Cryptocurrencies
Cryptocurrencies
Exploring a revolutionary technology
Authors Innopay Jacob Boersma Gijs BurgersJacqueline van Huijstee Maarten Rood
Release
June 2014
Copyright © 2014 Innopay All rights reserved
Contents
1 MANAGEMENT SUMMARY ... 4
2 INTRODUCTION ... 8
Distributed consensus technology as a new trust enabler ... 8
Suggestions for banks, regulators and entrepreneurs ... 8
Market is at risk of deadlock ... 9
Reading guide ... 9
3 THE EXPERTS’ PERSPECTIVE ... 10
3.1 Dave Birch: Technology above currency ... 10
3.2 Tuur Demeester: Cryptocurrencies will cause a paradigm shift on the financial market ... 12
3.3 Simon Lelieveldt: The colouration of coins ... 15
4 THE ENTREPRENEURS’ PERSPECTIVE ... 17
4.1 Jouke Hofman & Niels van Groningen: Start your car with a private key ... 17
4.2 Tony Gallippi: The continuance of the evolution of digital money ... 20
4.3 Pierre Noizat: How Bitcoin will be a major driver for developing a macro economic system ... 23
4.4 Bobby Lee: Reinventing doing business in the financial world ... 26
5 THE GOVERNANCE PERSPECTIVE ... 30
5.1 Marc Hemmerling: The complementarity of payment systems ... 30
5.2 Kim Gunnink: Will cryptocurrencies live up to their expectations? ... 32
5.3 David Aylor: Understanding leads to acceptance ... 35
6 CONCLUSIONS ... 37
6.1 Cryptocurrencies are here to stay; we are only just seeing the beginning ... 37
6.2 The technology will be developed further ... 38
6.3 Any transaction service can benefit from cryptocurrency principles ... 38
6.4 Banks will get involved first hand, and will integrate cryptocurrency principals into their own infrastructure ... 39
6.5 The right regulatory framework needs to be put together ... 40
6.6 Improved governance can enhance trust ... 40
6.7 Promises and threats ... 40
6.8 There is a need to educate in order to promote smart use ... 41
7 REFLECTION ... 42
7.1 The technology is here to stay, but current services might go ... 42
7.2 For the industry to go forward, dialogue between players is essential ... 42
7.3 Challenges for cryptocurrencies ... 44
8 ABOUT INNOPAY ... 46
9 SOURCES AND REFERENCES ... 47
10 GLOSSARY ... 48
1
Management summary
Cryptocurrencies such as Bitcoin are a hot topic with both enthusiasts and detractors. To get an insight into what we can expect from cryptocurrency in the near future, Innopay interviewed 11 globally leading figures from the cryptocurrency and payments field. We interviewed experts, entrepreneurs and representatives of a variety of governance institutions to obtain a broad view of developments.
Distributed consensus technology as a new trust enabler
The general consensus is that cryptocurrencies will not be going away any time soon. What makes this a disruptive innovation however is less about the currency aspect and more about the cryptographic block chain technology. This allows for distributed consensus in a decentralised system, paving the way for applications in securities, cadasters, loyalty and notary services but also in fields such as e-‐identity and e-‐invoicing.
By leveraging its unique advantages, cryptocurrency can become an innovation on par with the Internet itself, and can enable a myriad of services that will revolutionize the way we do business online.
The history of digital currencies up until now: decentralised trust has long been a major challenge
Adoption remains slow, how will we bridge the gap?
Mainstream adoption of Bitcoin is speeding up but still has a long way to go. Although it offers unique advantages for cross-‐border transactions and micro payments, it is unclear how Bitcoin and other current cryptocurrencies can bridge the gap from early adopters to the majority of merchants. Some experts and governance representatives strongly question the viability of Bitcoin in the long term. Current implementations could also contain hidden flaws that still need to be ironed out and that could lead to a loss of trust by the general public. Although that would be the end for specific cryptocoins, the ideas behind the currencies will continue to be developed and become part of the toolkit used to build future transaction networks.
Banks will get involved and integrate cryptocurrency principals
Banks do not see cryptocurrencies as a threat to their position in the financial market; the market share of Bitcoin and other coins is much too small for that. The core role of banks as trust providers remains important and can also allow banks to offer their own services in the cryptocurrency space. This allows them to become a bridge between old and new financial systems and between entrepreneurs and regulators.
