Bitcoins increasingly seen as potential game-changer

Virtual currency Bitcoin has the potential to be a game-changer according to accounting and consulting giant Ernst & Young, (EY).

EY's view is being seen as the latest sign that banking and finance circles were closely following the controversial digital currency.

According to Colin Pickard, director, financial services - regulatory advisory, Ernst & Young, Bitcoin could bring substantial benefits to the financial services industry by cutting down the costs of cross-border transactions.

He, however, added that unless governments started regulating it, the currency might never ''take off'', as it still faced serious hurdles.

The digital currency comprises a code that could be "mined" using software and the resulting pieces of code could be traded via a number of online platforms or spent on goods where the seller accepted Bitcoin as payment.

The currency has, however, undergone dramatic swings in valuation and due to some criminal activity associated with it, has also gained the unsavoury reputation as a bubble commodity unworthy of serious consideration.

The currency finds favour with many illicit online traders, as the buyer's identity is more difficult to trace than with card payments (See: FBI shuts down illegal drug site Silk Road).

However, according to Pickard and others at EY, who had followed Bitcoin closely for the last year or so, it was beset by myths, and that it would be wrong to think of the digital currency as truly anonymous or particularly vulnerable to hacks.

Opinion however, is sharply divided over the upbeat prospects for the currency which is now attracting greater attention.

According to detractors of the virtual currency, there are tell-tale signs in the currency's stratospheric rise, which saw it increase in value by a factor of six since early November.

They point out the rise would be enough to convince many experts that the boom was the latest in the long history of financial bubbles.

In the 17th century Holland witnessed a tulip-buying mania, when bulbs were being traded for the modern-day equivalent of hundreds of thousands of pounds.

According to one veteran American stockbroker, Art Cashin, the Bitcoin market was just 'trading tulips in real time'.

The uncertainty of the market was brought home recently when Bitcoins plunged dramatically in just one day on the MtGox exchange - from around £800 per coin to £550 - after the People's Bank of China said it was introducing regulations targeting Bitcoins.

The bank said this was being done 'to protect the interests of the public, to protect the legal status of China's yuan currency and to prevent money-laundering risks'.

According to commentators, the danger lay not only in the fact that some governments did not recognise Bitcoins as legal tender, but also that the currency had no physical existence.