Cryptocurrency: do you need to accept?

Cryptocurrency
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8 June 2018 | 0

There are few topics as divisive in the tech sector as cryptocurrencies and bitcoin. For some people, fiat currencies — those currencies backed by governments around the world — are seen as a tool of control and taxation.

They are easily tracked, taxed and moving them around the world requires the assistance of a third party like a bank that expects to be paid. Cryptocurrencies such as bitcoin, on the other hand, are supposedly a step on the road to a freer and more democratic world.

They are decentralised and can be moved easily and anonymously around the planet, they can be used to pay for transactions for next to no cost, are extremely secure and it is possible to make a lot of money investing in them.

“The adoption of bitcoin shows that the world has an appetite for blockchain-based digital currencies and payment. Whether it’s bitcoin or a central bank issuance, digital currencies can offer tangible improvements to financial services by increasing security and reducing friction, particularly in international payments,” Liam Chambers, IBM Research Ireland

There is just one problem. Other than transactions in which people purchase bitcoins themselves, not many real world deals are actually being done with the currency.

In fact, the complexity of accepting bitcoins recently created an embarrassing moment for the cryptocurrency revolution when a major bitcoin convention in the US had to stop accepting the currency as payment for tickets dues to the fees and congestion associated with it.

The North American Bitcoin Conference was held in Miami in January and had to pull out of accepting cryptocurrencies for last minute ticket sales. It put out a statement, saying “we have, and always will, accept cryptocurrencies for our conferences, up to fourteen days before the event. However, due to the manual inputting of data in our ticketing platforms when paid in cryptocurrencies, we decided to shut down bitcoin payments for last minute sales due to print deadlines.”

To the wild
Created in 2009 by Satoshi Nakamoto, bitcoin was the first cryptocurrency to be released into the wild. Its purpose is to allow one person to directly send money to another, in a peer-to-peer transaction that doesn’t require a third party such as PayPal, a credit card company or a bank.

Unlike conventional money, there can only ever be a maximum of 21 million bitcoins in the world, and there are currently around 17 million in circulation. New bitcoins are ‘created’ by a process known as mining, which effectively means having computers solve extremely difficult problems, taking time and energy.

Every bitcoin transaction is recorded and verified on a public digital record, the so-called blockchain, and there are thousands of copies of this record around the world, making it extremely difficult for any person to manipulate or falsify the data.

Bitcoin is by far the best known of the cryptocurrencies, but there are over 1500 in circulation including Ethereum, Ripple, Bitcoin Cash, Litecoin and EOS. Technically, there is nothing stopping anyone from creating a new one at any time.

So what is the situation for Irish organisations looking at cryptocurrencies as a route to new trading and commerce opportunities? Should they accept bitcoin or other currencies as well as euro and dollars?

“We threw it out there that we would accept them as part of professional fees. Nobody else had done it and we have an awful lot of fintech and tech clients so we’ve moved naturally into that area, with a number of ICOs looking to launch here,” said Susan Cosgrove, Cosgrove Gaynard

Digital tokens
“Today, it takes one click to buy an airline ticket or a new sweater, but if you want to buy stocks or get a mortgage, transactions like that are more time intensive. Whether it’s waiting for documents or settlement, many types of transactions aren’t instant,” said Liam Chambers of IBM Research Ireland.

“Assets like gold, real estate, fine art or carbon credits are more difficult to transfer, often obligating buyers and sellers to contend with mountains of paperwork and lengthy procedures. By representing physical assets as digital tokens on a distributed digital ledger or blockchain, it’s possible to unlock the value of real-world assets and to exchange them in real time.”

Currencies built on blockchain technology offer tremendous potential to the global financial system and none of this discussion is lost on central bankers.

“Around the world, central banks are actively involved in understanding and even experimenting with digital currencies. In fact, nothing is stopping a central bank from issuing a digital version of its fiat currency today,” said Chambers.

“The adoption of bitcoin shows that the world has an appetite for blockchain-based digital currencies and payment. Whether it’s bitcoin or a central bank issuance, digital currencies can offer tangible improvements to financial services by increasing security and reducing friction, particularly in international payments.”

