FIS Blog

Cryptocurrency Versatility


James Hutchison | Thursday, June 23, 2016

How Public Blockchain Currencies Continue to Go from Strength to Strength

Few technologies have been the subject of such fervent debate as cryptocurrencies in the past decade. No longer a fringe payment mechanism, many billion-dollar businesses readily accept payments in currencies such as Bitcoin and Ethereum. In fact, Bitcoin currently has surged past $700 per coin as it approaches the “halving” event (the date after which Bitcoin miners begin to get half the amount they currently get for mining Bitcoins). Regardless of your opinion, the rise in popularity of virtual currencies cannot be ignored.

Economics 101 tells us that money is created and distributed by governments and central banks. The reason is simple: control the production and distribution of the officially accepted money of the realm and you can control everything. But crypto-currencies are, in most cases, peer-to-peer. They don’t require a government or bank in order to function: people exchange cryptocurrencies for goods and services without the involvement of any state, central bank or, indeed, any bank.

Public vs. Private

While the big name public cryptocurrencies have grabbed all the headlines, we are already seeing new, private virtual currencies springing up that satisfy smaller payment niches. To many banks, as well as startups looking to serve the legacy financial industry, cryptocurrencies – specifically blockchain – have some enticing features and advantages. However, since they are peer-to-peer and uncontrollable, they are seen as either risky or of limited strategic value. Perhaps the biggest appeal of public blockchain currencies is the fact that they are open source; anyone can jump in and trade or use the currency anywhere in the world and according to a known set of rules.

Private cryptocurrencies, which run on permissioned blockchains in secured environments, make a lot more sense as they could operate more efficiently, predictably and profitably than the unruly public Bitcoin blockchain. Banks and large organizations see a strong potential role to administer private currencies for much narrower and focused use-cases than the more generic public currencies. In contrast to large-scale public currencies, private blockchain infrastructure is accessible only to entities that have been sanctioned by the administrator (bank), with strict limitations on the uses made of the system. In these cases, the currency is just a medium of exchange to facilitate whatever that blockchain is facilitating.

Standing on the Shoulders of Giants

The irresistible growth in the use of cryptocurrency platforms can be put down to entrepreneurial innovation and an ability to fill gaps in traditional banking infrastructure. No matter the brand, the underlying open public distributed blockchain matters. Once the infrastructure is in place and has reached critical mass (as many would argue Bitcoin has already), startups can build out financial services without the need to invest in the prohibitively expensive global infrastructure; they simply build applications and services on top of the cryptocurrency ecosystem and they can launch financial services without the need for a data center, a large IT department or massive hardware overheads.

The ability for any entrepreneur with a good idea to have ready access to an open source payment mechanism is fueling an explosion in new and innovative niche financial services. Often, these services target constituencies and geographies underserved by traditional banking providers and, consequently, bypass them altogether.

The prevailing view of these currencies is that the value of each is based on the potential of a currency’s ecosystem itself to provide market value. Buying Ether or Bitcoin is effectively like buying a share of stock in the ecosystem. The value rises and falls with the success of the ecosystem and its uses in the real world by public and private entities. The degree to which the currency “takes off” impacts the value of the currency like a share in company stock.

Reports of the Death of Cryptocurrencies Seem Increasingly Ridiculous

The uses-cases for privately operated blockchain currencies are certainly interesting, but the potential for public cryptocurrencies is quite simply fascinating. We have seen many examples in history of currencies being established by both private and public entities — tribes, kingdoms, trade guilds, private banks, and nations. Crypto-currencies are the latest technological advancement in allowing groups to establish custom designed currencies. We see banks and nations working to establish their own digital currencies and these are interesting experiments. Bitcoin however has already established a global footprint and proven itself to be incredibly resilient and dynamic. It has weathered several severe storms and has proven its usefulness on the global stage. The key point here is that the world’s most compelling example of digital currency is completely public and peer-to-peer. It is truly a global, cloud-based financial utility available to anyone who has a connection to the Internet.

Those who say Bitcoin and Ethereum are, or will become, irrelevant are simply wrong. Cryptocurrencies are not just schemes in use by fringe libertarians and hackers. Nor are they simply tools to circumvent laws; they are production-grade financial tools in use for legitimate and exciting purposes, with truly open global financial services that bypass traditional banks’ infrastructure. Some suggest that blockchain-based payment systems could even surpass the volume of the U.S. Automated Clearing House financial transactions network by as early as 2020.

Not only is public cryptocurrency usage set to accelerate, the underlying blockchain technology will form a core part of the next generation of the Internet and will radically transform not just commerce, but the nature of corporations and many of our institutions across society. Everyone needs to pay attention to this.

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Tagged in: Blockchain, Consumer Engagement, Digital Wallets, Digital Currency, Financial Institutions, Retail, Rewards, Security, Strategies, Point of Sale, Bitcoin, Alternative Payments

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