The credit crunch and Eurozone crisis have left many at odds with financial institutions, but the recent success of Bitcoin is challenging our understanding of money and forcing a rethink of our relationships with banks and governments. Could this trend towards crypto-currencies be the most economically disruptive movement imaginable?
Claimed by some to be the world’s best performing currency, the value of a single Bitcoin exceeded $1,000 recently for the first time in its short history, and it shows no sign of slowing down following a US Senate committee hearing in November which deemed virtual currencies as a “legitimate financial service”. The recent valuation is in stark contrast to just three years ago when one of the currency’s earliest evangelists, a Floridian going by the name Lazlo, offered to trade 10,000 Bitcoins for a couple of pizzas in a bid to drive acceptance of the tender. Someone took him up on the offer and, if they’ve been lucky enough to keep hold of their remuneration, it is now worth more the $10m. Another early adopter proved himself to be anything but lucky, however, with hapless IT worker James Howells recently sparking a treasure hunt at a Welsh landfill after inadvertently binning a hard drive holding 7,500 Bitcoins that he had amassed in 2009. After realising his mistake, and that his collection was now worth $7.5m, Howells went to the landfill site in south Wales where the manager showed him a tip the size of a football field and explained his hard drive could be four or five feet deep. Indeed much has been made of the cryptocurrency of late, in the press and in the halls of power, with it “capturing the imaginations of some, striking fear among others, and confusing the heck out of the rest of us,” as senator Thomas Carper remarked to the US Senate. And there’s no doubt that much of the discussion around Bitcoin is a result of it being used for purchases from Silk Road – an online black market which, until it was closed down by the FBI in October
, could best be described as ‘eBay for drugs’. The virtual currency’s popularity, you see, is in part due to the difficulty of tracing transactions. Of course, Bitcoin now holds appeal beyond the recreational drug user too timid to fraternise with their local dealer. And, although Silk Road 2.0 and several other Silk Road competitors have come and gone since the underground website’s demise, the virtual currency is slowly starting to be used for other, more legitimate means beyond those “exploited by malicious actors” as the FBI eloquently put it to the senate. This vote of confidence in the senate is no doubt partly to blame for the recent upsurge in the currency’s value, but another reason may well be the lack of confidence we currently have in our own governments, and of course the banks. Backtracking slightly to fill in some blanks, Bitcoin was founded in 2008 by an anonymous programmer going by the pseudonym Satoshi Nakamoto, and the way that it works is that the virtual tokens are released through a process called ‘mining’, which involves a network of computer solving complex mathematical problems. For each problem solved the ‘miners’ are rewarded with new Bitcoins, giving incentive for people to provide computer processing power to solve the problems. As Bitcoins are released they’re put into a public ledger called the Blockchain before being floated, and becoming completely decentralised currency. It’s not run by the authorities or the state, it’s private, anonymous and fast. As Paul Kemp-Robertson explained to the audience at Ted Global in Edinburgh earlier this year, with more and more services accepting Bitcoin as payment we’re starting to see people placing more trust in technology, with it starting to “trump and disrupt and interrogate traditional institutions and how we think about currencies and money”. It’s news to no one that trust in banks is at an all-time low in many countries around the world, and that hierarchy is having a bit of a wobble. Kemp-Robertson iterates this saying: “It’s all about heterarchical now, so people trust people like themselves more than they trust corporations and governments.” The Contagious Communications co-founder goes on to pose the question: “If you think we’re starting to question and disrupt and interrogate what money means, what our relationship with it is, what defines money, then the ultimate extension of that is, is there a reason for the government to be in charge of money anymore?” It’s a good point and one that obviously strikes a chord with Tom Robinson, co-founder of Elliptic, who explains that Bitcoin removes financial middlemen by enabling direct, secure transactions over the internet. He tells The Drum: “Western Union charges 10 per cent of every money remittance, Visa and Mastercard charge up to three per cent of every merchant transaction. These intermediaries are simply no longer needed, leading to huge cost savings.” Robinson is in the process of building the UK’s first fully regulated virtual currency exchange, so unsurprisingly is quick to sing the praises of Bitcoin, but he makes a very worthy point when he argues that instead of the middlemen, the biggest winners out of the proliferation of virtual currencies will be the world’s unbanked – “the other half of the world’s population, for whom Bitcoin will provide financial services for the first time, and who no longer will have to rely on loan sharks to borrow or hide their wealth in order to save”. Explaining the appeal of this alternative monetary system, he says: “Over the past 30 years we have gone through an enormous technological revolution which has changed the way that commerce takes place and transformed almost every industry on the planet. However, what has barely changed is the way that money works – how payments are made and value stored and transferred at a fundamental level. “Payment systems such as credit cards, PayPal, Western Union are simply clumsy sticking plasters on the old banking system, merely adding extra middlemen and increasing the friction with which money is moved around. “In the past few years we have also seen a dramatic shift in the public perception of the financial world. Events such as the credit crunch, Eurozone crisis, and levies on bank deposits in Cyprus and Argentina, have left many people uneasy with financial institutions and their ability to manage and protect our wealth. “Out of this combination of factors we are seeing financial innovations that challenge in a very fundamental way what money is and how it can be used. Does money have to be issued by a central bank? Do we need trusted financial intermediaries or can we instead trust new technologies to take their place?” While Bitcoin obviously leads the way as the first of the decentralised crypto-currencies, copycats such as Litecoin, Feathercoin and BBQcoin have emerged, but none with anything approaching the user traction or valuation of Bitcoin. One interesting variation to keep an eye on however, is the Google-backed Ripple, which could well signal an onslaught of big brands getting involved in the alternative currency market. Returning to Kemp-Robertson’s Ted talk he tells us, “brands stand or fall on their reputations, and if you think about it reputation has now become a currency”. Reputations are built on trust, consistency and transparency, he explains, “so if you’ve actually decided that you trust a brand, you want a relationship, you want to engage with the brand, you’re already kind of participating in lots of new forms of currency”. There are already untold brands using loyalty as a micro-economy, some of which are hugely successful, such as air miles (there are more unredeemed air miles in the world than there are dollar bills in circulation, according to Kemp- Robertson), Starbucks Star points (these account for 30 per cent of all transactions in Starbucks on any one day) and the recently launched Amazon Coins, a currency which is currently purely for the Kindle, but another great example of currency staying within its ecosystem. Kemp-Robertson sets forth that it’s quite easy to imagine this naturally extended to purchases of “books, music, real-life products, appliances and goods and so on,” with the outcome being that all of a sudden Amazon is “going head to head with the Federal Reserve in terms of how you want to spend your money, what money is, what constitutes money”. Kemp-Robertson leaves a few questions to be lingered over: “Is technology making paper money feel outmoded? Are we decoupling money from the government? Are brands starting to fill the gaps?” It may still seem far fetched and a long way off, but one thing that Bitcoin has shown, according to Elliptic’s Robinson, is that many people would prefer not to have to trust any central authority with their wealth. “Bitcoin’s greatest strength lies in its large and passionate community of users, miners and advocates,” he says, “something which would be difficult to replicate with a centrally administered currency”. But, if there’s one thing that big brands know about by now, it is building large and passionate communities of users and advocates.This article first appeared in the 13 December issue of The Drum. Click here to order your copy