Promotion of trust
Generally, more transparency, traceability and security can promote trust between parties and help accelerate financial inclusion. Anyone with a mobile device could access a digital wallet to serve as a bank account, essentially ‘banking’ a large percentage of the approximately two billion unbanked adults in the world.

“Programmable money can be designed to flow as easily as e-mail without sacrificing regulatory controls, monetary policy or personal privacy. The future of programmable money is dawning and currently in Sweden, Riksbank is experimenting with eKrona, and the Bank of Canada is working on a proof-of-concept with CADcoin,” said Chambers.

Issuing fiat on a blockchain has numerous benefits. The traceability of blockchain helps prevent financial crimes such as money laundering and corruption, and the efficiency of blockchain will reduce transaction and settlement frictions.

“The whole mechanism underlying Bitcoin which sounds noble and innovative and very technical, doesn’t lend itself to either very rapid transactions or very cost-effective transactions,” Dermot Williams, Threatscape

Lots of companies and retail outlets around the world accept cryptocurrencies, including some in Ireland. One is Cosgrove Gaynard Solicitors in Dublin. Earlier this year it announced that it would accept bitcoin as payment for services, making it the first Irish law firm to do so.

“We threw it out there that we would accept them as part of professional fees. Nobody else had done it and we have an awful lot of fintech and tech clients so we’ve moved naturally into that area, with a number of ICOs looking to launch here,” said Susan Cosgrove of Cosgrove Gaynard.

Not much interest
“So far, there hasn’t been much interest, but it’s there as an option. We will have to bounce it off the law society as soon as someone wants to do it. There are law societies in Canada that have laid out the rules for accepting new currencies, but we’ll obviously need to make sure that we stay on the right side of the Law Society here.”

Cosgrove said that when a client chooses to pay with bitcoin, then the currency would need to be cashed out into Euro straight away for regulatory reasons and could not be held for investment purposes.

“It would be a normal transaction, because the Law Society decrees you can’t hold assets like that.”

Built on the concept of blockchain, cryptocurrencies have sparked a wave of development in related technologies. Blockchains are chains of data that are secured and linked through cryptography, forming an open distributed ledger that records transactions in a verifiable and permanent way.

“People associate it with Bitcoin, but there are far more applications than cryptocurrencies. It’s basically a cryptographically secure distributed ledger which means that we can store anything that can be cryptographically represented in a database that is shared across multiple organisations,” said Niall Moran, director of the Microsoft Technology Centre in Ireland.

“Everything is secured and hashed and can’t be tampered with, is distributed across multiple organisations so no one organisation has complete control. That means that any transaction on the blockchain, any digital asset that gets moved from A to B has to have consensus across all organisations. That means you end up with a very secure, tamper proof database across organisations.”

Cryptocurrencies took off, in Moran’s opinion, because financial transactions over geographically diverse areas historically have been slow.

“Our focus is on advancing the enterprise-readiness of blockchain, taking the underlying technology and making it enterprise-grade. Cryptocurrencies aren’t really part of our focus but there’s no doubt that blockchain and the technologies prompted by it are here to stay,” Niall Moran, Microsoft Technology Centre, Ireland

Beyond currencies
“Supply chain, any type of asset ownership, deeds of houses, ownership of vehicles or auditing the movement of assets across organisations – all of these things can be done using bitcoin-inspired blockchain technology. If you can get all the parties to the transaction into a consortium, working together on the blockchain, you can remove a lot of problems.”

“Our focus is on advancing the enterprise-readiness of blockchain, taking the underlying technology and making it enterprise-grade. Cryptocurrencies aren’t really part of our focus but there’s no doubt that blockchain and the technologies prompted by it are here to stay.”

While blockchain has a bright future, the same can’t unequivocally be said about the cryptocurrencies that have inspired it. Not everyone is an unqualified fan.

“The problem with Bitcoin in particular is that the underlying value of the currency itself isn’t specifically rooted to anything tangible and as a result is massively volatile,” said Dermot Williams, managing director of Threatscape.

