- 35% of Aussies believe Bitcoin will be transacted more than traditional currency
- A major advantage of cryptocurrency is its in-built security structure
- However, issues have been raised with cryptocurrency usage
Technological innovation has continued to evolve at an unprecedented speed. Smart phones replacing telephones, online streaming services like Netflix replacing video, DVD and cinemas, and then there’s the inevitable march of proptech.
Money – and more specifically, currency – has not been immune from digital disruption.
Money is important and ubiquitous. But what is ‘money’?
You may think of it as cash, coins, and the credit cards we use to buy things with. But it can include that pay now, but later click of your smartphone. It is anything we use that is generally accepted as a form of payment to make purchases.
With ‘money’ expanding online, we now have digital assets that have been created over the past decade (and new ones almost on a daily basis), called cryptocurrencies.
Established in 2008/09, Bitcoin is the most popular of these. Millions of Australians now believe Bitcoin will be transacted more widely than traditional currencies, according to a recent survey from Finder.
Generation Z (52%) are the most likely to believe Bitcoin will outstrip centralised currency in popularity, followed by millennials (45%) and Gen X (30%). Baby boomers (17%) are less inclined to agree.
For the past 100 years, it has been the norm for governments to hold a monopoly over the issuance of money. This is known as ‘fiat’ currency, or in other words, government-issued money that is not backed by a commodity such as gold.
As technology and internet communications continue to develop, and cryptocurrencies gain traction, a salient question comes to the attention of economists, political scientists and technology developers: will cryptocurrency replace all other digital currencies in the future, and ultimately all physical currencies?
Will buying a home with Bitcoin become the norm? Will people be free to choose cryptocurrency as an alternative to government-issued money, and will competition between different currencies be the future of monetary transactions?
Why is it growing?
Cryptocurrency is a digital currency that uses a new innovation called blockchain technology to provide enhanced security features. Although the first cryptocurrency was launched during the global financial crisis, its origins actually date back to the 1970s.
Two Nobel Prize winning economists, Milton Friedman and Friedrich Hayek, predicted that the internet and technological innovation would be the driving force behind reducing the role of government as the only authority that issues money.
Although cryptocurrencies such as Bitcoin serve the same fundamental purpose of money (a medium of exchange for goods and services), there are a variety of innovative features that make it attractive as an alternative to traditional forms of money.
Firstly, cryptocurrencies can only be sent or received by recording that transaction on something called the “blockchain”.
The fundamental role of the blockchain is to keep a record of all transactions without the need for a third party to verify the transaction. In other words, the buyer and seller interact directly with each other, relying on a peer-to-peer relationship which records a timestamp and issue of ownership to solve the double-spending problem. Transactions are recorded as “blocks” that are linked together as a “chain” of previous cryptocurrency transactions.
The best way to think about the blockchain is to consider a book in which a user records all their monetary transactions on the pages of that book. Each page is considered a block while the entire book is the chain.
In this way, everyone on the network has a book of their own transactions, which then combine to create a unique record to prevent double-spending. In the case of Bitcoin, each block has data of the transaction (information about the buyer and seller, and the amount of Bitcoin being transacted), a unique hash code that detects changes in the block, and a hash of the previous block.
Each transaction is verified using proof-of-work. In the case of Bitcoin, a computer node (called a miner) solves a mathematical puzzle to verify the transaction, then is rewarded a small amount of Bitcoin for their service. These cryptocurrency payments introduce new Bitcoin into the market, but the number decreases with time so there will never more than 21 million Bitcoin in circulation.
Bitcoin acts like precious metal commodities such as gold, as the mining of Bitcoin is analogous to gold miners using resources to discover and adding these newly discovered gold reserves to circulation.
Finally, unlike traditional physical currencies – which are centralised and controlled by central banks – cryptocurrency networks are decentralised.
This means that users retain control of their funds without having to transfer their assets to a central authority. A cryptocurrency network is a collection of distributed nodes, where no centralised authority is responsible for issuing and managing the cryptocurrency. This is in contrast to a central bank, which is solely responsible for issuing the nation’s currency and it is illegal for any private firm to create a currency that can be legitimately used.
Advocates of Bitcoin often point to these innovative security structures as something which would encourage widespread adoption.
What’s the catch?
However, as with most issues in public policy, Bitcoin is not without its critics.
Due to its distributed, non-centralised nature cryptocurrency is anonymous. This raises concerns with governments that it can be used for criminal activities, such as money laundering, the dark web and tax evasion.
US Treasury Secretary Janet Yellen has argued that cryptocurrencies are mainly used for illicit financing, and hence require extensive government regulation to curtail their use.
However, a Forbes op-ed titled ‘The False Narrative of Bitcoin’s Role in Illicit Finance’ argued the available evidence does not show that cryptocurrencies are mainly used for illicit financing.
A more pressing issue that could limit cryptocurrency adoption is its highly volatile nature. Its value is mainly determined by speculative moves in demand without any stabilising factors, which create huge fluctuations.
As the Director of Munro’s, Drew Pflaum, said in a previous article, “People seem to invest into cryptocurrencies for similar reasons that they invest into penny stocks or buy lotto tickets.”
This limits both investor and consumer confidence, discouraging people from holding cryptocurrencies for long periods of time. Therefore, the higher risk associated with cryptocurrencies compared to traditional currencies is likely to be a major factor preventing it from being accepted on a large scale.
Bitcoin the future?
According to the Finder survey, 17% of Australians already own cryptocurrency.
Unlike countries such as China and Russia, the Australian government has not been hostile to the rise of cryptocurrencies. Crypto exchanges are legal in Australia, and the country has been progressive in its implementation of cryptocurrency regulations.
This still means it can be taxed. According to the ATO’s Assistant Commissioner Tim Loh, “gains from cryptocurrency are similar to gains from other investments, such as shares. Generally, as an investor, if you buy, sell, swap for fiat currency, or exchange one cryptocurrency for another, it will be subject to capital gains tax (CGT) and must be reported.”
Only time will tell whether cryptocurrency will surpass traditional currencies. The aforementioned concerns may very well prompt governments to crack down on cryptocurrencies to prevent their widespread adoption in the future.
Will property be transacted using Bitcoin or another equivalent? Probably, but it won’t be widespread. Yet.