What unites drug-smugglers, libertarian critics of fiat currencies and technology evangelists? Answer: the crazy world of digital currencies such as Bitcoin, a peer-to-peer anonymous market that disintermediates banks in the payment process.
At first blush, its easy to dismiss Bitcoin as a fad or bubble. After all, its function as a store of value, medium of exchange and a reserve asset is undermined by regulatory threats, price volatility, supply risks (given digital imitators), and the lack of an institutional backstop. However, for digital aficionados, its remarkable ascent last year having jumped 8,000% in value to top $1,200 a Bitcoin before crashing in December after Beijings intervention suggests the world of cryptocurrencies is here to stay.
In theory, Bitcoin could serve two understated purposes: facilitating mobile transactions in emerging markets and, in the process, being a weapon in the so-called global currency war. China, India and Brazil have posted the highest growth in Bitcoin downloads over the past year. According to Jana, a mobile-payments company that serves as many as 2 billion people in emerging markets, some 58% of those surveyed, from Vietnam to Brazil, said they would feel comfortable investing in a virtual currency, rising to 75% in Kenya, home of the wildly popular M-Pesa mobile-money network.
In fact, in some countries, as many as a fifth of respondents claimed that virtual-currency investments were a safer long-term bet than stocks and property, a worrying prospect for Bitcoin detractors since it underscores how the world of alternative currencies is now increasingly accepted as a distinct asset class.
The craze highlights potentially disruptive shifts in payments technology in Africa, for example, where some 99% of low-value transactions are in the form of physical cash, a costly means of transacting compared with digital currencies. By contrast, mobile Bitcoin money could facilitate low-value, as well as high-value, transactions. If digital currency adoption in regions with nascent banking facilities such as Africa takes off it threatens to disintermediate pricy credit-card companies, wire-transfer companies and bank payment systems in the process.
If this bullish case were to emerge all would not be lost for banks. Financial institutions could generate fees by facilitating access to a free digital payments system; seek to create their own proprietary product; or acquire companies that harness the power of digital currencies. At the very least, the threat of a new digital currency is already boosting competition in the payments market.
The monetary challenges are substantial. In the US (especially among libertarian critics of the Federal Reserve), India and China, Bitcoin adoption, in part, reflects distrust of domestic currencies as a store of value. Widespread Bitcoin adoption in emerging markets in Africa would also threaten central banks attempts to control domestic money supply in already volatile economies. This raises a contentious prospect: could reserve managers in emerging markets one day acquire digital currencies as a liquid alternative to the dollar and to reflect new trading patterns?
As smartphones, connectivity, open-source systems and growing faith in digital money as an asset class disrupt the traditional role of banks, these questions are pertinent, not far-fetched.