Reasons Not to be Fearful: Demystifying Digital Currencies
07 May 2020, by Stephen Stonberg • CFO & COO
The topic of digital currencies tends to attract extreme responses on all sides. Their greatest advocates insist that they are the way of the future, and the essential foundation of a new, more democratic financial system. On the other hand, critics condemn them as volatile, untrustworthy and unsound as either an investment or means of exchange.
The criticism of digital currencies are grounded in some real consumer sentiment.
A global survey by Kaspersky last year found that 31% of consumers across 22 countries believe digital currencies are volatile and would need to be more stable before they consider using them. A small minority, 19%, had experienced hacking attacks while using them.
On one level, people are unwilling to trust digital currencies because they are not accustomed to them. Like every significant evolution in the history of payments, a new medium of currency tends not to seem as substantial or real as its predecessor. Added to that, an entirely digital asset means there will always be fears over fraud and cyber attacks.
Cryptocurrency has also created it’s own reputational problems through initial opposition to traditional financial systems, something that is now starting to be reversed.
In other words, consumers could be forgiven for lacking trust in digital currencies. But those fears are not necessarily justified, and they can be dispelled by understanding both some of the fundamentals of cryptocurrency and some important changes that are shaping the next phase of its evolution. Here are three points for any sceptic to bear in mind:
Blockchain creates trust
The irony about a lack of trust in digital currencies is that the technology they rely upon was specifically designed to create a system of trust.
Blockchains, the digital ledgers that evolution of a mature and trustworthy asset record the creation and transaction of cryptocurrencies, create a transparent, timestamped record of ownership — created with such significant and widely distributed computing power that they are essentially impossible to tamper with.
There is no central repository of data that can be targeted in a cyberattack, and it is this decentralised model — as opposed to the predominant role that institutions play in managing fiat currencies — that appeals to most advocates of digital currency.
Blockchains create an unprecedented level of transparency around financial ownership and transactions. Rather than undermining trust, over the long term they will facilitate it.
Regulation is increasing
While cryptocurrency made its name as a virtual Wild West, the market has shifted significantly in the last few years. More capital has flowed in, and regulators have begun to take an interest. Notably, Liechtenstein has created a first-of-its-kind regulatory framework that allows for the tokenization of any asset: allowing the underlying asset to be held and traded digitally.
The government of Bermuda, for example, has announced that residents can now pay their taxes and other fees in cryptocurrency, and will provide support for other “decentralized finance protocols”. Both are indicators that digital currencies will be increasingly governed by regulation in the near future. For consumers that is an important development — signifying the evolution of a mature and trustworthy asset class where market participants are required to play by the rules.
The market is becoming institutional
In parallel with growing regulation has been the increasing prevalence of institutional investors in the market. Cryptocurrency asset manager Grayscale saw capital inflows of over $600m in 2019, more than in the previous five years combined, with 71% of that from institutional investors.
In addition, according to a survey by Fidelity, 47% of institutional investors think digital assets have a place in their portfolio. Greater institutional investment is both a recognition of growing trust in digital currencies and an enabler of further growth and evolution. As the market becomes more institutional in its composition, it should also become more viable for a broader subset of consumers and investors.
These recent shifts towards a more regulated market in which institutions are increasingly willing to participate can help validate the intrinsic promise of digital currencies: that they will help to create a more transparent, seamless financial world.
Building trust is one of the most important enablers to realising that vision at scale. Ultimately, blockchain is underpinned by a system of trust, and that is why companies like Bittrex Global continue to foster innovation and advance the adoption of blockchain technology. In 2020, we can expect to see the market take some important steps in the right direction.
The original article on ‘Demystifying digital currencies’ was published in the recent edition of Cards International. The article explores how digital currencies are a useful tool for creating trust, and positions Bittrex Global as a pioneer in this space.