The Real Deal Surrounding Digital Currency
Last week, I attended the Digital Currencies Conference in NYC. Organized by American Banker, it’s a good conference to dig-in to digital currency as it has a more realistic bent and a good representation from banks and government regulators. Think less ‘Bitcoin bravado’ and more real details of how the underlying technologies could be integrated into the global financial system, within legal frameworks to improve efficiency and capabilities.
The future of Bitcoin
While Bitcoin is the current clear leader of digital currencies, there was considerable discussion amongst the attendees over whether it had a future. Some said that Bitcoin would be the winner or there would be no winner at all. Others thought Bitcoin was nothing more than a Ponzi scheme. I’d say that the strongest current was that Bitcoin was likely not going to be the long-term winner, but that many of the underlying technologies will likely be incorporated into the future vision for digital currency.
Digital currency is still new
There was acknowledgement that digital currency is at the very early stages. While the nominal value of digital currencies is fairly large (although still tiny compared to global money supply), the amount of transactions taking place with digital currency is miniscule. Most of Bitcoin holdings just sit as a speculative store. Very few retail transactions take place with Bitcoin. The fact is that payment systems in the U.S. and the developed world work pretty well, so there isn’t a compelling motivation for consumers or retailers to introduce Bitcoin as an alternative payment method. Right now it’s more of a gimmick.
The global remittance effect
There was a lot of attention paid to this topic. Apparently this is one of the first perceived killer apps for digital currency. Global remittance flows are very large and tend to be very inefficient with very high fees. Several companies are trying to use digital currency to cross borders with no fees. The key in this case is how to make use of the digital currency once received in the developing economy. Unfortunately there are currently nearly zero options for using digital currency like Bitcoin in a developing economy, as well as almost no way to use it in a developed economy. So getting a bunch of Bitcoin doesn’t help to put food on the table. The challenge for these digital currency remittance companies is to find ways for the transfer to be converted to local currency so that it can be used. But perhaps this conversion brings us back full circle by imposing high fees. The jury is out.
As far as what to watch out for – I found it interesting to hear from Chris Larsen, CEO of Ripple Labs. Ripple is another digital currency with a completely different architecture from Bitcoin, with some advantages and some disadvantages. Ripple is working hard to sign up banks and other institutions to help grow its network, as opposed to Bitcoin which focuses on avoiding the existing financial infrastructure. A fork of the open source Ripple protocol was recently announced called Stellar. It is financially backed by Stripe which has been a high flying player in the payments space. Interested to see where this goes in the future.