The rise of virtual currencies is an inexorable phenomenon. Today they represent only a marginal share of trade and are struggling to gain acceptance as a store of value. However, the technology behind virtual currencies is likely to dominate and change the definition of money. By Christopher Dembik, Economist, Saxo Bank.
In recent decades, the dematerialization of the currency has accelerated with the spread of payment cards and the emergence of electronic transactions via the Internet and mobile telephony. Virtual currencies, especially Bitcoin, are just the latest in a process that has been running since checks were put into circulation.
Even the most fervent advocates of virtual currencies will recognize that there are still far too many obstacles to consider for use by the general public. The technical complexity for the uninitiated, the instability of the exchange rate and the absence of guarantees on exchanges and storage, like for example the deposit guarantee existing in France, prevent them from claiming real role of store of value.
It seems unlikely that Bitcoin can be sustainable. On the other hand, the technology behind virtual currencies is likely to dominate medium-term financial transactions.
The advantage of the Bitcoin protocol
The technological impact is already perceptible since it has made it possible to improve the payment systems of banks and online businesses. Thus, regional banks have adopted this technology to bypass the major international banks they are dependent on and have access to a faster payment system and lower cost. Numerous e-commerce sites have acted similarly to offer this technology to their customers.
The most visible and economically attractive benefit of the Bitcoin protocol is certainly the significant drop in transfer fees it allows. Today, incumbent operators, like Western Union, charge fees of up to 10%. Thanks to the adoption of Bitcoin technology and the arrival of new players in the process, a Goldman Sachs report estimates that transaction costs could rise from an average of 6% to less than 2.5% next ten years.
Adapt or cooperate with the Bitcoin ecosystem
The considerable savings generated for users could be channeled towards R & D, investment in fixed assets or consumption. In the poorly banked economies of Africa, Bitcoin technology is already a market of the future that has been backed by the rise of mobile telephony.
According to the Overseas Development Institute, Africans pay an average transaction fee of 12.3% for 200 euros, while companies using Bitcoin technology charge between 1% and 3% on all amounts.
In order to maintain their footprint in the payments industry - which is worth nearly $ 1.2 trillion - online payment service providers will have no choice but to adapt and cooperate with the industry. Bitcoin ecosystem.
Security to reinforce
To consider a more widespread use of this technology by the financial system stakeholders, it will, however, strengthen its security because it is still very vulnerable to hacking and viruses. Cybercriminals can steal Bitcoins by using malware targeting portfolios stored on computers and connected to the Internet. They can also hack into bitcoin exchange platforms - as has happened many times over the last few years - causing net losses for virtual currency holders.
As there is no external player to certify security procedures and verify that the storage of bitcoins and account management are performed in the best conditions, this leaves a wide scope for cybercriminals. The main weakness of Bitcoin in relation to the central currency is that once a transaction has been approved by the issuer and the receiver, it can not be canceled without the permission of the receiver.
No way to recover funds stolen by a "pirate"
In other words, it is enough for the criminal to hack a Bitcoin account to transfer the money to his own account. Even if the holder of the hacked account notices the fraudulent transaction, he has no way to stop it or recover his money because of the lack of regulatory framework and insurance on deposits.
The more virtual currencies develop, the more likely they are to become targets of criminal organizations, and the more calls for improved security features will be urgent. The problem is that the cost of enhancing security will certainly be borne by users through higher transfer fees, which could automatically reduce the appeal of this technology.
Once this challenge is overcome, the applications are however multiple. Ultimately, it is possible to imagine a system of central banks using this technology to improve the European payment system in euros.
What future for coins and banknotes?
The possible success of the Bitcoin Protocol raises, finally, the question of the durability of fiduciary money which includes both coins and banknotes. The technical evolutions have systematically resulted in a dematerialization and an acceleration of the speed of circulation of the currency.
The phenomenon in France is very noticeable since the market of means of payment is characterized by a small proportion of transactions in currency in favor of the bank card and especially the new means of electronic banking which have experienced strong growth in recent years.
We can easily anticipate that the movement will continue as the Bitcoin technology is adopted. However, to announce the death of the fiduciary money is very premature. In many countries, the use of cash remains dominant over other means of payment, often for cultural reasons. In the United States, this is the number one method of payment, accounting for about 40% of total transactions. We can therefore anticipate for several decades the cohabitation of different forms of money and the maintenance of the major role of fiduciary money as long as it enjoys collective confidence.