• New research from Imperial College London and eToro argues cryptocurrencies are already fulfilling one of three main criteria of money
Cryptocurrencies like Bitcoin offer a viable evolutionary 'next step' for money and have the potential to become a mainstream form of payment within the next decade. This is the central finding of new academic research from Imperial and eToro.
In a research report published today - Cryptocurrencies: Overcoming Barriers to Trust and Adoption - Professor William Knottenbelt from Imperial College London and Dr Zeynep Gurguc from Imperial College Business School argue cryptocurrencies are already equipped to fulfil one of the three fundamental roles of traditional fiat money: acting as a store of value. The three criteria are as follows:
Store of value: allowing individuals to make intemporal choices on when to spend their purchasing power
Medium of exchange: facilitating the exchange of goods and services by eliminating the inefficiencies associated with a barter economy
Unit of account: acting as a measure of value in the economic system.
Meeting the last two criteria will require Bitcoin and other cryptocurrencies to make progress on remaining challenges such as scalability, design and regulation.
The research argues that money has evolved significantly over time. The earliest forms were based on systems of barter and objects of value such as cowrie shells. Over time, these early ideas were replaced by coins, notes and payment cards. The rise of contactless and mobile payments is the most recent step.
In each case, new forms emerged which rendered older ones obsolete, such as coin minting and electronic banking. However, despite the changes, money's three core functions have remained constant throughout.
Provided they can demonstrate progress as a medium of exchange and unit of account, as well as a store of value, cryptocurrencies represent a viable technological update to the way we spend money.
The research also notes that each evolutionary stage of money has brought about a reduction in payments friction. Given their design principles, the paper concludes that the widespread use of cryptocurrencies is a natural next step to reduce friction in the global economy.
Professor William Knottenbelt from Imperial, said:
"The world of cryptocurrency is evolving as rapidly as the considerable collection of confusing terminology that accompanies it. These decentralised technologies have the potential to upend everything we thought we knew about the nature of financial systems and financial assets.
"In this context, we wanted to get back to basics: clarifying the nature of cryptocurrencies as a new kind of asset class, contrasting them with traditional forms of wealth, and classifying the main challenges that need to be overcome in order to drive their success forward.
"There's a lot of scepticism over cryptocurrencies and how they could ever become a day-today payment system used by the man on the street. In this research we show that cryptocurrencies have already made significant headway towards fulfilling the criteria for becoming a widely accepted method of payment."
Imperial and eToro set out six existing challenges that cryptocurrencies will have to address in order to become a mainstream method of payment. These are:
Scalability: many cryptocurrencies are built on blockchains that aren't designed to facilitate high volumes of transactions at present. The mining community of individual blockchains needs to prioritise solving scalability issues in order to succeed
Usability: like any invention, user-friendly design is at the core of mass adoption. Cryptocurrencies can be complex and require specialist understanding
Regulation: this is currently fragmented with different countries pursuing different regulatory routes. Without a standardised global approach to regulation, Bitcoin will struggle to gain mainstream traction
Volatility: all fiat currencies fluctuate in value. However, current significant volatility in cryptocurrencies hinders their ability to be considered a store of value. As price movements settle the store of value function can be realised
Incentives: any new financial ecosystem requires careful thinking about how its reward system will influence behaviour. If this isn't built in the right way, then the system will quickly be manipulated by some users to the detriment of others
Privacy: while blockchains provide a transparent single source of truth, different levels of privacy available to different users is often attractive. Without this, some people will stay away from cryptocurrencies
Iqbal V. Gandham, UK Managing Director of eToro, who commissioned the research, said:
"People have grown used to their view of money as a solid, permanently fixed idea when in fact the opposite is true. The history of money is a history of evolution, of new technology replacing old to improve the transfer of value from one person to another. Cryptocurrencies represent a next step on this journey.
"The first email was sent in 1971, but it took nearly three decades for the technology to become commonplace with a user-friendly interface in the form of hotmail. The first ever Bitcoin transaction took place a little over eight years ago and today we are already seeing it begin to meet the requirements of everyday money. Given the speed of adoption, we believe that we could see Bitcoin and other cryptocurrencies on the high street within the decade. There are of course barriers to mainstream adoption, but they are far from insurmountable.
"Perhaps the thing that will ultimately tip cryptocurrencies into mainstream is the issue of cross-border payments. These remain difficult and expensive in many cases. Cryptos are cross-border by design, enabling wealth to be transferred far more easily. The potential for this to be a leading use case looks very strong."
Dr. Zeynep Gurguc from Imperial, said:
"New payment systems (or asset classes) do not emerge overnight but it is worth noting that the concept of money has evolved - even in our lifetime - from cash to digital or contactless payments. The wider use of cryptocurrencies and crypto-assets is the next natural step if they successfully overcome the six challenges we set out in our report."
Glossary of terms
Crypto-asset: a digital asset that utilises cryptography. Cryptocurrencies are a sub-set of cryptoassets as are cryptocommodities (computing, storage and networking resources which power blockchain ecosystems.)
Cryptocurrency: a cryptocurrency is a digital currency that uses cryptography to generate 'tokens' and verify the transfer of these tokens between people. Cryptocurrencies are completely decentralised and operate without a central authority, like a bank.
Bitcoin: a digital currency created in 2009 by Satoshi Nakamoto, a pseudonym for the developer(s) behind the cryptocurrency, and now one of the largest and most well-known examples of a cryptocurrency.
Blockchain: Blockchain is the underlying digital technology that allows cryptocurrencies to exist. It is a digital and decentralised ledger that records transactions.
Decentralised ledger: this is a ledger that is held by everyone on the network and records the movement of each token on the network. It is publicly accessible and unchangeable.
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