However it is also recommended that banks study the underlying mechanisms of cryptocurrencies and start adopting the benefits. Banks can use this opportunity to innovate their transaction infrastructure, or run the risk of lagging behind. There is also potential for non-‐bank players to reap the benefits if banks move too slowly.
Market at risk of deadlock
While the collective understanding of cryptocurrency is still developing, the growth of the market is being threatened: regulators are waiting to see how the market develops before issuing regulations, banks are waiting for the regulators to come up with clear guidelines and entrepreneurs are waiting for acceptance by the banks and the regulators. This early market stage calls for pioneers within each stakeholder group, who dare to move forward and show confidence that challenges can be solved as they appear.
The right regulatory framework needs to be put together
To get out of this deadlock and ensure adoption in the long run, regulations are needed to legitimize the Bitcoin and cryptocurrency industry. In the short term however, businesses need to accept that they have to grow first and get regulated later. Although many fear that regulations could become too strict, experts agree that you cannot ban the technology, although strict regulations will certainly further slow down this fledgling industry. Regulation can also help by regulate the use of the technology, protecting consumers and pulling cryptocurrency out of the shady “black market” world with which it is often associated.
Improved governance and education can enhance trust
We see the rise of more centralised governance of cryptocurrencies in the coming years, for example in the shape of self-‐regulating industry bodies such as DATA1. This will stimulate the required dialogue with regulators and improve trust and thus adoption by the general public, as well as the dialogue between the players themselves, in order to share best practices and move forward together.
As well as governance, education is needed on both the good and bad sides of cryptocurrencies. Entrepreneurs have a role to share their experience and improve understanding with both potential users and regulators, leading to broader acceptance. There is a need for a clear story that explains to the layman how the technology can work for him. This is an essential requirement to be able to bridge the gap into mainstream acceptance.
The future of cryptocurrencies
If the industry in its current state can manage the challenges with which it is faced and effectively organise itself, other sectors will be able to start innovating using cryptocurrency technology as well. Any transaction market or context where ownership needs to be
undisputed can benefit. We need to bring the current industry to maturity as soon as possible so that we can copy the benefits to other markets in need of innovative exchange mechanisms. There are interesting times ahead, exploring the revolutionary technology of
cryptocurrencies.
1 DATA, the Digital Asset Transfer Authority was established in 2013 with the aim to become a
regulatory organization for companies at the forefront of emerging payments, virtual currency, and other financial technology innovations (http://info.datauthority.org)
The Bitcoin ecosystem and its players
2
In
troduction
Cryptocurrencies are a hot topic for friend and foe. Ever since this phenomenon came to the fore through the rise of Bitcoin, all stakeholders in the financial industry (banks, regulators, merchants, users and entrepreneurs) have been struggling to get to grips with it. Is it money, an asset or technology? Or is it something we haven’t seen before, a category unto itself, like the Internet back in the early nineties? As with the early Internet, opinions are divided as to whether it is here to stay.
The team at Innopay has been closely following the development of cryptocurrencies since 2010, recognizing the disruptive potential of this technology. Bitcoin has clearly gained traction in the meanwhile and other ‘altcoins’ appeared. We became used to new words such as ‘mining’, ‘cold storage’ and ‘block chain’.
Distributed consensus technology as a new trust enabler
Certainly cryptocurrencies are not going away any time soon. However, in a few years we might not call them ‘currency’ anymore because they are not fulfilling the traditional definition of a currency. What makes Bitcoin and other cryptocurrencies such a disruptive innovation is mainly the cryptography based block chain technology, which allows for ‘distributed consensus’ by an unlimited group on an untrusted network. Decentralized trust is a mathematical problem that has been on the agenda of academics for decades2.
Thanks to the decentralized consensus mechanism there is not one single individual, company or public institution that claims the truth on ownership of assets, but instead the ‘crowd’ holds a public ledger that is continuously confirming and securing who owns what. Seen in that light, Bitcoin is ‘just an implementation’ of this principle applied to a medium of exchange that can be used as a store of value and currency and therefore a trusted instrument in commerce. Other potential applications of block chain technology can be found in contexts with centralized asset registries, such as securities, cadasters, titles and deeds. Transaction markets like the ones for digital identity and e-‐invoices could also benefit from aspects of the technology. Initiatives to develop these types of applications are underway.
