While not the only cryptocurrency around, Bitcoin was the first to solve the well-known double-spending problem that characterizes digital currencies. Tackling the issue demanded the creation of blockchain technology (BCT) combined with a brute force algorithm known as proof of work.
Created in 2009, Bitcoin is now one of the largest (and most unstable) currencies in the world (Says & Says, 2017). Launched in the Internet’s fringes and initially used only by computer geeks, the cryptocurrency has now become a hot financial asset attracting both traditional and new investors. Word out there is that Bitcoin billionaires do not spend because they fear losing money as Bitcoin rapidly appreciates over time and ad infinitum (Tucker, 2017).
Bitcoin and its crypto-cousins have been able to bring together the financial and tech sectors. Not that the former neglected to adopt new ICTs for core operations. On the contrary, plenty of tech innovations did take place in the industry. Bitcoin and related technologies bring to the table the so-called “Internet of value” (Tapscott & Tapscott, 2016), the real potential of undertaking built-in and secure financial transactions over the Internet on a global scale.
As a new technology with disruptive potential, cryptocurrencies should, in principle, have the same role that relatively old ICTs such as the Internet, mobile technologies, and social media have had in the recent past. That is, cryptocurrencies should also be enablers that end up enhancing human development. In this light, what really matters is the degree of technical innovation and the potential impact the technology could have in addressing existing development gaps.
Exploring this potential requires a solid starting point that is two-fold. First, understanding the core functions of currencies needs to be introduced. These include money 1. As a measure of value, a standard of price, or a unit of account; 2. As means of payment or circulation; and 3. As a store of value. Historically, such features have evolved from being purely local to making one or more currencies function as global money. A rapid overview of Bitcoin and other cryptocurrencies shows that the store of value function has become their primary function at this point. However, due to current volatility, they are an unstable and probably unreliable store of value mechanism in the short term.
Second, reviewing the history of money is equally important. Barter economies used cocoa beans, shells, stones or others as means of payment. Precious metals then emerged as the most common form of money. This was followed by the emergence of banks, credit and national central banks complemented later on the advent of inconvertible fiat money. The evidence shows that money is a social construct established according to historical standards and specific institutional arrangements. The state has played a critical role in the last 500 hundred years.
With this in hand, cryptocurrencies should be revisited to determine their exact specificity and place in currencies’ overall evolution. In principle, cryptocurrencies seem more prone to support the delivery of overall commercial and financial services with less relevance in areas such as justice, human rights, and similar.
The state’s role is also important to consider as it has a monopoly on currencies as a means of payment, partly to avoid currency proliferation that could lead to widespread fraud and corruption. Here the role of central banks vis-a-vis cryptocurrencies also need to be factored in. Note that Bitcoin and its crypto-family could de facto become global money, thus by-passing national authorities.
However, nothing stops national governments from creating their own cryptocurrencies to eliminate paper money once and for all (Rogoff, 2017), thus preserving their currency monopoly.
Cheers, Raúl
References
Rogoff, K. S. (2017). The curse of cash: How large-denomination bills aid crime and tax evasion and constrain monetary policy. Princeton University Press.
Says, J. A., & Says, T. A. (2017). Bitcoin Now Worth More Than All UK Pound Banknotes & Coins In Circulation. December 10. https://smallbusinessprices.co.uk/bitcoin-vs-currencies/.
Tapscott, D.,& Tapscott, A. (2016). Blockchain revolution: How the technology behind Bitcoin is changing money, business and the world. Portfolio/Penguin.
Tucker, J. A. (2017). How to Live Like a Bitcoin Millionaire. Foundation for Economic Education. December 11. https://fee.org/articles/how-to-live-like-a-bitcoin-millionaire/.
