Cryptocurrencies: where to from here?

Cryptocurrencies have shown the world a new way of paying for goods and transferring money using an international currency unconstrained by national boundaries and national politics. A new democratised, decentralised way of managing money. 

There are problems in paradise however. The current crop of cryptocurrencies are swiftly turning into an environmental disaster. The largest of which, BitCoin, is estimated to be burning 0.5% of the world’s electricity by the end of 2018.

Add to this the problems associated with a lack of consistent KYC and AML procedures, large fees, slow transactions and huge volatility in the market and we have significant reason for change.

Advantages of Cryptocurrencies

According to Investopedia 

• Anonymity
• No VAT or sales tax (see previous point)
• No third-party interruptions (no invisible compliance department will block or delay the transaction)
• Low transaction fees
• Mobile payments

CoinReport adds

• Borderless payments
• All transactions are “push” which stops extra invisible fees being charged by merchants
• Safety from identity theft
• All transactions can be verified by anyone
• No person, organisation or government can tamper with it or deduct money from an account without the keys
• No charge backs for merchants

Also:

• The money is safer since no one else is using it to invest and therefore you cannot get a ‘run on the bank’. This could be described as a negative since no one can provide interest on your investment but since the currency is likely to be appreciating in value as an asset this is less of an issue.

What are the real issues with the blockchain?

The Bank for International Settlements (BIS) report

The BIS is described as the global central bank to all the central banks. In their annual economic report for 2018 the BIS outlined a number of “insurmountable” issues with blockchain based cryptocurrencies. Chris Skinner’s excellent summary of the salient points, along with a link to the full report, can be found here. In a nutshell the main points raised are:

• Scaleability
  • With large numbers of transactions the size of the blockchain ledger that must be replicated around the internet would be huge. In order to handle the number of transactions that Visa or MasterCard handle in a day on a blockchain would break the internet.
  • The blockchain resolution to the above, capacity capping, limits usefulness of the currency for day-to-day transactions
• Unstable valuations
  • Huge volatility in currency exchange rates due to no central bank. Since no entity is responsible for smoothing out the currency exchange rates, there have been instances of people purposefully crashing the value of the currency in order to buy more at low prices or pumping a currency to artificially raise prices.
• Trust
  • No deal is final. In theory, if a lot of transactions were done on an offline replica of the blockchain it could supersede the original and cause transactions to be wiped away. There is no time limit on this effect.

Additionally

• Mining
  • Cryptocurrency mining is swiftly turning into the environmental nightmare of the 21st century. Currently using more electricity than Ireland or Sweden, BitCoin mining turns electricity into heat by getting massive computers to perform near-pointless calculations in an attempt to find the key to the next block
• KYC and money laundering
  • Cryptocurrencies have had a bad name because BitCoin was adopted as a way to allow people to anonymously fund illegal activities on the dark web. From drug and modern slave trafficking to blackmail and extortion, BitCoin has been seen behind all of it.
• Large coin valuation
  • When BitCoin valuations went to $20,000 the idea of purchasing a small value item with BitCoins becomes a mental challenge (e.g. 80c chocolate = 0.00004 BitCoins)

So, what can be done?

Clearly all of the above issues are challenges that must be met head-on and dealt with. There is nothing in that list that cannot be fixed with the right technology. In fact the right technology may not be Blockchain but something similar to it. It is possible to design a new currency platform that resolves each and every one of the problems listed, while maintaining the advantages provided by the basic form of a blockchain based currency. I am excluding the anonymity advantage from the list. If you wish to trade in human slaves you should continue using BitCoin.

If you also believe that mining, and more generally, Proof of Work is not the answer and would like to discuss ideas to improve the situation, please get in touch.