Bitcoin's Future & The Emerging Markets Crisis

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Newsstand owner counts Argentine pesos, 01/24/14. Argentina lifted financial restrictions in place since 2011, a day after the peso suffered its worst single-day dive since the 2002 financial crisis.
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The virtual currency Bitcoin means different things to different people.

If you’re the Wiklevoss Twins, who own Bitcoin Trust, it means an estimated value of $55 million.

If you’re Robert Faiella and Charlie Shrem, the two men who run the online exchange Bit Instant, it means charges of money laundering, which were handed down just yesterday by the Manhattan U.S. Attorney’s Office.

And if you’re the New York Department of Financial Services, Bitcoin’s meaning has yet to be determined. But a two-day hearing beginning today could firm up some definitions.

Charlie Herman, economics editor for WNYC, joins The Takeaway to discuss how today's hearings could change our understanding of virtual currency.

"It has this bad reputation right now," says Herman. "Every time we hear about Bitcoin in the mainstream media, or people who aren't paying a lot of attention to Bitcoin, when they do hear it it's often connected to things like illegal gains, trading drugs or pornography—it's getting a bad reputation. But I would also argue that they're trying to push past this."

Herman says that Bitcoin is transitioning away from its bad image as it gains more attention as a financial medium, especially now that the New York Department of Financial Services is taking notice. 

"The financial industry is trying to figure out whether they want to participate in this," says Herman.

If the New York Department of Financial Services comes up with particular rules around this digital currency, Bitcoin may become more mainstream or be stifled, says Herman.

"What they set here in New York state will end up having repercussions nationwide," he says. "Most of the financial institutions being based here will want to follow [these rules] and that will sort of follow with the rest of the country."

The Emerging Markets Crisis

While Bitcoin may be on the rise, the currencies in countries like Argentina, Turkey, South Africa, and Russia are on the decline.

Some call it an “emerging markets crisis”—and even U.S. markets are starting to feel the effect of plummeting currencies and financial and political tumult in developing economies.

Gillian Tett, assistant managing editor and columnist at The Financial Times, predicted the early months of 2014 would bring this sort of turbulence.

"The thing to understand about the emerging markets is they have been hot, hot, hot as far as Western investors are concerned for the last few years," says Tett. "People were looking at the growth rates in America and Europe and said places like Brazil and China look so much more exciting. What's happening right now is they're going from hero to zero—suddenly investors are getting cold feet and starting to panic about some of the fundamental problems in the emerging markets."

Tett says that when looking back over the last decade or so, places like South Africa, India and Brazil made a lot of reforms and changes to their economies. While the changes were appealing to outside investors, Tett says the models adopted by these emerging markets were not sustainable.

"They've kind of been backsliding for the last couple of years," she says. "A lot of the growth that people were excited about until quite recently was because of the reform efforts that they had made about 10 years ago. They've kind of taken their foot off the pedal as far as that reform is concerned so reality is catching up unfortunately."

China seems to be having some of the same problems as other emerging markets, but their problems are a bit more complex.

"There are two big issues with China right now—firstly, it's been a very export driven economy until recently, which means when demand does slow down in a country like America, that hurts Chinese factories," says Tett. "Chinese authorities are trying to re-balance because they know that's not sustainable. They're trying to get Chinese consumers to spend more, but that's taking time to readjust and there are some big, big structural dislocations there. The second big problem is a credit bubble."

Tett says that just like America a few years ago, Chinese banks are currently stuffed with potential bad loans—a problem the nation is finally attempting to deal with.

China and Brazil aren't the only emerging markets facing challenges—Turkey also has big economic problems. Listen to the full interview to hear Tett's take on this European nation.