THE BIGGER PICTURE
You may be familiar with the term "Bitcoin", without understanding its use or the overall concept of "blockchain" or "cryptocurrencies".
A “blockchain” is a digitised, decentralised public ledger. It includes all “cryptocurrency” transactions - namely, all transactions done in digital or virtual currencies (that use cryptography to make them secure). Currently, blockchain technology is used primarily to verify and record transactions in digital currencies though it is possible to digitise, code and insert any kind of document into the blockchain, for example, money printing by Central Banks. Bitcoin became the first decentralised cryptocurrency in 2009.
Bitcoin is perhaps the best known, but it is only one of the many digital currencies in use today. In the present climate, individual jurisdictions taking the risk to be the first to set up Bitcoin trading exchanges in order to increase their revenue will need to have deep pockets, to put hope over reality. Politicians and central bankers are notoriously slow to accept change. China, for example, has recently made it illegal to open accounts for Bitcoin, and South Korea has banned initial coin offerings.
The global banking system, built on the principle of fractional reserve lending, is clearly fragile. In Europe it is undercapitalised. The media ascribes falsely too much power to Central Banks, turning the CEOs into global celebrities. “The lady doth protest too much, methinks,” says the queen in Shakespeare's Hamlet.
Freedom of choice is the stuff of political life. However, political power is addictive and seldom easily relinquished. Central Banks are independent in name only. Allowing a method of exchange to flourish, free from scrutiny and control and without providing tax revenue for the local authorities, does not fit any political narrative.
However, much more than a speculative punt or a way to avoid scrutiny, the concept of cryptocurrency has, over the long term, the potential to change the medium of financial exchange we call money.
The use of digital currency is already being embraced in business. Burger King now offers Bitcoin with its sales as a loyalty bonus! Nevertheless, to succeed as an industry, Bitcoin will need to be regulated; it must be auditable and insurable. The cost of this will be significant.
Institutional investors which drive world markets have remained on the sidelines, as cryptocurrencies are too volatile and lack safeguards. Some may argue that this defeats the goal of enabling them to carry out transactions 'off the grid'. But this argument fails to fully understand the far-reaching potential of cryptocurrency.
A recent move by the precious metals dealer Goldmoney Inc. to offer storage, converting digital currency backed by Gold, is another recent innovation. Goldmoney's financial statements can be audited, clients can be protected against theft and owners can trade ownership. Over the long term, the key to the success of all cryptocurrencies resides in the financial institutions' ability to overcome the current lack of custodial transparency, institutional level insurance, anti money-laundering standards and auditable financial statements.
Blockchain cryptocurrencies are here to stay, and to revolutionise world economy. Eventually, as the extraordinary potential of blockchain is further developed, embraced and regulated, credit and debt markets will be redefined, as will the way that the private and public sector do business and provide finance in exchange for goods and services.
The comments and observations by the author are a reflection of his opinion and do not constitute an offer to buy and hold securities, nor does he receive any remuneration of any kind from names referred to.