Facebook improving payments is likely only the start of what’s to come with currency
In the beginning, there was Bitcoin. First proposed by the anonymous Satoshi Nakamoto in 2008, the first Bitcoin was created, or mined, in January 2009, before 4K TV, before Snapchat, before so much of the web we know today.
10 years later, cryptocurrencies only have a total value of $177 billion (£138bn).
‘Only’ might be the wrong word but that’s approximately 500 times smaller than the total value of all money globally yet the media, governments and central banks are all standing up and taking notice.
It’s again scheduled for discussion at the forthcoming G20 meeting in Japan this June and big companies like Facebook, Amazon, Tesco, Microsoft and others rumoured to be looking into how they might get involved.
Why all the fuss? A cryptocurrency means an individual can become their own bank. People can perform transactions anonymously, with near nil fees, in real-time and cross-border while storing their wealth independently without being able to be tracked.
It’s a scary thing for governments to deal with. Dr Richard Whittle, chief economist at The Future Economies Research Centre at Manchester Metropolitan University suggests that the real question is ‘how can government handle this if they can’t even control the banks?’ The simple answer is that governments cannot fully control a cryptocurrency by virtue of their fundamental design.
They are stateless, meaning that no nation has jurisdiction over it entirely.
Banks are often prohibited from overseeing cryptocurrency transactions on behalf of their clients for regulatory reasons because senders of cryptocurrency are required to pay a small fee that is paid to an anonymous miner who verifies the transaction.
Not knowing the geographic location of this person means that the bank cannot be certain that this small payment has not been made to a person in a sanctioned country such as Iraq, however unlikely.
It has been a key block in regulated banks experimenting more in the technology. The taxation of cryptocurrencies poses similarly unique challenges.
Just 802 US citizens declared cryptocurrency gains or losses on their IRS tax returns in 2015. That figure is woefully small and almost certainly incorrect. Around 5% of Americans are now said to have invested in Bitcoin.
Ownership and transactions can be anonymous and sit outside of the existing financial system meaning that if users wish to hide such activities from tax authorities then this is easily done, ignoring the moral and legal implications of course.
This needs to be balanced with the level of volatility of cryptocurrency. One Bitcoin has been worth everything between £2,500 and nearly £15,000 in the last 18 months. Exactly three years ago, one Bitcoin was worth £320. And even the level of privacy is changing.
The IRS achieved a court ruling to force cryptocurrency exchange Coinbase to provide personal details of 13,000 of their ‘high value’ account holders.
The value of Bitcoin rose sharply at the start of April 2019 (Chart: Coindesk) This tracking of exchanges is preferable for tax authorities rather than relying upon the morality of individuals who would perhaps shelter their gains anonymously whilst being forthcoming to declare their losses for relief purposes.
And there are further challenges. Cryptocurrency exchanges and supporting wallet storage technologies are largely unregulated meaning that in the event of a mistake or hack, such as the Mt Gox scandal in 2014, there is no support or banking helpdesk to assist you.
Being your own bank means exactly that. Despite the advantages, you and you alone bear responsibility. There are over 2,500 active cryptocurrencies, according to Investing.com, up from 1,600 less than a year ago.
The actual number is incredibly complex and up to three-quarters of initial coin offerings (ICOs) – the crypto version of an IPO to a stock market – are said to be a scam.
Government control? At the macro level, a nation state has two methods to control their economy.
Fiscal policy of tax and spend alongside monetary policy controlling the supply and inflation rates through adjusting interest rates.
If adopted on scale, this technology will wrestle control of the monetary system away from government and central banks and into the hands of individuals and corporations.
The million/billion/trillion dollar question is when might this happen? Cryptocurrencies are unlikely to disappear because they have unique advantages over traditional currencies and the existing banking system.
But without widespread regulatory approval and a global common standard they are unlikely to be adopted by the masses or receive long-awaited backing from big investment groups.
We are in limbo and have been for some time now, with adoption limited to a small minority of private investors.
