Traditionalists who dismiss the recent spike in the value of digital currencies such as Bitcoins as just another tulip mania may be in for a rude shock when they try to pay for their cappuccino with a crisp tenner in the future.
Punters can already swap their “real money” for the virtual currency at the smattering of bitcoin ATMs – introduced here in 2014 – across the country, from Westfield Sydney Central Plaza to Melbourne’s Emporium. Bridging the generation gap, there’s even one at a Canberra bowling club, the RUC at Turner.
“If you think this is going away you are missing the fundamental change,” says banking analyst Martin North, who has crunched some of the first numbers to be released on usage in Australia. “It’s very early days, but to my mind it’s gone beyond the ‘it’s going to blow up and everyone will lose their shirt’ phase.”
Those steeped in the notion of colourful paper being the only bona fide money – in other words, most of us – have a right to be bemused. After all, how could an intangible set of numbers that exists only in the ether have any legitimacy?
Consider that digital currencies are “governed” by an obscure peer-to-peer network rather than any central bank or sovereign nation. No central data repository exists: ownership and transactions are recorded on a virtual platform known as a blockchain, or distributed ledger.
Then there’s the baffling verification process of Bitcoin “mining”, which involves computer boffins racing to crack a cryptographic code (rather like gamers seeking a higher quest on World of Warcraft). While transactions are anonymous, these “miners” have full view of every debit and credit to the virtual ledger.
Despite the murky intrigue, interest in crypto-currencies is burgeoning, not just on the part of the IT in-crowd but banks and global regulators as well.
The rawest indicator is the value of the currencies. Similar to penny stocks, relatively low volumes have accentuated the volatility with Bitcoins having been worth a fraction of a cent in 2009, they recently soared above $US3000 before a flash crash sent the currency back to around $US2000.
A renewed surge has sent the price above $US4200.
A quirk of Bitcoin is that production is capped algorithmically at 21 million. About 14m reportedly have been minted already, but as with most aspects of crypto currencies there are plenty of alternative facts.
While no one is sure whether this capping mechanism will work, it’s worth remembering that paper money is limited only by the availability of fancy paper (or these days, polymers) and ink. Central banks can – do – crank out more paper to execute monetary policy of the day.
The value of Ether – or Ethereum blockchain, another popular cryptocurrency tipped eventually to surpass Bitcoins – has also soared. At the start of the year an Ether could be bought for $US8; recently the value topped $US350 and they currently trade around $US330.
“In the longer term, these are fluctuations around a strong growth trend,” writes RMIT University economics professor Jason Potts. “Crashes will cause some to abandon the field. But signals of longer term growth in these crypto currencies and assets point to a possible emergence of a new type of market, through the building of a new economic infrastructure.”
That’s lofty stuff indeed. But for everyday consumers struggling with downloading an app rather than interrogating a blockchain, the revolution will unfold more subtly.
Potts estimates the current market value of all crypto currencies on issue at around $US100bn compared with $US60bn a month ago. But locally, usage for day-to-day purchases has been derisory, either because of consumer lack of awareness or because numerous point-of-sale payment options already exist.
Using Bitcoins is a theoretically simple matter of opening an online wallet (such as Coinjar) and then finding an exchange (or ATM) to purchase the coins. For some years, Australian consumers have been able to pay for purchases with Bitcoins from a handful of merchants, including the online airfare portal Webjet.
But to date usage remains in novelty value territory.
In the first attempt at estimating take-up, North’s firm Digital Finance Analytics asked respondents about Bitcoin usage in its regular survey of 52,000 consumers on broad banking issues.
The results suggest that of nine million Australian households, 6.9m are “digitally enabled” (connected to the internet). Of these, 10 per cent are aware of Bitcoin and, of this sub group, 60,000 have used the currency in some way.
A further half are Bitcoin traders, leaving 30,000 people – about 0.2 per cent of the adult population – to have transacted.
However, the Australian Digital Currency Commerce Association estimates that at least 250,000 individuals have transacted with digital currencies at least once. This is based on the customer base of the association’s members that include six digital currency businesses.
CEO Nick Giurietto concurs crypto currencies are not yet a “mainstream thing”. “The two main uses for digital currencies are investments and international remittances,” he says. “Day to day payments are really small, perhaps 1-2 per cent of volume.”
While usage is confined to what North terms the “pointy end of the digitally literate”, take-up is fast growing in absolute terms: up 180 per cent from 12,000 people 12 months ago. Usage appears to be biased to video gamers – naturally well versed in the digital world – purchasing games and peripheral equipment.
The results are unsurprising because beyond novelty value there’s little advantage in using a Bitcoin to buy a cappuccino. But the advantages lie in lower costs, generally for offshore remittances and in countries where money transfer fees are higher. “If you want to move $20,000 from India to Australia to pay your kids schools fees,” Giurietto says. “With Swift (the global network for financial institutions to exchange information about financial transactions) that will take three to five days and cost you a few per cent. With digital currencies you can do it in two or three minutes and pay a fraction of a per cent.”
Westpac’s Geoff Ward, the bank’s lead technology architect for payment domains, says there’s a lot of interest in the topic, evidenced by the poultice of material available online. But warns: “A lot of the companies pushing the stuff are start ups looking for equity injections.
“However, there are some interesting propositions being put forward as well as established entities, such as Swift, are now getting involved.”
According to North, all exchanges of value rely on confidence the medium of exchange will be accepted and cyber currencies are no different. “If people are confident in it they’ll use it,” he says.
The ADCCA’s Giurietto says some investors have made “great returns” on digital currencies, but he cautions them to do their own research. Giurietto reckons the price fluctuations will abate as the digital currencies expand. “As these digital currencies grow you can expect to see much of this volatility fade away.”
Not surprisingly, the anonymity of digital currencies means some users have nefarious motives.
In a disturbing recent example, the perpetrators of the WannaCry global ransomware attack who demanded payment in Bitcoins.
Abuses aside, central banks and governments globally realise that crypto currencies aren’t going away in a hurry. Rather like Uber, the digital currency proponents are forcing the authorities to devise a framework that legitimises the use of these currencies.
Westpac, meanwhile, is hedging its bets on cryptocurrency adoption. The bank is eyeing an operating model that is “crypto agnostic”, allowing different uses while also aligning these applications to regulatory requirements and internal bank practices.
Ward notes the need for regulators to tackle issues such as user anonymity.
“Simply it’s a watch and learn principle,” Ward says. “But there are various propositions about early products coming to us all the time about how we might use it.”
Globally, crypto currencies are subject to varied degrees of legitimacy (and tax treatment).
Apart from declaring digital currencies should be subject to GST, a recent Senate committee on the issue proposed a Digital Economy Taskforce “to gather further information uses, opportunities and risks associated with digital currencies”. The committee also proposed these currencies be covered by anti-money laundering and counter terrorism financing legislation.
“It would be fair to say central banks and legislators aren’t quite up to making sure consumers are fully protected when using the currency.”
It’s all about the distributed leger.
The currency aspect is only one part of the cryptocurrency story. Arguably there’s more interest in the underlying blockchain (aka distributed ledger) technology, which simply means the transactions are recorded on a dispersed chain of data points rather than a simple repository.
Ironically, given the anonymity underpinning the transactions, regulators and banks alike are interested in the potential of the technology to provide greater efficiency and transparency in facilitating transactions.
For its part, Westpac is exploring the use of the cryptographic techniques underpinning crypto currencies, in order to track and confirm transactions (and the ownership of physical goods) in real time.
By Michael Bennet
Editor, Westpac Wire