The development of cryptocurrencies

Over the last few years it has been hard to escape news of the development of cryptocurrencies such as Bitcoin and Litecoin. Cryptocurrencies can be seen as one of the most disruptive trends in the world of payments and, according to Goldman Sachs at least, will help shape the future of finance.

What is a cryptocurrency? Cryptocurrencies (or digital currencies as they are also known) are essentially secured peer to peer currency and transaction networks but, unlike a traditional system, are decentralised. Their creation is not controlled by central banks and this allows direct payment to be made between payer and payee without an intermediary bank. “Money”, both physical and electronic, has to serve three main purposes to society.

• A store of value – The ability to buy goods or services with the currency at a future date
• A medium of exchange – with which to make payment
• A unit of account – to measure the value of an item for sale

In general, cryptocurrencies are designed to have a limited supply in order to keep the currency scarce and valuable but it is debatable as to the extent to which they currently satisfy all three of these points.  What isn’t in doubt though is that they have become more popular over recent years and with further proliferation of platforms and coverage their rise will probably endure. This is evidenced by the fact that Bitcoin recently took centre stage at Sibos, a traditional banking conference, and prominent articles on the subject from institutions such as the Bank of England.

So what are they benefits of using cryptocurrencies as opposed to traditional forms of money?

Well the obvious one would be low transaction fees. The money has to be “mined”, which does come with a fee, but the cost is still small in comparison with sending money through the banking system, especially when it involves sending money overseas. Tied to this cryptocurrencies also come with an element of freedom in that they allow you to send and receive money anywhere in the world at any time without the usual limitations (bank holidays for example).

They are also secure, hiding any personal information which protects the vendor and allows for an element of control not generally seen with traditional currencies. No extra fees can be charged for example without agreement with the consumer first. Taking this a step further it is possible to assign rules to the transaction such as the agreement of payment terms through a supply chain or the ability to spend money in the local area, which allow for a sphere of control not currently easily achieved. 

There are of course disadvantages to using cryptocurrencies as well, the main one being there is still a lack of awareness of them and how they may be used. Some businesses are adopting them (63,000 according to Informilo) but the list is still relatively small and it will take some time before adoption is widespread. Cryptocurrencies are also more inherently volatile than traditional currencies, which doesn’t help with their standing as either a “unit of account” or as a “store of value”. Over time this should settle down but price rises and falls of 20% in a day are not unheard of.

Cryptocurrencies are still developing and with that will come a sense of legitimacy. Previous exploitation, in the early days, from drug dealers and money launderers disguise the fact that any financial system can be abused. The fact that they are now being adopted to manage B2B transactions, albeit on a small scale, should be a guiding stick towards future acceptance. There are hurdles to overcome, such as establishing rules and regulations but the ability to transact openly and without burdensome cost implications has massive advantages and procurement teams would be wise to understand them before they miss the boat.