Suggestions for banks, regulators and entrepreneurs
This report gives a concise overview of key opinions within the industry and a clear message to regulators, banks and entrepreneurs. Those are the parties that are shaping the industry, based on the demand of their various customers. In creating this report we interviewed 11 industry experts coming from the worlds of payments, regulation and entrepreneurship. Their views and recommendations form the heart of this document.
2 Lamport, L.; Shostak, R.; Pease, M. (1982) "The Byzantine Generals Problem". ACM Transactions on
Market is at risk of deadlock
The collective understanding of the cryptocurrency phenomenon is still developing, which threatens to stall market development. Many parties are waiting for each other to make the next move: some entrepreneurs are waiting for ‘regulation’ and acceptance by banks, banks are also waiting for ‘regulation’ and regulators are waiting for ‘the market’. This early market stage clearly calls for pioneers within each stakeholder group, who dare to boldly move forward into this uncharted territory and who have confidence that problems and challenges can be solved as they appear.
Reading guide
This report consists of three parts. The first part consists of the aforementioned interviews from the different stakeholder groups. In the first three interviews payment and financial services experts provide a broad perspective on society, economy and payments in general, and the function cryptocurrency might fulfil. This is followed by the second set of interviews with entrepreneurs currently leading cryptocurrency companies. The entrepreneurs bring the hands-‐on experience with doing business in the world of Bitcoin. After the entrepreneurs, in the third set of the interviews professionals involved in government and governance share their opinions and elaborate on what function regulation fulfils or will fulfil for cryptocurrencies.
The interview section is followed by the second part of this report: a summation of the conclusions that can be drawn out of these various insights. In the third and final part of the report, we reflect on the cryptocurrency and payments landscape and recommend ways forward for the three angles: regulation, payment providers and entrepreneurs.
The appendixes at the end of the report provide a glossary explaining the terminology used throughout the cryptocurrency sphere as well as a reference section with links to further reading material.
3
The e
xperts
’ perspective
3.1
Dave Birch: Technology above currency
What impact will cryptocurrency have on the world in the long-‐term?
To answer this question, I think it is important to pull apart what cryptocurrency actually means. I see cryptocurrency as:
• A new currency;
• The mechanism for wholly virtual currencies to exist; • A generalised mechanism to transmit value.
Each of these definitions has a slightly different impact. In the long run cryptocurrencies will be important as currencies but not in the Bitcoin sense. I am more interested in the value-‐ based currencies, because cryptocurrency must represent a real value to have a future. Currency and its value must make sense to the community in which it functions. Pure cryptocurrencies (like Bitcoin and Litecoin) that do not represent an underlying value will not have a future in the long run.
The use of cryptocurrencies to carry existing currencies (e-‐cash) around can have a future, however this will be less important and won’t have a big impact.
The concept of a public ledger, using cryptocurrencies for things other than currencies, has a long-‐term potential use. If you can use block chain
technology to transfer digital assets, then the demand to move money around will decrease3. In other words, we might look at equity in a different way if we are able to transfer ownership efficiently online. We could also see start-‐ups fund themselves using open share registers.
Some of these developments or impacts will create new institutions. We need to wait and see what institutions will arise from developments this new technology brings. However, I expect cryptocurrencies to remain a novelty for the coming couple of years. But in five years, it is possible that we start to see the first real applications moving towards the mainstream.
3 The Bitcoin.org website provides a clear explanation of how block chains work: https://bitcoin.org/en/how-‐
it-‐works
Dave Birch is a director of the UK and US based consultancy firm Consult Hyperion. Dave is considered a specialist in electronic transactions and advises governments and large companies on digital identity and digital money.
“Cryptocurrencies that do not represent an underlying value do not have a future in the
What risks and challenges do you see ahead for cryptocurrency?
The issues raised about cryptocurrencies, primarily the issue that cryptocurrencies are used on the black market, are marginal and form a distraction from
any real dangers or risks. The same goes for the so-‐called tax issue: Governments are concerned that they do not have the ability to tax Bitcoin and miss out on tax revenue. Since realizing
a dynamic and efficient economy should be more important to governments, the tax issue should not be considered a major concern.
There will be development changes and growing pains like we see them at this moment. Even if Bitcoin as we know never takes off, the technology is going somewhere and is here to stay.
How do you think traditional economic institutions like banks will react?
