Towards the end of 2014, there seemed to be a huge fuss made over new mobile payment systems. Apple with all its brand behind it was finally making mobile payments a consumer reality. The era of cash we were told, in the industrial world at least, was slowly dying. Apple Pay was labelled the killer. Mobile wallets were declared the future.
Beyond the wallet horizon
This mobile wallet future will probably still happen. Yet it is a future guilty of technological myopia. I may indeed be using Apple Pay regularly in 3 or 4 years. But this emergent technology is nowhere near the biggest change set to occur in payment systems. The economic disruption fueled by relentless growth in smartphone ownership vastly exceeds limited predictions of mobile wallet innovation. Quite frankly, recognising the potential of Apple Pay is admiring the latest version of the horse and carriage, just as the first motorcar comes zooming past. If you want to know what the world of financial transactions will look like over the next century, you better focus on the revolution brought on by cryptocurrency.
The world of cryptocurrency
The most well-known form of cryptocurrency at the moment is Bitcoin. Bitcoin is a digital currency that relies on computer encryption techniques to regulate the generation of currency and verify its transaction between individuals. The easiest way to see it at work is to install a Bitcoin Wallet smartphone app such as Baseline, Blockchain or Coinbase. Your Bitcoin can be stored in these wallet apps and then traded for money at a Bitcoin exchange. If that simplistic definition does not make Bitcoin clearer to you, do not worry you are far from alone.
The public’s view of Bitcoin is that it is a confusing form of electronic currency that nobody really understands. Ask most CFO’s how it functions, or how it has value, and they often remain quizzical. In contrast, Bitcoin to its advocates is the biggest game changer since the introduction of the internet. To anyone that looks at cryptocurrency, even for a few days, it is very hard to argue against the zealot’s opinion.
Why is cryptocurrency different?
The first caveat to note is Bitcoin is more than a currency. To borrow a phrase from a leading financial pundit, “seeing Bitcoin as a currency is like seeing e-mail as the internet”. With Bitcoin users have the potential to create an IPO and issue a form of shares. They can also use Bitcoin to help protect intellectual property, amongst a multitude of other uses.
As a currency though, the potential is still colossal. This is not an exaggeration, cryptocurrency could genuinely change the world economy. This is primarily because the biggest advantage to Bitcoin is it dramatically lowers the cost and risk of financial transaction. The leading players Visa and Mastercard charge a small percentage to the vendor to complete a financial transfer. This cost is then transferred to the consumer by the vendor. Western Union is similar, but the percentage cost can be higher, almost 10% in some cases. With Bitcoin the cost is negligible and the scale is global. The speed is also instant. No more waiting 3 days for money to be transferred. Moreover, there are no national boundaries affecting Bitcoin. There are consequently no conversion fees related to currency exchange.
Hence Bitcoin’s value for remittances is obvious. The cryptocurrency offers far greater security, at far faster speeds, at often far lesser cost. All Bitcoin requires is an internet connection. This is something that is becoming more available worldwide, especially with the growth of very cheap mobile web enabled feature phones.
Remittances are just a fraction of the whole
Cryptocurrency’s potential is not confined to remittances, according to leading Bitcoin supporter Andreas Antonopoulos. He argues, Bitcoin could fundamentally change the life of billions of unbanked people in the developing world.
Consider that the number of people with internet access outnumbers those with banking or credit options by almost a billion. There are also billions more engaging with only local cash currency. Elsewhere consider the millions who are victim to a deeply insecure and fluctuating national currency. They are often restrained from moving their savings to a more secure system by government regulation designed to prevent capital flight.
Bitcoin, argues Antonopoulos, circumvents all these problems. Through Bitcoin these individuals are able to offer their services to a worldwide market. They can receive investment from any nation without concern for uneconomical transaction costs. Furthermore, they can bypass national currency regulation. Put simply with Bitcoin, it may be possible to bring billions of people who have previously never directly engaged right into the heart of the global economy.
Cryptocurrency is a safer payment alternative
The transaction cost benefit is a small fraction of the whole advantage of Bitcoin. This is because Bitcoin inherently takes away the need to trust the transaction partner. The faith is moved towards the cryptography process.
Without going into the technical specifics, the security provided by the cryptography is vastly greater than anything involved in credit or cash transactions. This is widely recognised by everyone involved. There nonetheless remains misguided concern that an encryption based currency would contain hackable weaknesses that could compromise the whole system.
The infamous Mt. Gox failure of 2014 was cited as evidence of this security flaw. Mt. Gox was the world’s largest Bitcoin exchange, at one point used for 70% of Bitcoin transactions. Last year, the company revealed almost $450 million worth of Bitcoin had been lost and presumed stolen from its exchange. This failure caused widespread negative publicity for Bitcoin, damning the entire cryptocurrency industry in public eyes.
Without question Mt. Gox was indeed a security failure, but one of design failure rather than Bitcoin cryptography. In Antonopoulos’ words Mt. Gox failed as it acted more like a bank and not like a Bitcoin exchange. This view is shared by many who are in the know about the long term security of Bitcoin. For clearest evidence of this positive viewpoint see the Bitcoin recovered price rise following the initial fall.
