There's general agreement that Bitcoin has the potential to disrupt and transform the practices and institutions on which the current financial system is built. Whether you are an enthusiastic advocate or a staunch traditionalist, wealth advisors – especially those with fiduciary responsibilities – have an obligation to get educated on the digital currency and understand the implications for themselves, their practice and their clients. To learn more, Hannah Shaw Grove, executive editor of Private Wealth magazine, recently sat down with David Berger, the founder and CEO of the Digital Currency Council, a professional association dedicated to cultivating best practices in the digital currency economy through the training and certification of financial, legal and accounting professionals.

Grove: The Council has attracted almost 1,000 members in just a few short months, pointing to strong demand from professionals for information and governance in an area that is still largely undefined. What was the genesis of the Digital Currency Council?

Berger: I’ve been following Bitcoin over the last 3 years. In my previous role as CEO Americas at Campden/Institute for Private Investors, many ultra-high-net-worth investors expressed an interest in Bitcoin.  They had lots of questions and were intrigued by the potential, but when I spoke with their wealth managers I was met with shoulder shrugs and a general lack of knowledge. It became clear to me that advisors and other financial professionals would need to develop an expertise on digital currencies because their clients would demand it.    

Grove: Can you briefly describe how Bitcoin works today?

Berger: Bitcoin is colloquially called “e-mail for value.” If you think about e-mail, it’s a technology, a network, and a communication. Similarly, Bitcoin is a technology that today primarily facilitates a transaction network.  The unit of account that is utilized on that transaction network is also known as a bitcoin, typically denoted with a small “b”. 

The technological breakthrough that underlies Bitcoin, known as the blockchain, is a transparent open source accounting ledger. The “magic” of Bitcoin is that it allows the transfer of value online without the support of a trusted third party, significantly reducing the friction and fees typically charged for facilitating such transfers.

Grove: I have heard that Bitcoin can change the types of risk traditionally associated with being a buyer and a seller. Is that the case?

Berger: Bitcoin flips the concept of risk on its head. It requires trust in math – an algorithm – not a third-party intermediary to complete a transaction. Further, much like cash, transactions are irreversible once conducted, eliminating the potential for charge-back fraud that plagues many merchants who accept credit card payments.   

Grove: It sounds like Bitcoin has huge implications. Can you elaborate?

Berger: Bitcoin has the potential to enable new and disruptive business models across the global economy. Most immediate is the application of micropayments or small payments not feasible with credit cards due to the minimum fees charged by card companies for transactions. Remittances are also almost certainly to be disrupted. Already today more value is transferred each day over the Bitcoin network than through Western Union.  In sum, as Bitcoin adoption increases, charging high rents for standing in the middle of a transaction or permitting the use of a proprietary transaction network will no longer be a sustainable business model.

Grove:  Are there applications for Bitcoin beyond use as a currency?

Berger:  Absolutely, one of the most interesting is that Bitcoin allows for each unit of value to be programmed for a specific use.

Grove: Does that mean that charitable contributions can be earmarked for specific activities? Or, in more practical terms, that a parent could give a child money for text books and clothes and be confident that the money wasn’t spent on, say, video games and cigarettes?

Berger: There are entrepreneurs working on exactly that application right now. The blockchain technology also permanently records events, whether contracts or publications or anything else. Bitcoin allows for applications that had never before been imagined and likely many that have yet to be imagined. 

Grove: Has Bitcoin helped create new wealth?

Berger: A lot of wealth has already been created and much more is likely to be generated in the future.  My expectation is that the wealth created from Bitcoin will rival the fortunes created by the internet.

The Bitcoin economy has grown and changed exponentially since the concept was first presented at the end of 2008. The value of bitcoin, while volatile, has grown from zero to more than $300 a unit. At one point, in early 2014, each unit was valued at more than $1000. Over $300 million of venture capital has poured into businesses in the ecosystem and companies have emerged to raise and manage Bitcoin-related assets. We are talking about something truly revolutionary with tremendous growth potential.

Grove: In Reinventing Finance (Private Wealth, Nov/Dec 2014) venture investor Marc Andreessen talks about the opportunity that crypto-currencies have to reinvent the entire financial system outside of the current processes. What does that mean for the role of trusted advisors?

Berger: First, financial advisors must provide real and valuable advice to survive.  Anyone that simply sits in the middle of a transaction will be dis-intermediated over time. Second, financial advisors need to get educated on the opportunities and risks presented by Bitcoin. Those that do can be part of defining the future of finance. Those that don’t will miss this exciting phase and be left to determine how they can best function in a redefined environment.

Grove: What’s the regulatory landscape for Bitcoin like now and how do you expect it to change over the short-term?

Berger: Today, the regulatory landscape is opaque. Multiple regulatory agencies and the courts have asserted authority, often with opposing views. Most are attempting to fit Bitcoin into existing frameworks. Only the State of New York has proposed a new framework, developed specifically for Bitcoin.  Whatever the outcome, most in the Bitcoin ecosystem look forward to the day when there is a level of regulatory certainty within which they can conduct business.

Grove: What are the real and potential implications for financial advisors?

Berger: Bitcoin has value because it is scarce and useful, and those characteristics have led to significant interest amongst investors and their advisors. But compliance departments have been putting up gates and to date, most – though not all – advisors are restricted by their clearing, custody and regulatory platforms from presenting clients with opportunities to gain exposure to Bitcoin. That said, suffice it to say that every financial services firm on Wall Street and across the globe is looking at the opportunity to determine how they can participate and benefit. I expect many will overcome the compliance challenges in 2015, opening a sea of opportunity for well-prepared financial advisors.

Grove: Are there any resources you can recommend to our readers if they want to learn amore about how Bitcoin works?

Berger: There is almost too much information available on Bitcoin today, particularly for the casual observer and computer scientists.  The Digital Currency Council offers a 45-minute introductory online course specifically designed for financial professionals, as well as more in-depth curriculum for those who are interested in pursuing certification and building the leading financial institutional of tomorrow.