I’m sure banks will use Bitcoin or any other cryptocurrency if it comes to that, but at this moment they don’t really care about it. All this might change in the long term of course. I think it is most likely that banks will not use Bitcoin as a currency, but they will use the technology behind it.
“Although there are risks, I don’t see them
3.2
Tuur Demeester: Cryptocurrencies will cause a paradigm shift on the
financial market
What impact does cryptocurrency have on the world in the long term?
Just like the Internet has broken open the information market, one can expect the same paradigm shift to occur with cryptocurrencies on the financial market. Barriers for entry have disappeared and people can now choose freely what currency to hold and use. The traditional financial system is being challenged to step up their game in terms of efficiency because the Bitcoin environment is removing middlemen. Bitcoin allows transactions anywhere, anytime and with no additional costs. It does not mean that banks will become completely obsolete, but it does entail that many of the transactions for
which we used to enlist our bank can now be organised by the decentralized systems of cryptocurrencies. Cryptocurrency allows free access to capital markets to everybody with a smartphone without imposing any capital controls. It allows for easier access to microcredit and easier, more transparent crowd funding. Bitcoin currently has 5 million users. If Bitcoin were to follow the growth of the Internet (which is not unrealistic), Bitcoin could have 500 million users in 2020, and 1 billion users in 2024.
What game changers for cryptocurrency do you foresee in the nearby future?
First of all it can be expected that we will soon see mainstream adoption of cryptocurrencies. The large corporations will soon start promoting Bitcoin to the early majority, in a similar way to what happened with AOL and Windows 95. Secondly, there will soon be many more applications of Bitcoin in daily life. Bitcoins might be bought at the post office, or could be used at Western Union to transfer money to foreign relatives. It will become more ‘real’ and independent from the Internet. Finally, in the middle to long term Wall Street will become interested in Bitcoin and Bitcoin companies as investment vehicles. This will open up the Bitcoin world to other industries seeking investment opportunities and growth. For instance:
Tuur Demeester is an economist specialised in the risks of financial systems and investor-‐protection against systemic crises. He was investigating economic crises and recessions in Latin America when he first came across Bitcoin in 2011. From 2012 onwards, Tuur has recommended Bitcoin as an investment object, and has been in touch with the Bitcoin community to be on top of the latest trends in the Bitcoin ecosystem and adjacent systems.
“The traditional financial system is being challenged to step up their game”
insurance companies could operate on a global scale since Bitcoin knows no entry barriers. In the end, cryptocurrency, and probably Bitcoin, might develop into an independent financial system. This will give rise to Bitcoin exchange markets, credits being given in Bitcoins and companies operating solely with Bitcoin payments.
Which threats or challenges do you foresee for cryptocurrency and specifically for Bitcoin? To answer this question we need to distinguish between Bitcoin as a technology, Bitcoin as a financial system and the technology of cryptocurrency in general. Cryptocurrency as a technology has already proven its value and seems to be here to stay. It has many advantages over the traditional systems and is highly efficient. Bitcoin is just one instance of a cryptocurrency system, so it could be that it contains Bitcoin-‐specific bugs or weaknesses. The advantage of Bitcoin as a technology however, is that through its open source software, these bugs can be mended easily upon an encounter. The biggest risk for Bitcoin as a technology and financial system is its complexity: severe bugs might cause a temporary panic amongst its users because they do not understand what is happening4.
Parallel to the developments mentioned, regulation forms a major concern for the companies that are professionally involved with cryptocurrency. Some changes in regulation could render their activities illegal5, which would make it impossible for them to operate. Where it concerns regulation of Bitcoin as a currency and financial system, the picture is rather complex. A part of the market using Bitcoin is above water, which is the white market whereas another part is under water and can be seen as the grey or black market. Extra regulation on Bitcoin would force Bitcoin further under water, with more of the Bitcoin transactions on the grey and black markets. Therefore I expect that governments will moderate their regulating activities for Bitcoin to keep transactions controllable in the white market, because that would keep the door open for taxation in one form or another. In the end, we will find a mixed landscape of governments embracing Bitcoin while others will reject it to some extent.