“The fiat currencies have some ultimate grounds in reality even if they’re mostly not linked to standard gold value anymore. They’re used by enough people, billions of people, to the point that we can all be reasonably confident that they will retain their value.”

While fiat currencies fluctuate in value in relation to each other, their values normally stay relatively stable compared to each other. Cryptocurrencies on the other hand are subject to wild speculation and their values can change enormously.

In 2017, the price of a single bitcoin went from $800 to a high of nearly $20,000, before dropping to the current level of about $8,500. How can companies operate with that degree of fluctuation?

“With blockchain-based crypto money stuff, in the five or ten minutes it takes to type in a transaction and process it, the value could go up and down. How do you work with that? With bitcoin, even its strongest proponents call themselves holders or ‘hodlers’ because they don’t want to sell it.  They think it’s going to go up and up so they intend to just hold on to it,” said Williams.

“This leads to a situation where the same people who are saying ‘this is going to be a bigger, better, newer way of transacting,’ are not actually transacting at all. They’re just sitting back and holding as a long-term investment and very little of it is actually moving around and being transacted.”

Williams is not the only one with reservations like this. Last month, Bill Harris, former CEO of Intuit and founding CEO of PayPal wrote an article for Recode.net which did not pull any punches.

A scam?
“Okay, I’ll say it: Bitcoin is a scam. In my opinion, it’s a colossal pump-and-dump scheme, the likes of which the world has never seen. In a pump-and-dump game, promoters ‘pump’ up the price of a security creating a speculative frenzy, then ‘dump’ some of their holdings at artificially high prices.”

So, what would it take for a cryptocurrency like Bitcoin to become respectable enough to be worth embracing? The answer, according to Williams, is quite a lot.

“I would answer by pointing out further difficulties that I have, and I think a lot of people have. The whole mechanism underlying Bitcoin which sounds noble and innovative and very technical, doesn’t lend itself to either very rapid transactions or very cost-effective transactions,” he said.

“People who are fans of Bitcoin rush to point out things like if I want to send $100 to my Aunt Mabel who lives in Sydney, going into a bank is time consuming and costly because there’s lots of fees and it might take a few days for the money to move from one bank to the other before it eventually reaches her. By contrast, with Bitcoin you can instantly send money to another Bitcoin wallet in seconds.”

But that is not really accurate anymore because to have a transaction permanently burnt into the distributed ledger which drives bitcoin involves transactional costs and time costs because it is so busy.

“It’ll take time for that transaction to actually get into the block, and there’s a cost. If want to go and buy a coffee, there’s no way you’re going to be able to pay for that with Bitcoin effectively because the costs that you incur are just too high and it’s going to continue to be the case because there are millions of computers around the world participating in the crypto work that’s required for every new block.”

These computers are currently doing that on the basis that there’ i still mining to be done and new bitcoins being awarded to those who win the race to create the next hash for the next block.

Coin cost
A further factor is the environmental cost. All those processors busily mining bitcoins are using an enormous amount of power to do so. According to Digiconomist, the estimated power use of the bitcoin network responsible for verifying transactions made with the cryptocurrency is 30.14TWh — which means that the network uses more power in a year than the whole of Ireland together.

“A measurable percentage of the world’s electricity is now going into to sustain the bitcoin network and from a green perspective, it’s horrible.  Some of it’s happening in parts of the world where people have access to cheap electricity because that’s what you need, and of course there are all sorts of people stealing electricity as a means of literally making money,” said Williams.

“If you list some of the key factors that people cite as being why bitcoin is going to change everything and why ten years from now it will be the only way people will transact, most of them don’t hold up to cold reasonable analysis. It’s not faster, it’s not more efficient, it’s certainly not a stable form of value — it’s none of those things.”

“I think as people realise this, that will further drive the insane market capitalisation of all the Bitcoins out there further down. Because in total Bitcoin is worth something like $150 billion at the moment but if everybody rushed for the exit to try and sell, I can guarantee there isn’t $150 billion of real smart money out there that has any interest in buying up an awful lot of digital nothing.”

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