitcoin are robust and ever since it first appeared Bitcoin has gradually been making in-roads into the mainstream until last Saturday I found in a Manchester Fish & Chip Shop which accepts Bitcoin.

So what is a crypto currency? Without getting too technical Bitcoin is digital money, it is obtained by a community of miners, who solve a mathematical problem and as a reward receive Bitcoin’s.

Each Bitcoin is then logged on a ledger which is maintained by the Bitcoin community and is public for everyone to see.

Describing exactly how Bitcoin works is a very complex subject and one which is far beyond my capability. If you’re a really interested then quick google search will tell you all you need to know.

For those of you who still think that Bitcoin is a little niche and will probably never take off, you may be right. However here are some facts that make you think otherwise.

A bitcoin is currently worth about £200.
In 2003 Bitcoin was £764 (worth more than an ounce of gold)
The FBI currently owns 1.5% of all Bitcoin.
In 2010 a man swapped 10,000 Bitcoins for a pizza (now worth £4.2 million)
Bitcoin computing 10,000 times more powerful than the worlds 500 super computers.
The largest Bitcoin transaction $114,000,000
It costs many hundreds of thousands of dollars to power bitcoin mining computers such is complexity of the mathematical problems the miners need to solve.

So regardless of your views regarding Bitcoin it is now a substantial operation worth many billions of pounds. Indeed the Winklevoss twins (made famous by the movie The Social Network and Facebook) have launched their own Bitcoin ETF for those investors who wish to add Bitcoin to their portfolio.

Now we know a little bit about Bitcoin are there any practical uses of a crypto currency and might it effect clients and their financial decisions.

Been digital means bitcoin have allot of advantages over traditional currency, it allows for micro payments, it can be stored on devices such as laptops, phones and computers and most excitingly you can program it.

Programming currency may revolutionise the way that money is handled, in particularly how money is gifted to the third sector or placed into trust. Let me give you two examples of traditional ways that people

a) Would gift money in to trust.

b) Give to charity.

In my first example where a grandparent wants to gift money to a grandchild explicitly for education they have a number of conventional options open to them.

Maybe the grandparents have set up a Child Trust Fund or a Junior ISA although this may grow to a large enough size to fund such things as University education it is only accessible at age 18 and there is no guarantee that the grandchild will spend the money on education. In fact they may go out and buy a Porsche.

Another way to do this may be to set up a trust with an expression of wish to the trustees that the money is only to be used for education. However you have all of the complexities of Trust law, trustees, and tax returns and if the grandchild doesn’t go into higher education – what becomes of the money? Not to mention the expense of setting up a trust.

Theoretically you could code a crypto currency so that it could only be spent with certified educational providers you could also add further lines of code onto the currency to ensure that if the grandchild hasn’t used the funds for education by a certain date it could revert to another cause, maybe a charity or better still revert to the grandparents.

This is far cheaper than setting up a trust and with a lot more control than gifting funds directly to a grandchild. In essence it gives you a very cost efficient way to ensure that the grandparents money is spent in a way in which they intended it to be.

For charities this could be better still. If an individual likes the idea of gifting to a charity but is put off by the charities high administration costs and bureaucracy they could code their money only to be able to buy certain things, for food grain or tents for shelter. The options are limitless.

Programming money also gives rise to the idea of smart contracts, contracts that automatically activate once certain perimeters have been met.

There could also be implications for financial planning.

Returns could be colour coded to identify capital growth or income, making tax calculations much easier (particularly important for trusts), a similar method could be used to code ISA tax years making it easier to annualise investment decisions.

Micro transaction would also help investors get exposure to smaller firms within large investment funds and the Bitcoin network could replace the existing trading platforms, increasing liquidity and decreasing trading costs.

Transaction fees for remittances of money to other countries would come down substantially too, some fee for remittances can be as higher the 30% of the money been remitted.

A digital currency would also be free of government manipulation, theoretically it would be impossible to debase a currency as there is only a finite amount of currency in existence and printing more is not an option. According to some estimates since 1913 the USD has lost 98% of its value. Digital currency savings would be wonderful for risk adverse severs as inflation would if the grandchild hasn’t used the funds for education by a certain date it could revert to another cause, maybe a charity or better still revert to the grandparents.

Programming money also gives rise to the idea of smart contracts, contracts that automatically activate once certain perimeters have been met.

There could also be implications for financial planning.

Transaction fees for remittances of money to other countries would come down substantially too, some fee for remittances can be as higher the 30% of the money been remitted.

Finally I can help with transparency in charges, money as before could be programmed for certain uses meaning the investor would not have to worry about hidden charges and commission as the money they invested would be programmed not to allow it. It may also be programmed so that a discretionary manager only receives payment should certain targets be achieved.

Digital Currency is still in its infancy and has many floors yet to be resolved, but hopefully I have highlighted a few ideas about how such an innovation could be used help individuals achieve their financial planning goals. As I write this there are no main stream financial products available to retail investors in the UK and certainly non that are regulated by the FCA. However if you have any ideas regarding Digital currency we are always interested in how new applications of technology my in the future affect our clients.

For further information contact Jonathan Beardmore on 0161 785 3500 or email jonathan.beardmore@pearsonlegal.co.uk

Please note that the information and opinions contained in this article are not intended to be comprehensive, nor to provide legal advice. No responsibility for its accuracy or correctness is assumed by Pearson Solicitors and Financial Advisers Ltd or any of its members or employees. Professional legal advice should be obtained before taking, or refraining from taking, any action as a result of this article.

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