4 In February 2014 a known bug in the Bitcoin protocol was allegedly the cause for major problems at one of
the largest and oldest Bitcoin exchange in the world, Mt.Gox. This so-‐called "Transaction Malleability" bug made it possible to change the unique ID of a Bitcoin transaction before it became confirmed on the block chain, resulting in losses of large amounts of bitcoins, the bankruptcy of Mt.Gox and the shutdown of several smaller exchanges.
5 For example: regulation classifying bitcoins as a currency or financial instrument could make it illegal to
provide trade/exchange services without a government license. Other examples include strict KYC requirements or heavy tax or administrative burdens.
“I expect that governments will moderate their regulating activities
for Bitcoin to keep transactions “controllable in the white market”
Besides risks and challenges concerning regulation, there are important risks associated with systemic errors and risks associated with growth. Bitcoin is focused on watertight security, but has to sacrifice speed in return. In the coming years we can expect new systems and technologies to resolve
this lack of speed as Bitcoin continues to grow as a platform. In other words, I think scalability issues are more of a growing pain than a systemic risk. It could also happen that current technology is driven out by more advanced technology. You could compare it to when MySpace was surpassed by Facebook’s growing momentum. For the time being however, we have to work without these technologies as we already experience the slowing down of the Bitcoin system. It is key for the growth of cryptocurrencies and Bitcoin that other companies and protocols take over part of Bitcoin’s processes in order to allow it to scale up further.
Do you think traditional financial institutions feel pressured by the advent of cryptocurrencies?
The general message in modern history has been: adapt or perish. The telecom companies that refused to jump on the Internet bandwagon in the nineties perished one by one. It is important to realise that Bitcoin will represent a similar change to our financial system. Our traditional financial institutions should take a close look at where they have the upper ground compared to Bitcoin. For banks this could be corporate banking for example, as they know how to eliminate or hedge risks. Insurance companies have tremendous amounts of data they could utilise to add value to the current Bitcoin value proposition. Interesting synergies could be realized by the integration of the old systems with the new Bitcoin system. Banks can draw valuable lessons from the clean cut between the holding entities of Bitcoins and the trading entities. It is best if banks do not wait for the regulation on cryptocurrency or Bitcoin to arrive, rather they should proactively take a stance on this matter and start researching how they can add value to Bitcoin, and Bitcoin to them.
What function do you hope cryptocurrency will fulfil in society in 5 years?
Currently we are experiencing a normalcy bias in Europe, which causes us to underestimate both the possibility and effects of another (financial) crisis. At this moment, we should actually anticipate the next country or bank to default. If another crisis happens, bail-‐ins will become the new reality. These bail-‐ins undermine the faith and trust in traditional central banking institutions and can drive consumers to Bitcoin, transforming Bitcoin from a back-‐up financial system to a mainstream financial system.
This shift in acceptance will cause four things to happen. First of all, cryptocurrency will be a worldwide accepted safe haven. It will represent the new offshore banking. Secondly, many cities and even countries will have cryptocurrency economies in which all their transactions will take place. Thirdly, cryptocurrencies will have over 100 million users (more likely close to 500 million users). Lastly, we will have the first financial services based on the Bitcoin system. These could be insurance companies, credit markets, loans and crowd sourcing.
“Scalability issues are more of a growing pain
3.3
Simon Lelieveldt: The colouration of coins
How do you think cryptocurrency is affecting our world?
Technology has always had the power to fundamentally change our business models and business relations. The advent of the Internet as a commonplace technology has created more balanced peer-‐to-‐peer relationships and has reshuffled traditional chains of business processes in most industries. The same is going on in the payments and transactions industry, we are constantly working on structuring, representing and securing “value”. Cryptocurrencies are simply the next stage in the development of payments and transactions. In European and Northern American society, money and its stability are such sensitive issues that the amount of regulation and governance applying to payments and transactions became quite substantial. Society has definitely showed interest in cryptocurrency, but is slow to accept cryptocurrency as a real currency.
What cryptocurrency related game changers do you foresee in the mid to long term? We should look for game changers in a few directions:
• Breaking down of trust through big security breaches or governance incidents; • Big brands accepting cryptocurrencies as a means of paying;
• The development of an alternative (private) currency which is much more efficient
than existing popular cryptocoins.
Given the above examples of game changers, I think the basic concept of the protocols and its peer-‐2-‐peer character is here to stay in one form or another.
To what extent do you think existing financial institutions feel pressured by the advent of cryptocurrencies?
