Value transfer: Why crypto-currencies are no longer just funny internet money

Smart infrastructure makes digital payment networks a potential market force

When a mainstream financial institution such as the Commonwealth Bank of Australia (CBA) starts testing digital payments platform Ripple, and the US stock exchange Nasdaq experiments with Bitcoin, it is a fair sign that so-called crypto-currencies are gaining ground. Westpac's venture capital investment in Coinbase, a leading Bitcoin company, provides further evidence.

In a speech in June at an Australian Information Industry Association function in Sydney, CBA chief information officer David Whiteing made a frank admission: the bank's technology advantages could slip unless it came up to speed with innovations such as Bitcoin.

Flagging the bank's trials of peer-to-peer fiat and crypto-currency exchange Ripple for transferring payments between its subsidiaries, Whiteing predicted that bank accounts could be used as "a storer of value, rather than a storer of currency value".

Using accounts as a loyalty points store in a similar but more sophisticated way to airline customers accessing frequent-flyer points, he suggested that "it shouldn't be that difficult for us to then add crypto-currencies to it, and whatever other means of payment transfers people might want".

Eric Lim, a lecturer in the school of information systems, technology and management at UNSW Business School, says recent crypto-currency trials at banks such as CBA, Westpac and ANZ are a wise way to test the market at a time when crypto-currencies are making the transition from being written off as "funny internet money" to becoming legitimate payment platforms.

Lim is a co-author of the recent paper, Bitcoin – Value Creation in Crypto-currency Networks: Towards a Taxonomy of Digital Business Models for Bitcoin Companies.

He believes the transparent technology infrastructure behind crypto-currencies makes them a real market force, noting that international money transfers over platforms such as Ripple – a real-time gross settlement system based in the US – can happen in minutes as opposed to weeks when cheques have to be cleared through traditional banking services.

"If banks refuse to go on such services, you can see that a large chunk of these micro-transactions – which by their sheer volume make up a lot of revenue for banks – [are] going to go away from banks," Lim says. "So it's very disruptive."

Our business is built on the belief that Bitcoin is a democratiser of finance


 Defying the doubters

Many sceptics are yet to be convinced about Bitcoin – a form of digital currency that is created and held electronically – amid concerns about the potential for money laundering and wild fluctuations in crypto-currency values.

However, proponents point to other technology-driven innovations that were once derided but which have come to be part of our everyday lives: there is the internet itself, plus online powerhouses such as Facebook, LinkedIn, eBay, Twitter and Airbnb.

For its part, Bitcoin has come a long way since 2008 when Satoshi Nakamoto – its credited inventor – unveiled the concept of a peer-to-peer version of electronic cash. Today, a reported 100,000 or more merchants accept Bitcoin and venture capitalists have 

widely used it to invest in start-up companies.

CoinJar, a personal finance company through which people can buy and spend crypto-currencies, has hitched its wagon to Bitcoin. Chief executive officer Asher Tan says one of the keys to the success of Bitcoin is that it is not controlled by a central body, but by a network of computers worldwide that verifies transactions multiple times.

"This makes it resilient to the outcomes of business, and the business cycle," Tan says.

CoinJar Swipe, the first Bitcoin debit card in Australia, helps users buy, sell, send, receive and spend bitcoins anywhere they like. Consumers and businesses can experience the benefits of digital currency and finance in their everyday lives, from owning their first bitcoins to using and accepting them around the world.

"Our business is built on the belief that Bitcoin is a democratiser of finance," Tan says.

Boasting more than 45,000 customers, he attributes the rapid growth of CoinJar to the development of a product that is focused on usability.

"It is beautiful, effective and easy to use," Tan says. "For this reason, we've attracted high-quality technology enthusiasts."

Blockchain is crucial

At the core of Bitcoin's success is that it does not require expensive third parties such as banks and payments processors to ensure a transaction is legitimate. Rather, it relies on the blockchain, a digital ledger on computers that run Bitcoin software.

