Money is evolving, and as more people join the Bitcoin network, the world may see a decline in the use of cash with the wider adoption of cryptocurrencies as legitimate assets. Much like the Internet and its associated technologies, mainstream adoption of cryptocurrencies will encourage a shift in traditional financing to a system more reliant on peer-to-peer payments and decentralized finance. Amid a global pandemic, this shift could see digital payments integrated into traditional banking methods to reduce interactions and mitigate risk of infection, as well as making transactions safer, faster and more efficient.
Several nations have already seen an increase in crypto adoption, with several banks in various stages of research and development of a central bank digital currency (CBDC) for five of the major currencies of the world: namely the U.S. dollar, the euro, the Japanese yen, the British pound and the Chinese yuan, with China leading the charge in terms of progress. Interestingly, emerging markets, such as India, Nigeria and Peru are the forerunners in an exciting crypto-boom, having seen the highest increases in usage during recent months.
Modern digital currencies have evolved to facilitate transactions in a way far beyond traditional methods, like cash or cheque. ‘Digital currency’ itself has existed since the late 90s, when e-gold was commonly exchanged via the Internet. Since then, the rapid growth of technologies and widespread adoption of mobile devices has resulted in the proliferation of e-commerce: inferring a demand for instantaneous transactions, and a more secure digital payments system.
Bitcoin is the most prominent cryptocurrency available, experiencing rapid changes in value due to multiple factors, such as supply, demand, exchange prices and global customer acceptance. Unlike standardized currencies, such as the Dollar or the Euro, Bitcoin is not regulated by a central authority. This means that Bitcoin transactions are inherently more discreet, a characteristic often championed by its proponents. By cutting out intermediaries, fund transfers also carry very low fees, meaning users can avoid traditional and costly bank charges.
Electronic payment methods have already substituted traditional payment options – the introduction of card payments ultimately substituted cheque payments. In a similar way, many countries, particularly those more disconnected from physical payment systems, have already begun adopting Bitcoin as a valid currency. Venezuela, Kenya and Nigeria are examples of such, and feature in a list of countries leading global crypto adoption. There are several operational services around the globe that are driving mainstream adoption. WeChat Pay and Alipay are dominating the payments system in China with their digital wallets. The collaboration between Safaricom & Vodafone on M-Pesa has expanded financial inclusion in Kenya, with 83% of survey respondents reporting a positive impact on their lives. Similarly, Facebook’s anticipated development of Libra, its blockchain-based digital currency intends to ‘support billions of people and transactions through a permissionless network.’
The introduction of these monetary systems, and others like them, could entirely reshape the nature of currency competition: given the dissonance between economic competition on digital networks and traditional currency competition. For example, Amazon and Alibaba have created their own ecosystems for the exchange of goods, enabling near-instant distribution of information. Where geographic constraints would typically impede the reach of physical currency, digital networks circumvent this issue all while servicing millions of participants.
Finance & Data
Smartphone technology has stimulated the evolution of the global payments system, making financial services available to 372 million active users with 290 live services in 95 countries. Similarly, emerging tech will perpetuate this development, and carry with it much broader implications. Big tech companies are stepping into their role as data intermediaries in modern economies, which could have drastic effects on the global payments system. Given that payments are fundamental to all economic activity, a globally available payment network based on cryptocurrency would demonstrate unrivaled access to data. Consider Facebook, Apple and Google, who all leverage sensitive consumer data for targeted digital advertising. It is easy to envision a global payments network leveraging the same tools for a more accurate analysis of economic behavior, or for determining eligibility for various financial services, such as loans.
Such a transformation, in the way that providers and consumers interact, exchange data and make payments, would clearly require a robust regulatory framework. Appropriate regulation would support innovation and would need to be conducive to protecting consumer privacy, while encouraging competition in the market. Emerging trends may lead towards monopolization, so the question of interoperability between payment and social platforms would likely take on new importance.
Cash or Crypto?
Introducing digital tokens that facilitate autonomous, uninterrupted peer-to-peer transactions to social and economic platforms could open up the potential to transcend national boundaries, redefining the way in which payments and user data interact. However, the accompanying regulatory demands will most likely prove to be the biggest obstacle to mainstream adoption. Central banks will similarly be critical to defining the framework and standards for all participants.
The key success factors will be centered on governance and regulation, the continued immutability and transparency of blockchain networks, and fundamental standards that facilitate interoperability. This will also have the effect of eroding the traditional barriers that hinder competition, like switching costs and network externalities: creating a market where the utility of cryptocurrencies would develop in tandem with the growing number of network users. In addition to the regulatory hurdles, people generally trust what they know, and would be reluctant to fully disconnect from their national currencies. Realizing the potential of cryptocurrencies will ultimately depend on the competence of the authority imposing industry standards, which is why the support of central banks is paramount to mainstream adoption.
A Forward Look
Undoubtedly, the international monetary system needs work. Digital currencies can deliver cheaper and faster cross-border payments, settle transnational remittances more efficiently for those least able to afford them, and ultimately improve financial inclusion. Nonetheless, it is unlikely that this will generate monetary denominations that are completely removed from fiat currencies. It is more likely that we will see emerging digital tokens continue to drive innovation in the global payments system, transcending national boundaries and redefining the way in which payments and user data interact. Eventually, dozens of national cryptocurrencies will be accessible on the market, backed by Central Banks within an appropriate regulatory framework.