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When it comes to debating digital currencies, increasingly it seems to be the case that we must ask “whose side are you on?”
Are you a sceptic, like JPMorgan Chase CEO Jamie Dimon, or billionaire hedge fund veteran Ray Dalio, or Nobel prize winning economist Robert Shiller, all of whom have bashed bitcoin recently, calling it a “a fraud”, and “a bubble”?
Or are you a “believer”, like Fidelity CEO Abigail Johnson, or even International Monetary Fund chief and economist Christine Lagarde?
It may seem strange to read that Lagarde is pro-digital currency, especially when bitcoin is still considered by many economic “experts” to be too volatile, too prone to use by criminal agencies and money launderers, and too slow when it comes to the time it takes to process payments, to be considered as an alternative to todays centralised, finite and national / regional currencies.
But last week, whilst giving a speech on behalf of the IMF in London at the Bank of England Conference, Lagarde devoted a large portion of her time to digital currencies.
Decentralised, self-regulating and certainly not the same as “digital payments”.
First of all, she was quick to distinguish “virtual currencies” from “digital payments”, namechecking services provided by Alipay in China, M-Pesa in Kenya, and Paypal. None of these are virtual currencies, she explained, but bitcoin and e.g. Ethereum are.
The difference, according to Lagarde? “Virtual currencies are in a different category, because they provide their own unit of account and payment systems. These systems allow for peer-to-peer transactions without central clearinghouses, without central banks.”
Here, Lagarde has hit on probably the biggest issue that banks, major financial institutions, and most likely the IMF itself, have with bitcoin and the blockchain. It is decentralised, and self-regulated.
It is this distinction that makes bitcoin both loved and hated, and such a hot topic of conversation. Can a decentralised ledger that processes, records and stores all transactions made using a network of independent digital currency “miners” really work? Won’t financial services activities always require 3rd party policing?
Some believe we will always need banks and institutions to act as the third party, overseeing and policing the financial system. Others believe that these same agencies are the ones corrupting the system, taking fees form customers for providing an unnecessary, outdated service. Why should continue to put up with unnecessary fees now that we have superior technology?
Still more people would like to see some kind of compromise where bitcoin and other digital currencies could be partially regulated. But in a way this stance defeats the entire object of the blockchain. It would be like inventing air-travel but refusing to allow the planes to actually take off. Pretty soon, people stop paying attention to these draconian and apparently unnecessary instructions.
There is not much room for compromise on either side of the debate.
Bitcoin still posing no challenge to the existing order of currencies?
In her speech last Friday Lagarde was quite scathing about the progress of digital currencies to date, arguing that:
“For now, virtual currencies such as Bitcoin pose little or no challenge to the existing order of fiat currencies and central banks. Why? Because they are too volatile, too risky, too energy intensive, and because the underlying technologies are not yet scalable. Many are too opaque for regulators; and some have been hacked.”
It’s hard to agree with Lagarde that digital currencies, and especially bitcoin pose “little or no challenge”. Perhaps not in the immediate short term, but most definitely in the long term.
The reason? The blockchain is a generation’s answer to the problem of fiat currencies, which, given how the modern world is evolving, are becoming increasingly out of date, and out of touch.
Lagarde does concede that her concerns about digital currencies are in fact, “technical challenges that could be addressed over time”.
She also suggests that the time has come for countries “with weak institutions and unstable national currencies” to stop pegging their currencies to, or simply adopting, the dollar, but to consider bitcoin instead.
Somewhat ironically, Lagarde was making this case in a country, the United Kingdom, that a generation or two ago was considered a formidable world power, but which now has an unstable currency of its own, is in political turmoil, and is unable to raise interest rates above 0.5% for fear of rampant inflation and financial meltdown.
So, should the UK start thinking about holding virtual currencies rather than physical dollars, for example? Lagarde suggested in her speech that “it may one day be easier and safer than obtaining paper bills, especially in remote regions. And because virtual currencies could actually become more stable.”
Bitcoin best way to send micro-payments – and given time, large payments too?
And finally, Ms Lagarde addressed the role of bitcoin and the blockchain in the world of payment services, saying “this is an economy rooted in peer-to-peer transactions, in frequent, small-value payments, often across borders.”
In many ways, micropayments are the perfect current use-case for the blockchain and bitcoin.
As Lagarde put it:
“four dollars for gardening tips from a lady in New Zealand, three euros for an expert translation of a Japanese poem, and 80 pence for a virtual rendering of historic Fleet Street: these payments can be made with credit cards and other forms of e-money. But the charges are relatively high for small-value transactions, especially across borders.”
Is it fair, or right, that the public should have to pay such high fees when transferring small amounts of money?
Clearly, there are many fintech firms out there who do not think it is. Think of payments services such as TransferWise, Revolut, or Circle Pay (or visit our site to compare the best rates on offer) who all operate under the principle that all money transfers should charge the lowest fees possible.
Of these three, only Circle Pay is currently prioritising blockchain, however, with the aim of making all transfers completely free, whilst the other two focus on undercutting the banks prices.
And perhaps that is the perfect illustration of where we are now with the blockchain.
Before long it will fiat currencies with a host of questions to answer, not the blockchain / digital currencies?
There is much disruption happening within the financial services industry. From banks making changes in-house, to fintech firms partnering with banks using Open APIs and in conjunction with regulatory bodies like the IMF, to fintech firms trying to tear up the rulebook, and finally, to ideas like the blockchain, which, long term, posits that the entire financial system should be overhauled and replaced.
Who will succeed? Only time will tell, but what is most interesting currently is that soon people will be asked to make a case that the current financial is modern, relevant or right?
After all, it is hundreds of years old, and times have changed. Bitcoin enthusiasts have fought hard to position the currency as a viable alternative to fiat currencies. But to date banks and financial institutions have not recognised the need to justify the existing system.
That time is surely coming fast.
In short, the blockchain could yet be bigger and even more transformative than the internet, and if anything, it is the banks and financial monitoring institutions that may be forced to change, or admit that they are not in control of the future direction of the financial services industry in its current form.