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From cash to code: the silent rise of digital currency
In less than a decade businesses will need to accept some form of digital currency as Big Data promotes a shift from cash to code. Just how businesses prepare for that shift will determine who hits the jackpot and who gets left behind.
That’s the message from the former innovation advisor to Hilary Clinton, Alec Ross, who contends that the current exuberance around Bitcoin is akin to the excitement generated by the early search engines.
Ross, a key player behind the campaign that helped carry Barack Obama to the White House in 2009, says that Bitcoin is just the beginning of the digital currency wave, and it probably won’t live to see the day when its kind becomes the norm rather than the exception.
Bitcoin may not survive but it’s clearly laying the foundation of what’s to come.
“The digital currencies out there right now, I think of these as like Lycos, Infoseek, Webcrawler, Altavista – all these old search engines that were around in the ’90s but don’t exist today,” Ross told delegates at the World Business Forum in New York last week.
The likes of Lycos and Altavista may not be around today but they did pave the way for Google and if Ross’ assumption holds true then perhaps we are all waiting for the digital currency’s Google.
When it arrives, in “five to seven years”, as Ross postulates, businesses will need to be prepared.
The rise of crypto-currency is closely aligned to the Big Data trend and Ross believes we are at “chapter one, page one”. While he isn’t sure what kind of digital currency will gain the widest appeal, he is confident a significant shift is afoot.
“I don’t know if Bitcoin is going to stay or if it’s not but what I do know is there are so many incentives in the markets … that in five years many of you will have to accept some sort of digital currency,” he explained.
The incentives to which he refers include bypassing the regulations that come with traditional currency markets and being able to complete financial transactions more quickly.
On the surface, it seems a great step forward for most businesses. The promise of lower fees, less red tape and faster transactions would be appreciated by almost everyone bar governments and banks.
But with change comes challenge, and integrating a digital currency into the business process involves an added layer of complexity that most consider not worth tackling right now.
There are very few, for instance, that currently accept bitcoin in-store. In New York City, however, one bar has taken the plunge.
EVR, in Manhattan, opened its doors to patrons – and eventually Bitcoin – earlier this year. Its owner, Alex Likhtenstein, was a Bitcoin enthusiast who saw the potential for the currency through EVR investor Charlie Shrem – the CEO of a Bitcoin transfer and top-up service.
The payment process right now is a little clunky, but it should improve with time. As it stands, it’s a three step process:
EVR receives the money into its account at the end of each day at the US dollar rate on offer at time of purchase. As such, it has no Bitcoin risk. It does, however, pay a 1 per cent fee to BitPay, but this is less than the around 3 per cent it stumps up to banks in the way of credit card fees.
While EVR may assume no Bitcoin risk, you can’t help but ponder the implications of the digital currency’s volatility on practical use.
Bitcoin owners have witnessed two sharp falls this year, one less than a fortnight ago amid news of the closure of black market Bitcoin user Silk Road, and another, more severe, in April.
Indeed, if you happened to enter EVR on April 10 with one Bitcoin worth around $US250, the value may have been under $US150 by the time you went to pay. That hurts, particularly if you bought a couple of bottles of Veuve Clicquot.
The year-to-date movements of bitcoins in US dollars, with the shifts more like those of a speculative stock than a currency. Source: Bitcoin Charts.
Governments, meanwhile, have a lot to lose. As Ross says, “nothing is more rooted in state sovereignty than currency”. A rise of crypto-currencies would take away control from the central bankers and government.
Policymakers around the world are already looking into the law enforcement challenges of currencies that can’t be tracked, but they will struggle to get ahead of the curve.
Bitcoin, too, is in danger of falling behind as new innovators chase a better system. Right now the volatility of Bitcoin leaves it open to attack from critics and competitors alike. The basic question is: what is it worth?
The value of commodities we can ascribe to physical properties. The value of a currency like the Australian dollar can be attributed to the backing of it by a functioning government to which you will pay taxes. The value of Bitcoin? Well, its worth hinges on what people are prepared to exchange for it. In essence, it has no unique characteristic nor special champion to make it any more valuable than a Super Mario coin.
It brings to focus an analogy put forward in a 2009 play about Enron to describe how its bubble burst so spectacularly:
“You get on a plane, you don’t understand exactly how it works, but you believe it will fly… Well, it’s like that. Except imagine if the belief that the plane could fly was all that was keeping it in the air. It’d be fine. If everybody believed. If nobody got scared.”
In April we saw what happened with Bitcoin when people got scared. But Bitcoin might soon be irrelevant, because if Ross is right, what we have seen so far is just child’s play. When the sector grows up, governments and businesses will have some real counting to do.
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