By Ralf Gladis, CEO, Computop
Are global cryptocurrencies the future? Do they solve the problems of a world in which there are 166 different currencies and present a progressive alternative to money controlled by central banks? Or will they unleash a dark underbelly of unprincipled individuals driven by their own interests? This debate has raged since the 2008 global financial crisis, when bitcoin, the world’s best-known cryptocurrency, was first conceived.
Many organisations are betting on its success, confident that its value will increase. The Canton of Zug in Switzerland now accepts tax payments in bitcoin and in the US, you can buy or sell it via PayPal. On the 12th anniversary of its creation Bitcoin hit a new high of $30,000.
On the flipside, however, bitcoin is a byword for volatility. In the 12 months to the end of January 2021, it traded at between $5,000 and $40,000, according to Bloomberg. It’s also, in some circles at least, a byword for “dirty” money, associated not only with the shadow economy and the criminal underworld but with environmental damage. The energy consumption needed to mine bitcoin and maintain it through algorithms has a hefty carbon footprint.
So what’s the truth?
Money or nothing?
Cryptocurrency is not actually good for much. In the world most of us inhabit, you can’t buy anything with it, so while cyber criminals demand it as ransom for the release of hijacked computer data, it hasn’t reached critical mass in a way that encourages e-commerce merchants to accept it.
Bitcoin does get publicity. Take the news, much trumpeted in summer 2017, that you could now pay by bitcoin wallet in 260,000 shops and restaurants in Japan. All this meant was that the manufacturer of a free app that turns the iPad into a POS terminal had integrated bitcoin as a payment option.
So far, no-one gains any practical benefit from exchanging their yens, euros, dollars, pounds and francs for virtual coins. In fact, switching back and forth only makes the payment process more cumbersome.
Cryptocurrency communities distrust institutions such as the ECB or the US Federal Reserve because their money-market policies influence the stability and exchange rate of currencies. By operating outside a regulated system, however, they expose themselves to less predictable risks. They also forgo consumer-friendly achievements such as buyer protection — and, as we’ve seen, lay themselves open to charges of irresponsibility.
Bitcoin draws parallels with ponzi schemes from history such as the South Sea Bubble and, more recently, with the dotcom bubble of the 1990s. But viewed more sympathetically, it can be seen as a noble experiment that went wrong and /or had unintended consequences. It was, after all, devised as a protest against a monetary system that brought countries to their knees during the last economic downturn (prior to the Covid pandemic).
Bitcoin was a field test for blockchain technology. The maximum transaction volume was several orders of magnitude lower than that of a conventional international payments system; the supply of the money was capped at 21 million units. It was not meant as a currency for the long term and in essence, was built on sand.
Alternatives to bitcoin
Meanwhile, thousands of alt-coins have appeared on the web. Most of them are financing vehicles — Initial Coin Offerings (ICOs), the virtual equivalents of IPOs — and, with one or two exceptions, they disappear as quickly as they came.
So what’s the future of cryptocurrency, if it’s not bitcoin? It’s still possible that another crypto coin will become the relevant currency. After all, there are still plenty of supporters of idea of a state-free digital parallel currency. The problem is that it’s hard to win interest and trust when most people think of cryptocurrency as a high-risk asset class. One of the biggest ironies of bitcoin is that it was born of a lack of trust — in financial institutions and governments and central banking systems — and it could die of it, too.
Political backing could save cryptocurrency, potentially. So far attempts by countries to introduce official currencies with crypto technology have failed — or else been associated with governments not readily associated with democracy and transparency. Estonia made headlines in late 2017 with plans for an “Estcoin” that would have run parallel to the euro. Six months later, however, the matter was off the table. In Venezuela, the despotic president Nicolas Maduro obtained extra state revenue by issuing the virtual “Petro” – but no-one can now buy anything with it. Only a handful of central banks have progressed to the soft launch / pilot phase, according to the Bank of International Settlements (BIS).
State cryptocurrency and Big Brother fears
In another ironic twist, replacing the government-backed currencies with as many official or state-regulated cryptocurrencies would do the opposite of what Bitcoin was intended for. It would not create a digital equivalent to anonymous cash, but instead reassert the control of nation states or central banks over citizens’ wallets. No government or community of states would allow a technology that prevents them from prosecuting money laundering and tax fraud.
In the conventional banking system, transaction data is distributed among many institutions, and access by investigators is subject to judicial review. In contrast, the blockchain of a cryptocurrency like bitcoin is a huge database that irreversibly perpetuates all transactions and is completely transparent to anyone who manages to assign a wallet to a person. In order to apply the Know Your Customer principle, that presents people from transferring vast sums anonymously, the authorities would need access to wallet addresses — and a law requiring this would be nothing less than an invitation to abuse the technology.
Carpe Diem? Facebook enters the fray
To add to the debate, in June 2019 Facebook announced the launch of its own cryptocurrency: Libra (now known as Diem). The Californian company has founded a Geneva-based consortium of 27 tech giants and financial companies for the purpose of “printing” money. Diem is cryptographically secured, but there the resemblance to bitcoin ends. To guard against volatility, Diem transactions are to be backed by hard currencies, in much the same way as gold once backed the US dollar. The news was announced only after heavyweights Visa, Mastercard, PayPal and Uber had officially agreed to co-operate.
Of course, the crucial question is what advantage this offers Facebook, Instagram and WhatsApp users given that Facebook has no significant experience as a trading platform? The fact is that since the company has probably more than a quarter of the world’s population in its user databases, if just a quarter of them were to pay with Diem, over time the consortium members — all of them private companies — could be among the largest creditors of the central banks.
Diem may never become systemically relevant as a parallel currency, but important political questions need to be asked in case it does. How would national supervisors set limits for the financial multinational? Which politician would dare to scare the Diem consortium out of the country if it didn’t submit to national rules?
Diem promises to do good for “unbanked” people and migrant workers who send money home from rich countries. While traditional international transfers are often outrageously expensive, newer providers advertise low fees and sometimes do not charge a commission if the recipient has an account or a credit card.
Final thoughts . . .
When bitcoin was first introduced it generated a level of excitement that indicated that the time was right for a digital means of payment that could be used internationally, anonymously and reliably, without incurring excessive fees for the customer. It was designed to generate complete trust between two parties to a transaction — and it is this level of trust that a well-positioned global payment service provider can create today.
We have the partnerships, the technology and the tools for seamless, fast and fair service — regardless of the customers’ preferred payment methods and their virtual or offline route to the retailer. The future is already here — but bitcoin and other cryptocurrencies don’t feature heavily in it.
Global Banking & Finance Review
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