When I look at consumer behaviour, I do not think a lot has changed or will change a lot. Consumers seem somewhat reluctant to embrace cryptocurrency and perceive it to have high risk. This would mean for especially banks that they do not have to fear losing their customers or revenue streams just yet. Above that, banks can allow themselves to
take a reserved stance: if cryptocurrencies would grow to have a significant demand or value in society, it will need to be regulated anyway. A more pressing problem for banks is the parties that offer cryptocurrencies in one form or another. They bring a compliance risk into the bank with a certain chance for onboarding “wrong” customers, which in turn leads to
Simon Lelieveldt is a prominent Dutch banking & payments consultant, specialised in aligning business processes and legal rules in electronic payments. Simon went on to work for ING Postbank, the Dutch central bank (DNB) and the Dutch Banking Association (NVB). He has been involved in the supervision of the first Dutch e-‐money schemes and in setting up SEPA. Simon currently acts as a compliance officer for a supervised institution.
“Banks do not fear losing their
customers or revenue streams
caution or reluctance to accept some of these parties. In the end, I think banks in Europe did – for some time – not have sufficient time and resources to follow up on cryptocurrencies. They were too busy with the SEPA deadline, so cryptocurrency had to take the back seat. What function do you think cryptocurrency will fulfil in society in 5 years?
At the moment, cryptocurrency still has that connotation of “money to the people” and of being a democratic system. However this is a misconception; even fully decentralized currencies will see the rise of organisations that manage, develop, implement and exploit services in the name of the cryptocurrency or its protocol. We will see this evolve in the coming years. Organisations behind these currencies, or built on top of them, will seek to influence and control these currencies. The next question is: how trustworthy will these important but more or less informal organisations be? The awareness that cryptocurrencies are in the end not just made by the people and for the people, should become more prominent so that we are better prepared for malicious organizations that also occupy the cryptocurrency space. Nevertheless, if a cryptocurrency is about to gain significant momentum and volume in society, regulation will come in place and there will be some authority centralising the cryptocurrency governance. Money is too sensitive of an issue to leave unregulated. It is best to be realistic about this, yet users that choose to use cryptocurrencies for the reason that it will stay unregulated might be disappointed.
In the future it is to be expected that we will have “coloured coins”, which will include certain normative values that a consumer likes to associate with. At the moment cryptocurrency mostly has the libertarian association, which appeals to a certain audience. In a similar way, coloured coins can be put to use for specific societal causes, spent at certain retailers or entail coin-‐specific discounts. My personal favourite – being a piano player as well – would be the music coin, that connects the artists more directly with their audience and disintermediates unnecessary elements from the music value chain. More generally: a whole new range of business models becomes possible through the colouration of coins.
“… even fully decentralized currencies will see the rise of organizations that
manage, develop, implement and exploit services in the name of the
4
The e
ntrepreneurs
’
perspective
4.1
Jouke Hofman & Niels van Groningen: Start your car with a private key
How is cryptocurrency affecting our world?
Niels: It is difficult to look into the future, but we see cryptocurrencies influencing the international payments sector, specifically micro payments and online payments. It is hard to imagine a world in which cryptocurrencies will not be used for online payments five years from now. For some of us cryptocurrency feels similar to when the Internet came about: something that will fundamentally change our society although we do not fully understand its implications yet. At this point in time we are mainly seeing payment solutions, although business ideas outside of the payments domain are widespread and ready to go, for instance using a block chain to send digital invoices. One of the essential things that we hope cryptocurrency will continue doing, is making it easier to do business and execute transactions in a more transparent way: we believe this would positively affect society in the long term.
Jouke: Also in the sense of ideology I think cryptocurrency is changing our mentality. Companies in Bitcoin are more or less forced to be transparent about everything, since the block chain is open to everyone. This lowers the threshold for newcomers. That is not the case for the existing financial industry. To build up trust it is
vital to show your cards and be transparent about your course. Without trust, you cannot exist in an anonymous decentralised world.
What key events do you foresee for cryptocurrency in the nearby future?
Jouke: A key event would be the acceptance of Bitcoin by a tax authority somewhere on the world. If this traditional governmental organisation would accept Bitcoin, or any other cryptocurrency for that matter, it would mean a huge step forward. And with this step many new consumers and merchants will start utilizing the cryptocurrency Bitcoin.
