Revolution is a word that often gets thrown around by those most excited about the rise of virtual currencies. But if it is a revolution, it’s a protracted one. Many non-techies still aren’t taken with the idea.
And, yet, the most crucial ideas in Bitcoin and its various competitors - Dogecoin, Litecoin and Peercoin to name a few - have captured the imaginations of a handful of forward-thinking businesses. In particular, the decentralised nature of them is what has fascinated many a techno-utopian.
The blockchain, the public ledger that records all transactions, is what provides this decentralisation. No longer is there a middleman recording every purchase or cash withdrawal - together, in a peer-to-peer network, every user is effectively the bank. This means no fees and no government or institutional control over the currencies. And unlike other internet-based, cloud technologies, there’s no one company holding all the keys to the data - the public key cryptography of Bitcoin gives each user control.
Then there’s the mining process - the mathematical problems miners have to solve by brute forcing hashes (the product of a hashing algorithm) attached to each block in the chain to unlock fresh coins.
Innovation sparked by the rise of Bitcoin has led to creations that will no doubt expedite the revolution. In the finance sector, we’re already seeing virtual securities, loyalty and gaming coins, many of which don’t even use the mining system. This is where the Ethereum project is taking a lead, looking at how it can bring some of the ancillary financial services typically associated with money to virtual currency, whilst also allowing customers to create their own local virtual currencies.
One of its truly novel ideas is to store contracts of any type between parties to be stored in the public ledger that is the blockchain. As there’s no controlling or bias entity that dominates the blockchain, it can act as an entirely neutral arbitrator and intermediary to financial agreements, again taking out any middlemen.
The ambition is even greater over at Project Douglas, which is trying to use the blockchain as a basis for a truly distributed organisation. This would see collective decision making amongst customers guide an organisation. This would create entirely new business models and “change the landscape of outsourced business services and service level agreements within organisations”, says virtual currency expert Dr Gordon Fletcher, senior lecturer in information systems.
But virtual currencies are permeating into individuals’ and business’ everyday existence too. All kinds of organisations have opened up Bitcoin or other crypto currency sales. Many of the early adopters are part of the tech industry. Just last month, electronics exchange store CEX announced it would accept BTC. Two of the biggest names in IT, Dell and PayPal, did the same earlier in the year.
Charities are also amongst those keen to exploit the decentralised nature of virtual currencies, stopping the government taking any tax from contributions and giving people a way to give 100 per cent. Nonprofits like The Water Project, which has been providing sustainable water projects throughout sub-Saharan Africa, and Save the Children both now accept BTC.
Salaries and invoices can already be done over Bitcoin, using the likes of BitPay. “A business could potentially reduce the costs associated with managing payroll by moving to a virtual currency. So in the longer run organisations may push for payment in virtual currencies because of the benefits to them rather than the employees,” notes Fletcher.
It’s possible to add documents to the blockchain too, using services such as BlockSign, Factom and Proof of Existence, in a form of "trusted timestamping" where documents are certified by a community of users.
Fletcher thinks the Local Exchange Trading System (LETS) of yore, where people traded skills and knowledge could benefit from adding a local virtual currency offers a mechanism to bring fairness to trades. Local governments are already exploring this idea, including Hull City Council, where HullCoins are handed to those who are in need of financial assistance, in return for taking part in local activities. They can then be spent on council tax and for goods and services.
These many use cases would indicate virtual currencies are taking off in a big way. And yet, despite all this progress in just a matter of years, full mainstream adoption remains elusive. The old monetary monoliths are still standing tall. What’s required, says Carl Wier, partnering and business development financial markets at Bitreserve, a wallet and transaction service provider, is for companies based on virtual currencies to solve different real world problems from those that are served by traditional forms of finance.
“Successful mainstream adoption comes down to some key elements: the business, its management, its model, its network of partners and of course, consumers themselves. But the key is that a product or business established around virtual currencies has to solve a problem. If it doesn't it is simply a 'me too' product caught up in the hype. Businesses solving real world problems with virtual currencies will be the most successful, and by default the most mainstream,” he adds.
According to Fletcher, the biggest impediment at the moment is simply low numbers of consumers with virtual currency to spend. The “tipping point” is elusive. “It would not take many people – if they share similar consumer behaviours – to reach this tipping point but we are not there yet. The first hint of this is CEX’s acceptance of bitcoin which makes them the first high street brand to accept a virtual currency,” Fletcher notes.
As soon as the likes of utilities and local councils adopt, paymasters will start to recognise the benefits too, he adds. “The potential ability to create a contractual agreement between consumer and supplier through the blockchain offers the prospects of reducing the need for bank-based standing orders and direct debits – effectively removing the cost of an intermediary service.”
Virtual currencies, in their many shapes, are changing things. It’s just that the average Joe, the person that matters here, hasn’t been convinced yet.