Bitcoin can be trusted
Security remains central to Bitcoin. Bitcoin has no centralised authority. It is protected by every member of the community who helps maintain a ledger of every Bitcoin transaction to prevent double-spending. Every single transaction with Bitcoin is therefore recorded to help maintain the system’s integrity. Successful transactions can also only occur with the right private key. If you do not have the amount, you will not possess the right private key, the fraudulent transaction can never go through. Your Bitcoin Wallet app is as a result probably more secure than your debit card.
This has huge implications. With Bitcoin you no longer have to worry about the user’s credit worthiness or the possibility of fraud. You are also not restricted by currency controls designed to protect the value of the national currency. Price fluctuation is no longer affected by the decisions of leading political or financial leaders. With Bitcoin you have the first global free currency available to an almost global audience.
Who’s championing Bitcoin?
The Argentine public have significantly adopted Bitcoin as a form of payment. To the average householder in US, Bitcoin represents volatility. In Buenos Aires, Bitcoin is a hallmark of stability when compared to the hyperinflation of the Argentine Peso. In fact of the almost 200 currencies available worldwide, there is a strong case for saying Bitcoin even in its first few years represents greater stability than almost 1/5th of them. This stability will only improve with increased use and ownership. As the currency becomes more liquid, it will almost certainly become more stable. This stability will also become further embedded as the industry inevitably gains greater regulation. It is therefore unsurprising that most of the countries that have banned Bitcoin have serious concerns about their own currency.
The major investors have backed Bitcoin
Advocacy of Bitcoin has also been legitimised by some very serious investment names. Speculation mounted this week that the Bank of England is looking to mint its own form of Bitcoin. Peter Thiel and Sean Parker of PayPal and Napster fame are large-scale investors in Bitcoin start-ups. Additionally, Peter Schiff, leader of Euro Pacific Precious Metals, the largest precious metal dealer in the world, lets his company accept Bitcoin. The Winklevoss twins, (of infamous Facebook lawsuit renown), allegedly invested when Bitcoin was worth less than $1. They have made some serious financial gains by recognising this early opportunity. During 2013 Bitcoin’s value reached over $1200. They now own 1% of all the world’s Bitcoin which currently has a $3.3 billion market cap. Virgin founder Richard Branson also sings the praises of the cryptocurrency. So much is his faith in Bitcoin that Branson’s Virgin Galactic even allows customers to purchase space flights with it. A future currency for a future way of travel perhaps?
Bitcoin purchase options back on Earth
Bitcoin’s presence is not just a future concept though, it is increasingly gaining store value. You can now use Bitcoin for a multitude of products. It is accepted at the takeaway chain Subway. Microsoft allow you to pay for digital products with it. Lamborghini have sold their latest supercar using it. Bitcoin gift cards can be used at Target, Walmart and Nike. You can buy apps and games with Bitcoin on Windows Phone. Starbucks let you exchange the currency for a Mocha using your smartphone. The largest e-commerce Bitcoin store even allows for lower prices than Amazon due to the cheaper transaction costs.
So cryptocurrency is the future?
Cryptocurrency will be the future, but it is not going to replace dominant fiat currency like the US dollar anytime soon. The US dollar has entrenched support and far greater store value. Other currencies may not have the same survival chances though. Bitcoin’s first imprint will therefore be seen in the developing world.
Consider examples like M-Pesa in Kenya. This mobile payment method has fundamentally changed finance in the country. Individuals are often sending funds/payments exclusively through mobile transfer on nothing more than basic feature phones. It is therefore not a great leap of imagination to picture individuals like those using M-Pesa adopting a currency with even greater reliability and lesser costs. Given the number of itinerant workers in the region Bitcoin’s transnational nature also provides greater value over current mobile alternatives.
The number of users of M-Pesa is limited only to Kenya. Mobile payment methods elsewhere have failed to develop mainly due to the diversity of payment systems and telecommunication providers trying to get a slice of the mobile transfer pie. There is less incentive to adopt a form of M-Pesa when there is no ubiquitous system everyone accepts. Bitcoin therefore has the major advantage of being the first player and the dominant currency in the cryptocurrency market. With Bitcoin, growth is only limited by the necessity of an internet connection. The rapid sales of cheap, high function smartphones most evident from Xiaomi further reduces this barrier to Bitcoin’s widespread adoption. The network effect is huge and will grow with further consumer usage. This is an awful lot of people increasing the worth, reputation and usability of a currency over time.
The mobile payment future
The phone has evolved its purpose alongside technological innovation. The telephone gave the consumer communication on demand. The creation of the smartphone gave the mobile consumer information on demand. Smartphones of the future with pre-installed Bitcoin apps may well give a majority of the world for the first time global finance access on demand. The future of mobile therefore will be mobile payments, but cryptocurrency on mobile is the method really worth paying attention to.
This article was written by Matthew Dow, Mobile Executive at Fetch.