Date posted: 1/12/2016 5 min read

Digital currencies and the transformation of payments systems

Cryptocurrencies and digital wallets will cause a fundamental upheaval in global currency systems

In brief

  • While bitcoin has criminal associations, future digital currencies will be more transparent
  • Digital currency payments are immediate, regardless of the payer’s location or payment method
  • Digital currencies are gaining legitimacy globally in commerce, courtrooms and legislatures

By Grant Anderson CA

Our past surrounds us. Every day, we are guided by the footsteps of our forebears. Sometimes that’s a good thing. Sometimes it makes change happen slowly.

The more deeply ingrained a custom or practice is, the more slowly it tends to change. Our legal system is an example. Our laws are slow to change; they lag behind rapidly-evolving innovation, always struggling to keep up.

Some of the faster change we see around us is a result of technology disrupting long-accepted ways of doing things. We’ll soon see fast and fundamental change with one deeply-embedded cultural convention: our currency and payment system. The convergence of digital currencies (also known as crypto-currencies), digital wallets and peer-to-peer payment systems will cause a fundamental upheaval.

Bitcoin a trail-blazer

Digital currencies will play a key role in this disruption. The first digital currency to achieve a significant profile was Bitcoin. Holding Bitcoin in a digital wallet can be likened to burying gold in your garden (though the analogy is not exact). It doesn’t earn any interest, its value fluctuates but it’s under your control and you can keep it secure.

Like the first movers in many tech areas, Bitcoin has been blazing a trail for others to follow. Much of Bitcoin’s work provides a great foundation for others to build on, such as the development of blockchain technology. But Bitcoin has also tarnished the image of crypto-currencies for many people as a result of its widely publicised fluctuations in value and its reputation as a tool used by criminals and money launderers.

Bitcoin ownership and use is widely thought of as anonymous, which made it popular on “dark net” websites such as Silk Road (infamous for facilitating drug dealing and other illegal activity). Unfortunately, the perception of anonymity tarnished the image of digital currencies as they appeared to facilitate criminal activity.

However, as criminal offenders have found at the cost of their liberty, bitcoin ownership and provenance can be established from the blockchain. Even the UK Treasury acknowledges that Bitcoin is only perceived to be anonymous. More correctly, it can be said to be pseudonymous; ownership is masked to some extent.

Bitcoin’s volatility as a means of storing value has also drawn a lot of attention. Again, this has tainted many people’s views of digital currencies in general. Actually, Bitcoin can be bought and sold like a foreign currency and has a market exchange rate against numerous currencies. There are dozens of active markets and exchanges within which Bitcoin (and other digital currencies) can be liquidated and/or converted. The exchange rate of Bitcoin fluctuates in just the same way that exchange rates for sovereign currencies fluctuate.

Transparency will bring protections

In the future, ownership and proof of value of digital currencies will be more transparent, providing protection against inadvertent loss of a digital wallet, fraud or theft, and as a deterrent to money laundering. Many people will see this as a reasonable trade-off for the loss of anonymity. Mainstream business will view traceability by taxation authorities or law-enforcement officials as a reasonable price to pay for these advantages.

Digital currencies remove barriers for payment

Businesses are continually evolving, seeking out faster, cheaper, more convenient ways of doing things for their customers and for themselves. Digital currencies can offer all of this. At present, the decision about whether a business should accept digital currency as a means of customer payment is probably more of a marketing decision than an IT decision. As with all business decisions, the cost of providing a digital currency payment service must be balanced against the benefits to customers and the business.

For most businesses down under, the best course of action is to learn about digital currencies and digital wallets. Gaining an understanding of how the current technology works and who is using it will help guide business thinking and strategy.

Multiple digital currencies

But which digital currency should a business accept? BraveNewCoin.com, Blockchain and digital currency advisers list conversion rates for 82 different digital currencies on their websites, but only six of the currencies have significant market capitalisations. Bitcoin currently dwarfs the others in terms of value and volume, and still has first-mover advantage in the market. How long will that last? Just as Bebo and MySpace were superseded by Facebook, another digital currency may rise up and gain mainstream acceptance.

In fact, businesses need not choose between the range of digital currencies available. Exchange and conversion tools are already available that accept payment in any digital currency and convert the payment instantly into the fiat currency of the business’s choice. So businesses can easily accept payments in many digital currencies.

Disruption to payment services is inevitable

Using digital currency, payments are immediate, regardless of the payer’s location, payment method or payment currency. Many consumers will choose these advantages and move away from traditional payment services. Bank and merchant service providers may be disrupted through mainstream acceptance of crypto-currency payment services for peer-to-peer payment.

The costs of payment services will drop for a number of reasons.

Firstly, digital currencies don’t have the same transaction costs as traditional banking systems and payment services. The capital-intensive legacy bank account systems of today’s banks will need to compete with secure peer-to-peer payments services that already exist. These services have smaller capital costs than bank legacy systems and so have lower transaction costs.

Secondly, digital currencies don’t have the same policing and enforcement costs as fiat currencies, giving another transaction cost advantage.

As crypto-currency enters the mainstream, use of conventional credit cards or bank accounts will decline. The savings, investment and lending functions of banks will remain, but payment services may disappear from banks completely. Indeed, it is possible that bank accounts as we know them will vanish and have their place taken by digital wallets.

Digital currency is here to stay

For many businesses in Australia and New Zealand, the biggest impact of widespread acceptance of digital currency will be the creation of a payment option that is faster, cheaper and more secure than any option currently available.

We have not reached the sweet intersection of consumer acceptance and technological capability for digital currency, but we can’t be far from it. The digital wallet technology exists today. Consumer acceptance of digital currencies is growing and will continue to grow. Digital currencies are steadily gaining legitimacy in commerce, courtrooms and legislatures around the world.

For most businesses down under, the best course of immediate action is to learn about digital currencies and digital wallets. Gaining an understanding of how the current technology works and who is using it will help guide business thinking and strategy.

Change and disruption in the realm of currency and payments is upon us. The question is not whether it will happen, but how quickly?

Grant Anderson CA is head of accounting and Xero.

This article was first published in the March 2016 issue of Acuity magazine.

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