The world has already accepted many of the concepts behind digital currencies although not in widespread general use beyond simple transactions. While large challenges exist for the commercial and financial sectors, full acceptance and integration into the world economy is inevitable. While Bitcoin began essentially as a “protest” and was founded as a way to allow person to person financial transactions at a low/no fee without the need for middle men such as banks, digital currencies are now substantially more than that.
Today, a large portion of the world operates as a cashless society using virtual representations of hard currency. Digital currencies in the form of electronic banks and credit cards set the stage through the electronic abstraction of cash2. Even prior to the crypto currencies we now think of as digital currencies, the first centralized digital currency (DigiCash)3, although unsuccessful, introduced the concept of digital currency in the late 1980s. Crypto currencies like Bitcoin and Ethereum bring properties like transparency and cryptographic signatures to achieve a distributed trust and consensus without the need for a centralized entity.
Unfortunately, technical complexities of digital currencies often prevent an intuitive understanding of digital currencies. Many people often get hung up on the virtual nature and hold onto the idea of currency being backed by something tangible which hasn’t been the case for many decades. Although understanding is made easier through tangible examples. In the social context this is driven through the gaming and the sharing economies. The use of digital currencies for CryptoKitties1,18 which was an early form of Non-Fungible Tokens (NFT) that have been in the news lately. Other crypto coins like Enjin Coin and Theta Token4 are being used along with virtual tokens in games to intuitively expose the users to digital currencies. In the sharing economy (direct to consumer transportation, consumer goods, and personal services) the properties of crypto currencies enabled through smart contracts provides a huge opportunity for efficiencies5,6. While not yet widespread, other examples include blockchain enabled city services and user to user bike sharing1,7.
Commercial, financial, and government sectors have begun to see the benefits of digital currencies. There are many challenges that must be overcome and are actively being addressed. These challenges include business model threats and regulatory concerns with additional concerns around identity and volatility.
In the commercial and financial space, digital currencies can be a threat to existing business models and will require close management and investment. Examples of threats include the loss of money transfer fees or the UN exploring whether digital currencies can directly replace bank accounts8. Commercial entities like PayPal, Facebook, and WeChat are running trials of digital currencies to provide services traditionally performed by banks9.
Regulation is a paramount concern for financial and Government entities across the world. In the United States FinCEN does not consider crypto currencies as legal tender but rather as property, while the SEC considers them securities and the CFTC considers them commodities10,11. These views are common across the world12. Despite the fractured regulatory space, there is ongoing progress such as Conference of State Bank Supervisors setting standards across the US13. Nations like China, Venezuela are investigating and El Salvador is launching their own digital currencies. Other countries have made attempts to limit cash purchases and while China pursues its own digital currency, it is massively cracking down on mining activities.14,15,16
Identity is another concern since anonymity was a key aspect of the original digital currency implementations. As regulatory frameworks have come into place the anonymous aspects are now being accounted for. While black markets and true anonymity will always exist, widespread acceptance of identity proofing balanced with privacy concerns will be needed for full acceptance worldwide15.
Another hurdle is the energy cost associated with crypto such as Bitcoin. However this challenge is being overcome by a switch from proof of work to proof of stake such as that is being undertaken by Ethereum and will result in 99.95% reduction in energy costs.17
While hurdles still exist, these issues are being directly addressed. The tipping point for social, commercial, financial, and Government acceptance already occurred and digital currency will ultimately be fully integrated into society.
- MIT Course Materials
- https://www.thebalancesmb.com/the-sharing-economy-and-how-it-changes-industries-4172234#:~:text=The sharing economy is an,under Dutilized skill or asset.
- https://complyadvantage.com/knowledgebase/crypto-regulations/cryptocurrency-regulations-united-states/#:~:text=Cryptocurrency Regulations in the United States,-Cryptocurrencies Not considered&text=The Financial Crimes Enforcement Network,value that substitutes for currency.