Whichever event will be the game changer, it will probably be driven by one of the following factors. First of all, the current lack of opportunities to innovate in the financial sector. Secondly, the limitations which the financial sector imposes on individuals, businesses and
Jouke Hofman (top picture) and Niels van Groningen (bottom picture) are two of the three original founders of Bitonic.nl, a Dutch website where consumers can buy Bitcoins in an easy and trusted way, using a popular pay-‐by-‐bank method (iDEAL). Over the past two years they have grown tremendously in terms of amount of bitcoins sold, number of employees and offered services and solutions. Within the Dutch scene for cryptocurrency, Bitonic is seen as a leading party that lowered the barriers for the average consumer to obtain bitcoins.
“Without trust, you can not exist in an anonymous
institutions. Lastly, there is the common mistrust of the financial sector, which is perceived as closed and not transparent.
What main challenges or risks do you see for cryptocurrency?
Niels: Within the Bitcoin sphere, we have experienced some problems lately that we regard as growing pains. Obtaining Bitcoins or other cryptocurrencies is still not user-‐friendly at all, especially for novice users. Nonetheless, the foundation is quite strong and the Bitcoin community has been quick with solving problems that have arisen over the past four years. It’s comparable to the development of Wikipedia: first it was deemed an untrustworthy source of information, but after years passed by, it is now one of the corner stones of the Internet and global information.
We also see regulation as an important factor. However, if regulation is seen as too restraining or otherwise not adequate, it can hamper the development of innovations. Right now the cryptocurrency industry is barely regulated which makes it easy for companies to develop new
innovative services without having to worry about regulation. When regulatory requirements get tougher, companies will need a certain scale to enter the regulated market. For instance, when start-‐up companies are required to have payment institution licenses, it is logical that they will not be able to start doing business because it takes a massive amount of resources. So at this point the biggest fear for the cryptocurrency world would be too much regulation or “panic” regulation like forbidding Bitcoin as a whole, since it will smother young companies with a bright ideas.
How do you think existing players in the financial industry will deal with cryptocurrency? Jouke: At this point we see that banks do not feel threatened yet although they are quite sceptical about what cryptocurrencies might bring. Especially the ‘open’ nature of most cryptocurrencies is contrary to how business is conducted at financial institutions nowadays. Some banks are actually quite inquisitive and want to explore the opportunities that cryptocurrency might bring. To us it is clear that there are opportunities for the traditional financial institutions to capitalize on. For example, we believe banks could facilitate the storage of cryptocurrencies in a safe and customer friendly way. Also we see that cryptocurrency can enable cheap international payments for the masses, which at this point in time is still a costly enterprise for an average consumer. In
services like international payments banks and remittance providers might have a market to lose, although we do not think traditional financial institutions will disappear. The traditional players will have to come up with an answer though if they want to absorb the possibilities that cryptocurrencies might bring.
“Cross-‐currency transactions will
increasingly be carried out by means of Bitcoin.” “if regulation is made that is too
restraining or otherwise not adequate, it can hamper the development of innovations.”
What role do you think cryptocurrency will play in 5 years?
Jouke: In three years, everyone on earth will know about Bitcoin. For us it feels like the discovery of the Internet or the advent of the mobile phone. A lot of things are going to change!
In about five years cryptocurrencies will be 10, 100 or a 1000 times larger compared to now. We think that Bitcoin in particular will remain a driving force behind all the cryptocurrency initiatives. The protocols behind cryptocurrencies will also be used in other contexts, like the transaction of property, the registration of cars, or various types of stock-‐market trades. Keys to a car could be encrypted in a block chain and passed on from owner to owner. You would be able to start a car with a private key you have just received.
Niels: Anything else for which we need notaries at this point could basically become more secure and transparent by using block chains. The primary application that we are using now is doing transactions, but with the block chain technology we can do so much more.
4.2
Tony Gallippi: The continuance of the evolution of digital money
How is cryptocurrency affecting our world?
I think Bitcoin and the dawn of cryptocurrency is probably the biggest opportunity for innovation, job creation and capital formation since the dawn of the Internet itself.
First of all, the technology of cryptocurrency is going to lead to a dramatic increase in the connectivity of businesses around the world. It is really going to revolutionize e-‐commerce, especially cross border e-‐commerce, both in the sense of B2B and B2C. When it concerns payments, cryptocurrency offers a borderless payment mechanism that might change the world like e-‐mail, the World Wide Web, or voice over IP (VOIP) did. Second, services that make money on fees, park money or move money around the world will be commoditised. The cheapest, most counterfeit-‐proof form of payment out there is Bitcoin.
