Although so many people refer to bitcoins as a “digital currency” (myself included), a expert on digital currencies says they actually aren’t. Alex Hern of The Guardian reports that an expert from Ernst & Young, a professional services firm, explained some of the myths about bitcoins, including the idea that they could one day replace “fiat” money.

Bitcoins

Bitcoins versus fiat money

Roger Willis has been keeping an eye on bitcoins since they first surfaced in 2009. He says fiat currency is money which governments have declared as legal tender. Of course bitcoins are not seen as legal tender. According to Willis, they weren’t even developed to be a replacement for fiat currency.

He said bitcoins were developed for use in ecommerce and “micro transactions” rather than as a replacement for dollars, euros and pounds. Indeed, regulators from the U.S. have noticed that bitcoins may hold promise as an online payment system rather than a currency.

Changing the shape of bitcoin risks

Because of this different view of bitcoins, he notes that the risks for investing in them look different as well. He said those who criticize bitcoins are often focused on price volatility and also their “deflationary nature.” There are only ever going to be 21 million bitcoins in existence, which is why some fear they could be deflationary because each unit could get comparatively more valuable as time goes on.

Hern notes that deflation is frequently blamed for Japan’s “lost decade,” and the spokesperson from Ernst & Young said that they hold the view that “mild positive inflation” is the best scenario for a national currency. However, he said deflation isn’t necessarily a problem for something like the bitcoin, which is really more of an ecommerce tool.

What the risks of bitcoins really might be

Willis focused more on fraud and speed as being the real dangers associated with investing in bitcoins. The bitcoin network is able to “confirm” transactions using them every 10 minutes. According to Willis, it takes five or six transaction confirmations to be sure that bitcoins haven’t been spent twice, and that can take 40 or 50 minutes at times. This could leave the door open for increased fraud in bitcoin transactions.

Some retailers do accept unconfirmed bitcoins as payments, but not all of them are able to afford the risk, especially if what they sell is expensive. Willis sees “definite positive gains” through lower costs of transactions, but also major negatives in accountability, dealing with anonymous users and regulation of the market.