Digital Currencies: No Threat to Their Real Counterparts - Yet
by Robert Roessler
There has been much speculation about the fate of the Euro over recent months. Maybe a bit too much as it is difficult to predict (and tiring to hear) what will or will not happen to a currency which is still in its youth, in historical terms. These recent developments in the currency arena however have prompted a renewed focus on alternative currencies, so let’s take a look at these – their future may be easier to predict too, after all.
The main purpose of a currency is to facilitate commercial transactions. With local micro-currencies, retailers hope to boost spending in their area. There are an estimated 4-5,000 different local and private currency systems worldwide. The rationale behind them makes sense, especially in times of austerity and economic uncertainty. I predict that local currencies will become more popular in 2012, and more regions, cities and neighbourhoods will create their own currencies. Most of them will have a short life, but others may last for a number of years.
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Similar to this, the majority of large companies have loyalty systems which they will gradually evolve into more fully fledged digital networks over the course of this year. Despite their growth in importance these micro-currencies are generally not considered to be a real competitor to real currencies. Electronic, digital and virtual currencies however have the potential to cause disruption and have a more serious impact.
Bitcoin is the most widely used virtual currency with a current market capitalisation of more than $40 million. The value of the individual Bitcoin units fluctuates against the dollar and reached its peak with nearly $150 million in June 2011. This is still miniscule in general money and payments terms, but it represents a growing trend and demand for currencies that serve one particular purpose.
Ven is one of the few virtual currencies that can be spent online and off. Its value is determined by a basket of real currencies and commodities, which now also includes carbon pricing contracts. It is the first virtual currency to be made available in global financial markets via Thomson Reuters and has ambitious plans to gain a small share of global transaction volumes – which will be substantial in absolute figures.
In a related area, London’s Oyster card system which currently provides a contactless pre-paid travelcard is planning to stop collecting fares altogether and will accept contactless debit and credit cards on London buses for the 2012 Olympics. This resembles the success of the Octopus card system in Hong Kong which, following its launch in 1997 as an electronic ticket for public transport, has developed into a full payments card which can be used online as well as offline.
So is there a green light for digital currencies and means of payment? The popularity of virtual currencies is based on the fact that they are easy and versatile to use, some of them are anonymous to use and they serve a clearly defined purpose for its users. Unfortunately it’s not that easy. Google has just announced it is to scrap plans for Google Bucks because of regulatory concerns. This is a valid point: currencies are highly regulated, and in most countries the state retains its monopoly to issue and control the central currency. Currencies outside state control may potentially be used for money laundering purposes or illegal transactions - the illegal drug marketplace Silk Road for example accepts Bitcoins due to the high level of anonymity for its users. Bitcoin in particular is under constant attack from regulators, and the second-largest exchange platform where users could convert conventional currencies into Bitcoins recently shut down.
At the same time it may well be the case that Bitcoin is now under particular scrutiny as it is seen as a threat to established systems and currencies - it undermines their monopoly and power. So is this the fate of the forerunner who starts to shake up the system and is then brought down? Or are digital currencies flawed by default as they will always struggle to reach a critical mass and will never be as controllable as conventional currencies?
I predict three things for 2012: Virtual currencies will become more visible and popular, and there will be more large corporations launching their own versions of electronic money. These will reach a critical mass, and as businesses will then be able to set the rules and exchange rates themselves, they will make some serious money, as Facebook’s successful payments business shows. I also predict that Bitcoin and other virtual currencies will not only survive but thrive, and they will continue to attract regulatory and media attention. And finally, I predict that the Euro will easily survive 2012 too. Whatever happens, digital currencies will play a different, more important role in the months and years to come, but it’s not quite time yet for them to replace the traditional money system. Not yet.
Robert Roessler, MHP Communications (www.mhpc.com)
Robert is a senior PR adviser with over 10 years’ experience in the IT, financial services and financial technology sector. Prior to joining MHP Communications, Robert headed PR campaigns for companies in the telecommunications space. He previously worked for Germany’s largest tech PR agency where he was responsible for campaigns across technology and payments.