I do not think countries will adopt cryptocurrency as their national currency, although I do think it will be permitted to use Bitcoin as an overlay currency like gold or silver. It might be much like when the Euro first came out; you could still use Marks, Francs and Guilders but you could use the Euro simultaneously. The currencies will co-‐exist; people can trade it or use it for their cross-‐border transactions or anywhere else where it makes sense.
How do you think existing players in the financial industry will deal with cryptocurrency? Companies that make their money in cross-‐border payments will be
the first to get disrupted. The Credit Card companies will be the next to be affected because they make money on overdraft fees, over limit fees, monthly fees, authorization fees and statement fees. Since the system is much more efficient, all of those fees will potentially disappear when you use cryptocurrency.
In the nearby future we will still need the banks for loans, savings and security. Nonetheless, the basic transaction is going to be commoditized. Therefore the banks have to do some soul searching and get back to actual banking instead of trading derivatives and things alike. Banks definitely steered away from their original charters and are active in fields that they were not designed for. However, the banks that realize that they need to go back to basics will be the ones left standing in the end.
Banks basically have two options. They can either act like the music industry did back when mp3s became mainstream: fight the new development tooth and nail, or they can pick it up
Tony Gallippi is owner and CEO of BitPay, a provider of Bitcoin payment solutions for businesses based in Atlanta, Georgia. Together with his friend (and co-‐founder of BitPay) Stephen Pair, he found out about Bitcoin in 2011. Intrigued by the ideas behind Bitcoin, they realized that Bitcoin could be a low risk and low cost payment alternative for Internet businesses while reaching a global customer base. They decided to build tools that would help merchants to accept Bitcoin payments and that is how BitPay was born.
“Banks have to do some soul searching and get
back to actual banking”
like the telecom companies did with VOIP. When VOIP came out, Telco’s could have fought it, but instead they adopted it and used it for their internal communications to dramatically reduce their costs. They survived because they embraced a new technology.
Banks that in one way or another will embrace cryptocurrencies will be able to offer services to their customers that other banks cannot. Imagine that a bank would suddenly announce that customers could send up to a thousand dollars anywhere in the world on the same day for a one dollar fee. That would be huge; people would be lining up to use this service because normally it would cost them at least 30 dollars to do that today. As soon as one bank starts
doing this, other banks will be quick to follow. My take is that the innovative banks will win whereas banks that choose to build a moat around their legacy business model will lose. What game changers do you foresee for cryptocurrency in the nearby future?
There are a few things I can think of that would really change the way cryptocurrency is embedded in our global society. If a big bank would embrace Bitcoin (or any other cryptocurrency for that matter), it would definitely be a game changer. The same goes for if a very large web merchant would start to adopt cryptocurrency. If one of the top ten American retailers would start to accept Bitcoin, people would wake up. Other merchants would suddenly be incentivized to look at the advantages of cryptocurrency in terms of risk, cost and reach. This could happen anywhere, also with a major retailer in Europe that wants to expand to other countries.
Another game changer would be if a big corporate party would start using for instance the multi-‐signature feature of the Bitcoin protocol: you could use this feature to issue five private keys amongst executives for instance. Any three of the five can now spend the corporation's money. This could mean that the use of the protocol would spread quickly through the corporate world.
When governments are looking for bailouts like we saw in Cyprus, people could be driven towards alternatives like Bitcoin since governments really cannot seize those6. Governments can make it illegal, threaten to throw you in jail, but they cannot steal it. You can punish people who use the technology for bad things, but you cannot regulate the whole technology itself.
What new business models do you foresee that we do not see today?
BitPay is basically part of one of the first layers being built upon the Bitcoin protocol in particular, together with for instance the exchanges. What I think we will see is that people will start to experiment with other aspects of especially the Bitcoin protocol, and not only
6 During the economic crisis in Cyprus in 2013 there was reports of a rush towards Bitcoin in other EU
countries, especially Spain. Technology website Motherboard wrote an in-‐depth article about this topic.
“Imagine that a bank would suddenly announce that customers could send up to a thousand dollars anywhere in the world on the same day for a
1 dollar fee. That would be huge”