The Adoption of Virtual Currencies

Walking by your local high street bank, you would be forgiven for failing to perceive that the financial services sector may be on the cusp of a technological revolution. It’s a revolution made possible by the technology that underpins bitcoin, which for most consumers remains a faraway novelty rather than a real alternative to a debit card or good old-fashioned cash.

A secret revolution

To understand why bitcoin can be simultaneously revolutionary and widely unappreciated, it is important to understand the difference between bitcoin, the first and most successful digital currency, and the blockchain, or distributed ledger, which is the technology that makes it possible.

Bitcoins are created by computers solving complex cryptographic problems that simultaneously verify bitcoin transactions between users. This process creates the blockchain, which is a record of all individual bitcoins that have ever been created and how they have been transferred to new wallets. Tracking this information tells a wallet how many bitcoins it has in it at any given time. The blockchain is maintained by every computer (node) using the network, and it is constantly updated and verified; hence the term distributed ledger. Individual users cannot alter the blockchain unless they control more than half of the nodes. Tokens of value can therefore be securely transferred between users without the involvement of a trusted third party taking its cut. Once a transaction in the blockchain is complete, it cannot be altered or reversed, but the process is not instantaneous.

Bitcoin for everyday?

Because transactions are neither instantaneous nor refundable, critics argue they are not suitable for day-to-day consumer spending. Moreover, consumers are unwilling to convert conventional money into bitcoins because the benefits do not supersede the risks (yet). The press has delighted in reporting the dizzying highs and dramatic crashes of the early bitcoin market, and observers rightly fear the value of their cash disappearing. Equally, people are oblivious to the comparative inefficiency and cost of existing payment systems because shops spread the costs here and there a few pennies at a time.

Because of the perceived risks associated with holding even modest amounts of the virtual currency, certain payment systems rely on workarounds that release consumers from the responsibility of buying or holding the virtual currency. The conversion from ordinary currency and back again happens without their involvement.

The blockchain in financial services and beyond

Finance could be said to be built on a system of ledgers, and financial institutions make a lot of their returns managing and recording transfers between them. Self-sustaining, secure, distributed and public ledgers could dramatically reduce the costs of financial services. Indeed, several major players including Barclays are investing in blockchain technology, but its real potential has barely been unearthed. Integrating creative works and inventions into the blockchain provides a permanent time-stamped record of the creation and its owner. A distributed ledger could track and transfer ownership of high-value real world assets like vehicles or houses using smart contracts that rely on encryption rather than lawyers.

The future of bitcoin

The first great innovation in any field is invariably surpassed by what follows, but so far bitcoin has bucked that trend. Ironically, it remains to be seen whether bitcoin has a place in the new financial frameworks created by its core technology.

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