We live in the information age: a time period characterized by the shift from more traditional industries to an economy based on information technology. As society makes technological advancements, the world economy is undergoing a digital revolution.
Fundamental evidence of this is Bitcoin, the world’s most successful cryptocurrency, with a market capitalisation of almost USD 255 billion as of January 2018. While cryptocurrencies have their share of limitations – the bubble they create, the lack of regulation and misguided investments they lead to – I’d like to focus on the positives of a system that is tantalising to so many investors.
Despite being the first and currently most important cryptocurrency in the world, Bitcoin actually emerged as a ‘side product’ of another invention. The inventor of Bitcoin, known by his pseudonym of Satoshi Nakamoto, had not intended to create a currency. In fact, his journey of producing Bitcoin began with years of unsuccessful attempts at inventing a centralised digital cash system. Their last resort was to build a decentralised digital cash system, as opposed to utilising centralised electronic money and central banking systems. This resulted in the invention of the blockchain, where a universal record of all transactions made with the currency is stored publically on a ledger in thousands of computers. This allowed for complete decentralisation and marked the conception of cryptocurrency.
In order to fully understand the working of cryptocurrencies, it is imperative to grasp their transactional properties, as exemplified by Bitcoin. Firstly, it is permissionless: Bitcoin is a software which can be downloaded for free from the internet, without the necessity of seeking permission from any source. After installation, transactions can be made between parties who hold Bitcoin and parties that accept them, without any barriers or gatekeepers whatsoever, offering a convenient way to conduct cross-border transactions with no exchange rate fees. Secondly, it is irreversible: once a transaction has been confirmed, it cannot be undone – there is a complete absence of a safety net. Thirdly, it is wholly anonymous: whilst it is possible to analyze the transaction flow, it is impossible to connect the real world identity of users with their addresses. This is because the transaction records written in the ledger contain an encrypted reference that cannot be connected to any party. Bitcoin and other cryptocurrencies have been designed for the purpose of being a secure – and in many cases – anonymous digital money. Hence, due to their anonymous nature, Cryptocurrencies are well-suited as hosts of nefarious activities, such as tax evasion and money laundering. This was seen in November 2016 with the arrest of Utah resident Aaron Shamo, who allegedly ran a Xanax and fentanyl manufacturer group. Shamo took his profits, which totalled to $2.5 million in Bitcoin.
Further, Bitcoin is an expeditious global system with instantaneous transactions in the network that is confirmed within minutes, and therefore entirely indifferent to physical location. Lastly, cryptocurrencies are highly secure: it is a medium of exchange that uses cryptography as a means to secure its transactions. Because it is not secured by people or trust, but by the mathematical technology used in blockchain, the probability of a Bitcoin address being compromised is incredibly low.
Whilst countries like the US, Canada, Australia, the European Union, and others have taken a generally positive approach towards Bitcoin, many other countries such as China, Iceland, and Russia do not allow their financial institutions to deal in it due to its complete lack of government regulation. Bitcoins are not issued, endorsed, or regulated by any central bank. But the currency is being traded on exchanges, portraying a technically well-established virtual currency system. Even large corporations such as Microsoft, Dell, Expedia, and Dish Network have joined the list of merchants accepting Bitcoin.
The potential of Bitcoin is not limited to transactional cost savings. Almost half of the world’s population does not have a bank account, although mobile penetration is above 75%. Bitcoin payments through mobile apps are enabling money transactions over remote distances at almost nil costs, bringing in savings of billions of dollars and eliminating financial intermediaries, such as banks, and their costs.
To conclude, the development of Bitcoin and other cryptocurrencies are a huge technological leap forward. Whilst Bitcoin has been called many things – “The future of money”, “drug dealer’s dream”, “disruptive” – Bitcoin has the potential to completely alter the way we bank, transact, and view money. It has its own challenges, including decentralised autonomous control and a lack of geographical and regulatory oversight. There is still no uniform international law covering the use of Bitcoin, and it has left lawmakers and regulators analyzing ways to properly regulate the cryptocurrency and its technical, legal, economical, and social problems before its acceptance in the mainstream. Nonetheless, Bitcoin and its underlying technology have great potential, and even if Bitcoin does not last in the long run, the technology underpinning it will be a game changer. The consequent economic changes will bring about unfathomable social and cultural progress globally.
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