Scale adoption is likely to be seen when corporate backed cryptocurrencies are launched, ironic given that Bitcoin was created to oppose the centralisation and incumbent power of such institutions.
In contrast, central banks have proposed a Central Bank-Issued Digital Currency (CBDC).
This would leverage some of the technological benefits of cryptocurrencies and the underlying distributed ledger technology (DLT) – a database held across a number of different locations or participants – but with oversight being provided by a single state authority rather than from a decentralised community.
The Bank of England has published four working papers on this subject over the previous 12 months trying to answer questions about how it would really work.
‘Cryptocurrency has the potential to fundamentally change the relationship between the state and money system,’ Dr Whittle says.
‘Government is given a false sense of familiarity by the currency part of the phrase. They think that this is something we have seen before, something we can control.
The potential here is so much more than that.’ Long-term we are likely to see the birth of a microtransaction economy where billions rather than thousands of transactions-per-second occur between a vast number of internet enabled devices, referred to as the Internet Of Things (IoT).
Here, transactions-per-second (TPS) is key. Presently, Bitcoin processes approximately only 5 TPS compared with Visa which can process a reported 24,000.
If microtransactions really catch on, it would require millions or billions of TPS.
While still difficult to imagine, it is the direction of travel for this emerging technology space.
Such a world would see real time payments, receipts and taxation. Imagine receiving your salary continuously as you perform your employed work rather than at the end of the week or the month.
Taxes such as PAYE and National Insurance would also be remitted to a central tax authority in real-time. Such principles would extend to corporates where the friction of tax (corporation and VAT) and cash flow management is eliminated and replaced with this continuous real-time system.
An accountant’s nightmare. In the nearer term, a cryptocurrency can be coded and issued in a matter of hours. Given most of the money we directly spend (rather than indirect taxation) is spent with corporations, you can already see the clues of where this is probably going.
Air miles, Nectar points, Disney Dollars, Clubcard Points, the list of loyalty schemes is endless.
Corporations have always recognised that through the control of such incentives they can promote our custom, harvest our purchasing data more completely and nudge our buying habits. A corporate-issued currency would take that to another level.
Could we really see Tesco Coin or Microsoft Coin? Perhaps. JP Morgan released the JPM Coin last quarter and now has 270 banks globally signed up to its Interbank Information Network where it will be piloted.
Japan’s banking giant Mizuho announced a J-Coin to promote digital currency usage alongside a consortium of banks representing 56 million customers.
Reported leaks from a Samsung insider suggest that the launch of Samsung Coin based upon the Ethereum blockchain is being researched.
Most interestingly is Facebook’s plans to integrate Messenger, WhatsApp and Instagram services was advertised to ‘allow messaging across platforms’.
What it hasn’t talked about is that similar changes could allow a Facebook Coin (only rumoured, at least for now) to move between these platforms as well as between connected subscribers. Improbable? Perhaps not.
The New York Times reported in February that Facebook is in advanced talks with leading cryptocurrency exchanges and former PayPal president and Coinbase board member David Marcus was hired to head up Facebook’s new blockchain unit.
A digital wallet has just popped up on the new Facebook release. The Wall Street Journal added further weight to rumours by reporting that Facebook was seeking $1bn (£760m) in investment for its cryptocurrency project.
The widely rumoured launch of Facebook’s Coin later this year would effectively bring the ability to store and transact money between all subscribers and vendors using these services, (approximately half the world’s population), many of whom are presently unbanked, or underbanked.
It’s not like Brexit, it’s not like the millennium bug, it’s not a temporary or short-term thing. This is a supertrend which has the potential to change centuries, if not millennia, of banking structures.
If the banking industry is the current example of Kodak, HMV or Blockbuster of times past, which cryptocurrency will become the Instagram, iTunes or Netflix of tomorrow and will surely change the way the whole world sees money. And chances are it is money that governments may never see unless they change regulations pretty quickly.
Gavin Brown is a senior lecturer in financial economics at The Future Economies Research Centre within Manchester Metropolitan University