All information about Bitcoin transactions is checked against previous entries in the blockchain, providing security against counterfeit bitcoins and illegitimate account holders.

Lim believes such infrastructure – which operates separately to Bitcoin itself – is one of the inherent benefits that has led to the quick take-up of crypto-currencies.

"Blockchain is the thing that gives Bitcoin its value because it's an open, public, accountable system and people find that it's a very transparent way of transferring bits and pieces of digital information such as bitcoins," Lim says.

The other key advantage, according to Lim, is that Bitcoin makes money programmable, with software developers having an open platform on which they can build products and services that let people and organisations do business with each other more flexibly and efficiently.

Whereas regular money sits around in a wallet, digital currencies can be set up to automatically pay for everyday items such as groceries or other products.

"[So] programmable money actually has a lot of value, but most companies have not really tapped into that yet," Lim says.

'Blockchain is the thing that gives Bitcoin its value because it’s an open, public, accountable system'


Digital ecosystem

What shapes as a possible game-changer for crypto-currencies is if global technology companies such as Apple, Google and Facebook decide to use their brilliant ecosystems to issue their own digital currencies.

Such digital money could be used to purchase everything from books, music and movies to a range of other goods and services. Given the reach of such companies, they have the potential to produce loyalty points, credits or a digital currency that could quickly span the world.

"Those companies are in a very strong position to issue their own currency in the future," Lim says.

He envisages a self-sustaining digital ecosystem "because once people see that there's a lot of value to be gained from that ecosystem, it means they won't mind holding on to that currency".

In their research paper, Lim and his fellow authors, Erol Kazan and Chee-Wee Tan from the Copenhagen Business School in Denmark, discovered that companies within the Bitcoin network exhibit six generic digital business models.

Their findings suggest that value-chain and value-network-driven Bitcoin business models create value through production, interfacing, matching and linking Bitcoin-related products and services.

Each service leads to a "concrete and immediate value-capture incident, materialised in the form of Bitcoin or fiat money exchange". By contrast, the Bitcoin business models in the study with a value-shop configuration create value by solving problems and providing insights.

To date, Lim says most companies have been using crypto-currencies to replicate traditional financial transactions, but more cheaply. As a result, the innovation is not being used to its full potential.

"But it will evolve as the infrastructure comes into place," he says.

Risk factors

Like any currency, Bitcoin comes with risks. The prime market danger is that Bitcoin values can fluctuate significantly. In addition, if for any reason fewer people begin to accept Bitcoin as a currency, these digital units may lose value and could become worthless.

With crypto-currency exchanges being entirely digital, they can also potentially be vulnerable to hackers, malware and operational glitches.

Despite such factors, Lim says the cross-border nature of crypto-currencies is a real strength compared with national currencies that may be subject to the vagaries of political and economic fallout.

"With a digital ecosystem it goes beyond a single country," Lim says. "The currency is simply gauged on how strong the ecosystem is."

Tan sees Bitcoin as a payment network, not purely a currency based on price. "As infrastructure grows, you will see price volatility, but it will stabilise," he says.

With criticism in the media outlining the risks and benefits of using Bitcoin, Tan notes that different players in the Bitcoin space have started to address issues around risk. Overall, he believes Bitcoin presents a more efficient, transparent system than what is on the market.

"I think a careful consideration of services will find that at least one that is purpose fit for each individual user," Tan says.

As for CoinJar, Tan acknowledges it faces challenges in an emerging digital market, but he is confident the business will play its part in the rise of an important new form of currency exchange.

"We're a consumer-focused company and most of what we do is to strive to bring high-technology financial solutions to a larger, more mainstream audience," he says

And he anticipates a bright future for crypto-currencies: "They will not replace fiat money, but they can complement and improve existing monetary systems."

Lim, too, expects such digital currencies to grow in popularity and influence as more and more merchants accept Bitcoin and the like. While crypto-currencies will inevitably evolve and potentially take other forms, he is sure of one thing – "It won't go away".


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