By Manie Eagar
I was interviewed in 2014 for an analysis of the digital currency sector by a research firm and offer my thoughts and the outcome of the report below. Interestingly, the report concluded that digital currencies are likely to be a major disruptive force within five years.
The report notes that there was a strong surge in the number of digital currency announcements shortly after market capitalization of Bitcoin, the most well-known digital currency, hit $1 billion and the number of digital currencies on the market has accelerated since then, exceeding the number of fiat currencies by June 2013.
The report notes that more than 1,700 digital currencies have been launched since January 2009. More than 700 are considered active, but only 35 have market valuations of more than $1 million. Many altcoins have aimed to enhance the existing protocol, extend functionality or improve the speed and security of digital currency transactions.
Not only about innovation
The idea of decentralized trustless systems is revolutionary but the real potential for disruption comes about through the ability to implement them and find compelling business models. The open protocols on which these digital currencies are based, together with the highly collaborative innovation processes at work amongst the different develop communities, has created such a stimulating environment for innovation that it is impossible to halt it. And these innovations aren’t only focused on financial applications of digital currencies.
These blockchain innovations include smart contracts, colored coins and decentralized autonomous organizations.
The next multi-billion dollar industry
Venture capitalists have invested more than $400 million in companies aimed at getting in early on the next multi-billion dollar industry. The report notes that awareness of digital currencies exceeds 50% amongst online adult consumers in the USA, the UK and Canada, but adoption has been slow to gain traction. However, about one in five consumers intend to make use of digital currencies in the future, which given the current low base of usage, suggests very high growth in adoption over the next few years, the report notes.
Segments like remittances, micropayments and online commerce could see mainstream adoption within the next five years.
There are three alternative futures for digital currencies – a trustless world, symbiosis and fractured horizons. If either of the first two materialize, we will see major disruption across a broad range of industries, mostly, but not exclusively, in the financial services sector.
Incumbents are ill-prepared for the disruptive wave that is starting to build and recommends that immediate action be taken to mitigate the effects of moving to a decentralized, trustless world.
What does this mean for your business?
The idea of decentralized trustless systems is innovative, but the real potential for disruption comes from the ability to implement them and find compelling business models. The open protocols on which these virtual currencies are based, together with the highly collaborative innovation processes at work among the different develop communities, has created an environment for innovation that it is impossible to stop it.
What should your business do?
- Organize and learn about digital currency to build insight on how it could affect your business. Although it’s not guaranteed to affect your business, having the understanding of the possible impact will be helpful.
- Build the skills and capacity within your business to implement digital currencies. Have your R&D department tinker with it to see if your business could handle the impact.
- Start building and implementing new processes and business models to include digital currencies. This may not happen until much later on, but having all the necessities will allow you to be one step ahead.
Newer digital currency companies are already looking into different applications of the currency in areas such as smart contracts, colored coins and decentralized autonomous organizations.
The five potential phases of adoption
Experts believe there are five potential adoptions as follows:
(1) Experimentation Phase. (2009–2010)
No real value associated with digital currencies. Hackers and developers playing around with the source code. Experimenting with it as a medium of exchange.
(2) Early Adopters Phase. (2011–2013)
Interest from investors and entrepreneurs started to grow with substantial press coverage. First generation companies (exchanges, merchant processors, wallet providers, etc.) started. Potential began to shine through poor management.
(3) Venture Capital Phase. (2013–Present)
VCs started investing in digital currency companies and rapid ramp-up is already outpacing the early days of the Internet. VCs poured more than $90 million into businesses in 2013 and more than $300 million in 2014 (compared to $250 million invested in Internet-related businesses in 1995).
(4) Wall Street Phase. (2015 – Present)
Institutional investors, banks, and broker-dealers begin moving money into digital currencies. Rising price and volume (in addition to development of derivatives) become the catalyst for mass adoption as retail investment follows.
(5) Global Consumer Adoption Phase.
Only happens if (i) companies continue to innovate and make it easier for consumers to buy, hold, and spend digital currencies, (ii) volume expands dramatically so that large merchants can start accepting payment in digital currencies, and (iii) digital currency awareness continues to rise with these developments.
Brave new world – complementary currency
Digital currencies may become an optional selection amongst a number of alternative digital finance. Its main competition will be highly innovative and accelerating adoption of airtime tokens offered by mobile phone companies and digital money tokens offered by mainstream and alternative financial service providers emerging from the convergence of digital banking, mobile commerce and platforms.
Financial regulators and compliance efforts will focus on the bridging capabilities of these new technologies across platforms, jurisdictions and commercial and social applications.
Some experts believe that it is possible to organize an entirely new structure of money, banking, and finance; one that is interest-free, decentralized, and controlled, not by banks or central governments, but by individuals and businesses that associate and organize themselves into moneyless trading networks.
There are reportedly more than 400,000 companies worldwide who trade more than $12 billion dollars’ worth of goods and services annually without the use of any national currency. All forms of business can begin to accept complementary currencies as payment, and offer to pay their employees partly in a complementary currency. They can be active in the this field, promoting applications that empower communities and small firms, rather than speculative activity.
Mobile phone companies can help scale complementary currencies by collaborating on SMS payment systems. Retail banks can open accounts in complementary currencies. All firms can integrate complementary currencies into their philanthropy and community engagement. Firms can switch their accounts to financial institutions that practise full reserve banking, including building societies and mutual associations. Firms can encourage local governments to issue their own mutual credit systems, and for all governments to tax transactions in complementary currencies in those same currencies, not national money.
Like Facebook, QQ, Twitter, LinkedIn and other networks that are purely social, some moneyless trading networks will grow exponentially and provide significant daily alternatives to bank-issued money. The vibrant field of innovation in digital currencies is already enabling new experiments in self-issued credit systems, such as RipplePay, which can be used to transact personal promises of all manner of currencies without the money actually changing hands.
In conclusion, complementary currencies might become dominant in emerging markets, whilst in established markets, they will enter initially as complementary and ultimately competitive alternatives to the current offerings with digital currencies as the leading complementary currency.