Virtual cash: The new payment frontier?

VIRTUAL currencies such as Bitcoin - also known as cryptocurrencies - have long been viewed with a mixture of disdain and distrust. Distrust because there has been talk of these "currencies" being used to anonymously buy things such as guns and drugs from sites such as Silk Road and Black Market Reloaded. And disdain because peer-to- peer cryptocurrencies do not have a central bank backing their value. Bitcoins don't exist physically; they are just computer files, and algorithms have capped the total number of Bitcoins that can be "mined" by computers solving complex cyptographic problems at 21 million in order to prevent "inflation". Also, unlike real world coins, each Bitcoin can be "broken" down into 1,000 "pieces" for payment purposes.

Bitcoin was first "developed" in 2009 by a little- known cryptographer going by the name "Nakamoto". Its attraction is easy to understand. Existing online payment systems such as PayPal and credit cards always take a cut either from the buyer or seller.

Bitcoin looks attractive because there are no middlemen involved and hence no cuts. Bitcoin fans also celebrate the fact that there is no central bank-type authority regulating the currency. However, as a senior official of the Bank of England said recently, "economies perform better when they have managed monetary policies" that only a central bank can provide.