The future looks shiny for coin with no country

Bitcoin isn't ready for popular consumption, and it may never be.

It doesn't fit into a neat product category. Often called a virtual currency, it's not legal tender anywhere on the planet. It's not an income-generating asset class suitable for most investors. Its value fluctuates wildly, from one minute to the next. And while it can be a cheap way of transferring money, there are too many glitches in its emerging network for bitcoin to be reliable.

Even its advocates have raised red flags. As Patrick Murck, general counsel for the Bitcoin Foundation, a not-for-profit devoted to "fostering the bitcoin ecosystem", acknowledged in a Senate hearing last week: "It's very much still an experimental currency and it should be considered a high-risk environment for consumers and investors at the moment."

But bitcoin embodies an elegant and disruptive technology. It uses file-sharing, the peer-to-peer computer innovation that spawned early music services like Napster, Kazaa and LimeWire.

Bitcoin gives file-sharing a brilliant twist. In essence, it has created "a decentralised virtual currency that uses a peer-to-peer consensus system to confirm and verify transactions", two researchers at the Federal Reserve Bank of St Louis concluded in a recent study. And Francois Velde, a senior economist at the Federal Reserve Bank of Chicago, made this assessment in a new report on bitcoin: "It represents a remarkable conceptual and technical achievement, which may well be used by existing financial institutions (which could issue their own bitcoins) or even by governments themselves."

Speculators and money launderers have already found much to like about the relatively anonymous digital currency, and that has forced the government to play catch-up. Bitcoin allowed the website Silk Road, which the government shut down in October, to become "the largest illegal drug and contraband marketplace on the internet", said Jennifer Shasky Calvery, the director of the Treasury's Financial Crimes Enforcement Network.

Federal and state authorities are requiring firms that exchange bitcoin into currency, or use it to transfer funds, to comply with existing regulations. But when the exchange takes place in a country where US authorities do not have access, "there may be opportunities for money-laundering", said Jeffrey Neuberger of law firm Proskauer.

Even with all of its problems, the eventual creation of a reliable, decentralised, peer-shared, computer-based currency remains the holy grail in some circles. Back in 1999, Milton Friedman predicted its eventual arrival. Markets would flourish in cyberspace, freeing people from what he considered the stifling grasp of a paternalistic and inefficient government. But one ingredient was missing, he said. He called it "a reliable e-cash", that would enable you to "transfer funds from A to B, without A knowing B or B knowing A".

Unfortunately, that would create new problems, he said. "The gangsters," he said, "the people who are engaging in illegal transactions, will also have an easier way to carry on their business."