Despite the hype since the launch of bitcoin in 2009, digital currencies still have a long way to go to become a widely used medium of exchange. Their arcane nature baffles laymen, reinforcing the perception that the blockchain, the technology underpinning digital currencies, remains the preserve of libertarians, tech geeks and even criminals using this new tool to hide the spoils of their activities. Many luminaries of the financial world openly express their disdain for the new game in town. Last September JPMorgan Chase’s CEO Jamie Dimon dismissed bitcoin as a “scam only useful for drug dealers, murderers and North Korea”.
Central banks show the way
All that can change if cryptocurrencies, as digital currencies are known, gain favour with the protectors of the financial realm: central banks. Many of them are already toying with the idea. A consortium of Japanese banks has announced the launch of the J Coin, a cryptocurrency backed by the Japanese central bank, ahead of the Tokyo Olympic Games in 2020. Estonia, a European leader in digital innovation, announced in 2017 its plan to launch a state-based digital “Estcoin”, although it was forced to roll back the plan after pressure from the European Central Bank. A 2017 survey by Cambridge Judge Business School found that 40% of central banks are considering using blockchain technology in the future, including issuing their own cryptocurrencies.
Some economists see such developments as a step in the right direction. Rod Garratt, Professor of Economics at the University of California Santa Barbara and former Vice President of the Federal Reserve Bank of New York, said: “If cryptocurrencies prove to have characteristics that people desire, then central banks should at least consider providing alternatives that feature these characteristics.”
A game-changer would be a cryptocurrency issued by a major central bank. The closest example so far is the forthcoming launch of a digital currency by Riksbank, Sweden’s central bank, a plan that could possibly enable every Swedish citizen to have an account with the central bank. But critics allege that this might be easier to implement in a society where nearly all payments are made electronically, such as Sweden, rather than the rest of the world where cash is still dominant. For others, central banks venturing into this territory may be shooting themselves in the foot. Dr Jon Danielsson, Co-Director of the Systemic Risk Centre at LSE, said: “A central bank cryptocurrency that removes the ability of the central bank to adjust the supply of money to suit the economy is a bad idea.”
The technology itself poses several problems. “There are technological issues related to scalability and security that have to be fully resolved before any form of central bank adoption of cryptocurrencies can take place,” adds Professor Garratt.
Some envisage the emergence of a cryptocurrency that would serve as a global reserve currency, mitigating the impacts of a future financial crisis similar to the credit crunch in 2008. Bancor Network Token (BNT), issued by Bancor Network, a cryptocurrency protocol and exchange, claims to be just that. Not coincidentally, it was named after the supranational currency John Maynard Keynes had envisaged in the 1940s. Last May, former White House advisor Gary Cohn predicted the emergence of a global cryptocurrency, marking however that this will not be bitcoin. But critics dismiss such aspirations as premature or just unfeasible. Dr Danielsson said: “Each country will want to hold onto the revenue they get from money and be able to adjust the supply of money to suit the economy. That precludes a global cryptocurrency.”
Corporate cryptocurrencies on the rise
Another way digital money may gain traction is adoption by tech powerhouses, which can introduce billions of users to this new tool. Telegram, a popular messaging app, launched its cryptocurrency in February 2018, aptly called Gram; this was followed in August by Line, the Japanese developer of a messaging app used by more than 200 million people. The same month Intercontinental Exchange (the owning company of the New York Stock Exchange), Microsoft, BCG and Starbucks announced the launch of Bakkt, a platform that will enable users to convert their digital assets into fiat money. Even Amazon has been reported to have purchased blockchain-related domain names, sparking speculation that the company, whose valuation recently surpassed the $1trn threshold, will launch its own cryptocurrency or cryptocurrency exchange. Rhiannon McGregor, Foresight Writer at The Future Laboratory, a UK trend-forecasting agency, said: “By allowing consumers to purchase products from around the world within Amazon’s own financial ecosystem, the company could streamline the buying process and forego the price volatility that accompanies current exchange rates.”
For critics, this resembles a fad rather than a response to a real gap in the market. Antonio Fatas, Professor of Economics at INSEAD, said: “Current currencies are providing a very stable means of payments for individuals and companies. As we have seen with the current versions of cryptocurrencies, they are volatile and not efficient enough to challenge the current model. And it is unlikely that a new cryptocurrency will address their shortcomings. This feels like a solution looking for a problem that does not exist.”
The social cryptocurrency
If there is one company that has the power to make cryptocurrency a household name, it is Facebook; with 2.2 billion users using its services for an average of 35 minutes daily, the social network has a unique advantage in the scramble for cryptocurrency dominance. The company has hinted that it may experiment with the technology, although it has banned adverts promoting digital currencies and initial coin offerings (ICOs), an increasingly popular way for blockchain startups to raise money by issuing their own currencies. David Marcus, former head of Facebook Messenger, announced through a Facebook post last May that he will lead a research group exploring potential uses of blockchain technology. The announcement sparked rumours that Facebook is keen on launching its own currency for uses as wide-ranging as paying users to post content and facilitating online transactions. Ms McGregor said: “A Facebook cryptocurrency could be incorporated into the brand’s rapidly expanding Marketplace, but it seems more likely that the social media giant will launch its own cryptocurrency exchange, offering its network of users easy access to a whole world of cryptocurrencies and thus catapulting them into mainstream usage.”
The company’s founder, Mark Zuckerberg, has never hidden his interest in blockchain. Last January he posted that his “personal challenge” for 2018 would be to explore the benefits of cryptocurrencies and blockchain technology. These “take power from centralized systems and put it back into people’s hands,” Mr Zuckerberg wrote, adding: ”I’m interested to go deeper and study the positive and negative aspects of these technologies, and how best to use them in our services.”
Critics fear that corporate cryptocurrencies may extend the grip of tech powerhouses over a crucial market such as finance. But in the brave new world of the blockchain, it is disruption that is the norm, rather than the continuation of the status quo. New players and risks may arise, said Dr Danielsson: “I do not think cryptocurrencies will go mainstream. This means a massive transfer of power and resources into the hands of a small number of unknown speculators and miners [individuals and companies who generate cryptocurrencies through computation], and would be seen as unacceptable by both most people and the political leadership.”