The End of Currency as We Know It?

The growing optimism of financial institutions with blockchain technology has spurred a lot of interest within the cryptocurrency community. They’re now exploring the possibility of using cryptocurrency as a global currency, much like its real-world counterpart, but without the need for governmental intermediaries.

This, however, requires nothing short of a compromise since the technology used in cryptocurrencies, which were meant to cut off intermediaries, will now be used in the interest of banks and financial institutions they initially sought to eliminate.

 

Financial Institutions on the Use Blockchain Technology

The challenge with decentralized currency is the way which central banks create money. Cryptocurrency protocols which gave birth to Bitcoin, Ethereum, and Litecoin uses “proof of work”, hashpower/electricity to mine currencies until they reach a fixed limit. And, unlike central banks, anyone with adequate resource and hashpower can participate in the process of increasing money supply.

But not all cryptocurrencies follow this convention. Some currencies are neither mineable nor obtainable by any other means except through exchanges. Ripple (XRP), for instance, is one of those few currencies with such peculiar characteristics.

First, it has no need of miners to keep the system stable and secure, and does the exact opposite each time transactions are made: a specific unit of XRP is “destroyed” (around 0.00001 XRP or 10 “drops”) per transaction. Accordingly, this would discourage people from spamming the system. Maximum supply is programmed at 100 billion XRP, 55% of which is held in escrow.

Although “decentralized,” Ripple is backed by big institutions primarily Google (Google Ventures), and other venture capitalists such as Standard Chartered, Siam Commercial (SCB Digital Ventures), Japan’s SBI Holdings, CME Group, Seagate Technology, and Venture 51. The focus of blockchain adoption was not so much on creating a global decentralized currency envisioned by Bitcoin, but in making transactions “frictionless” and resistant to hacking.

Banks and financial institutions loved the concept and saw in Ripple the potential of using blockchain technology to make money transfers many times faster, a lot cheaper, and more secure than conventional banking and money service business. In fact, Ripple protocol is already supported by hundreds of banks and financial businesses across the globe, including American Express and SBI Holdings.

 

Use Cases of Blockchain Technology in Business

 

Banking & Money Service

Blockchain technology is the key to solving the age-old “Byzantine General’s Problem” when it comes to trust-based peer-to-peer transactions, one of which is the problem of “double spending.” In a traditional banking system, transactions between accounts and different banks have to be cleared to preclude the possibility of fraudulent transactions going through, especially now that most transactions involve digital cash and electronic money transfers over the Internet.

Although quite secure, they’re not essentially 100% hack-proof. The Bangladesh Bank Heist of February 2016 proves the vulnerability of a centralized method of transaction over the Internet (hackers employed the Dridex malware to send instructions to the Bangladesh Bank at the Federal Reserve Bank of New York through the SWIFT network.)

Banks and financial institutions are now looking to adopt a decentralized, consensual way of confirming transactions – one of the defining features of cryptocurrencies and distributed ledgers – to make cross-border, bank-to-bank transactions that are virtually hack-proof. To address the issue of congestion due to slow rate of confirmations, they’ve opted for cryptocurrency protocols which take mining out of the equation, i.e. pre-mined currencies.

 

Payment methods

The fact that tech giants, like Google, have invested in blockchain technology could be a strong indication that we are, indeed, looking into the future of cashless transactions. IBM also works with a pre-mined cryptocurrency, Stellar (XLM), to make cross-border payments more efficient and secure. Using this platform, they hope to eliminate the “costly, laborious, and error-prone process of making global payments.”

Microsoft retracted in their previous decision to stop accepting Bitcoin payments. Volatility and high transaction fees during peak hours can make Bitcoin payments troublesome for most businesses. But because of its high-yield potential for long-term investment, some businesses prefer Bitcoin over much stable but dormant pre-mined cryptocurrencies like Ripple and Stellar.

Several countries in North America, Europe, and Asia have brick-and-mortar businesses that accept Bitcoin payments with the same goal in mind. Since Bitcoin is regarded as a rare, highly-prized commodity, accepting them as payments is a viable way to make long-term cryptocurrency investments.

Some people went as far as using Bitcoin to acquire properties like one of Malaysia’s top entrepreneur who bought a piece of land for half a Bitcoin, and a property developer in the UK who sold two luxury homes for Bitcoin.

 

Internet Sites & Social Media

Blockchain technology can also have a positive impact on Internet sites and social media because of the massive traffic they generate. Having a cryptocurrency for users and subscribers seems to be the way forward. Facebook CEO, Mark Zuckerberg recognized the potential of having a cryptocurrency for its 2 billion users and subscribers.

Online stores and online services would also benefit from cryptocurrency payments for the very same reason banks and money service business are using it with the Ripple currency/protocol.

 

Implications of Institutionalizing Cryptocurrencies – Two Sides of the Story

Based on these observations, two possible scenarios are starting to emerge. Blockchain technology is undoubtedly the next generation of secure, peer-to-peer transactions. But as to the control of money supply and the ability of users to store value outside the realm of government regulation, the issue of decentralization could reach a stalemate between institutionalized cryptocurrency like Ripple, and a truly decentralized cryptocurrency like Bitcoin.

In such a case, we might be seeing two types of cryptocurrencies serving two different purposes – one as a fast and secure method of payment and money transfer (akin to fiat currency), and another as a store of value. Ripple has its merits as a payment method because of its liquidity, stability, and abundant supply. Bitcoin could also be used for the same purpose, but until it creates a permanent solution to scalability issues, transaction fees, and slow transactions, it might be best to keep it as a store of value or as an investment option.

Another possibility would be one of them prevails over the other. In the case of Ripple taking the lead as the dominant cryptocurrency, we might see a resurgence of centralized money in the form of a peer-to-peer currency based on trust. If Bitcoin, however, stays on top and manages to solve the issue, the other type of cryptocurrency could weaken or fall into disuse.

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