You can view the full publication here which covers the future of FinTech, London vs. other financial capitals, buyside implementations, CTRM, devops, digital currency, fast-growth and handling fast-growth periods and regulation in financial services.
Money is strange. If I need to pay someone in the same room as me, I can hand them a token directly. But if I need to pay someone at a distance, I have to trust one or more third parties to relay that token to the eventual recipient. Not only am I reliant on these third parties existing, I am also subject to whatever rules and fees they choose to apply.
In 2008, Satoshi Nakamoto published a white-paper presenting Bitcoin, a ‘peer-to-peer electronic cash system’. This new system suggested a fundamental change in the way that value can be transferred. The paper said that value could be transferred at distance without reliance on any trusted third parties. The implications of such an innovation, if it were to be widely adopted, are enormous.
Further, the use cases for such a system go far beyond currency and payments. At its heart, the technology behind Bitcoin is a distributed asset register, which could be used to exchange tokens representing any asset, again without reliance on trusted third parties. This potential for revolutionising value transfer has led to comparisons between the current state of Bitcoin, and the early days of the Internet, an information transfer system.
In addition to Bitcoin, there are already a number of other similar currencies, such as Litecoin, Ripple, and Dogecoin. There are also a number of projects building more advanced functionality, such as derivatives and smart property, on top of Bitcoin, including Mastercoin and Counterparty. While none of these have yet garnered the same level of interest as Bitcoin, they demonstrate the enormous amount of innovation happening in the space.
So are digital currencies about to go mainstream? Should we all jump on board, and ditch our existing banking systems? Not yet. There are a number of obstacles on the road to widespread adoption. Regulators are taking a cautious approach, not wanting to move too quickly until they can get a better handle on how the new technology will be used. The EBA recently issued guidance in which it noted the potential of digital currencies, but also advised regulated financial firms to think carefully before getting involved.
Digital currencies are still in a very embryonic stage, which brings with it a number of teething problems. To start with, understanding among users is fairly limited, from consumers to merchants to speculators. Consequently, price volatility of Bitcoin versus the dollar is high, making its use as a currency problematic. Further, the number of merchants who accept Bitcoin as a means of payment is still small. Bitcoin also has image problems, having been subject to a fair amount of press hyperbole around its potential use for illicit trade.
Some of these issues are to be expected in any early-stage technology. Many of them also take a narrow view, focussing only on Bitcoin as a currency or payment protocol, rather than stepping back to appreciate the underlying technological innovation. The key to Bitcoin, as previously mentioned, is the distributed asset register which allows value transfer without reliance on trusted third parties. The range of potential applications for such a technology is vast. There is already discussion of using it to improve custodianship systems for equities, bonds, land registry, and more.
So who is taking advantage of these early opportunities? As a currency, Bitcoin is being accepted by a number of merchants (including Expedia, Overstock, and many more) who see it as a cheaper option than Visa, MasterCard, and other traditional payment methods. Uptake amongst retail customers has been slower, as it is still not particularly user-friendly, nor are there many clear benefits yet to entice users. Speculators are starting to trade Bitcoin more actively, thanks to its current volatility. There are also a raft of venture capital-backed companies starting to provide digital currency services, who clearly see the long-term potential of digital currencies and hope to profit from building the necessary infrastructure (Elliptic, Coinbase, Blockchain.info, Circle, Xapo, BitPay, etc.).
Bitcoin and other similar digital currencies are certainly a technological breakthrough, but have a long way to go before they’re widely adopted. Exactly what their major use cases will be remains unclear, but there’s enough momentum already to suggest that they’ll have a role to play in the financial world. At the very least, this is a time for stakeholders to educate themselves on the potential of this new technology. At most, it could completely change the way we think about money.
This article is published in Harrington Starr’s third FinTech Capital magazine. You can view the full pdf here which covers the future of FinTech, London vs. other financial capitals, buyside implementations, CTRM, devops, digital currency, fast-growth and handling fast-growth periods and regulation in financial services.