Virtual Currencies: Inevitable or Insignificant?


WSBI and ESBG payments expert Norbert Bielefeld argues in the latest edition of News & Views explores the issues around virtual currencies, including regulatory aspects, the risk to customers and the push to a cashless society.




Published: 19 January 2015




​​​​Virtual currencies may be today’s door to every essential question on payment systems and monetary policy, or they could just be a topic of online speculation and discussion. Those who debate on this concept are often pitted into two "all-or-nothing" opposing camps: those that believe the advent of crypto-currencies is unstoppable and inevitable, and those that believe these currencies will never make any real impact – the "never ever" crowd. I would also suggest there is a more significant third camp: those that believe the technology behind crypto currencies has the potential to significantly disrupt the banking validation chain, and the entire concept of third-party validation.

Different parties are advancing the virtual currency debate: market participants are mobilising venture capital to acquire market share in this promising market; crypto-criminals are developing their own solutions; and parliaments and central banks are pondering their stance and policy on the subject. The fate of virtual currencies – whether they should be embraced or discarded – will ultimately be decided by regulators and stakeholders, and any decision should take into account these currencies’ potential to reinvent value propositions and business models, as well as the positives and negatives for financial institutions and society at large.

Which virtual currency(ies) will survive is beside the point. An increasingly peer-to-peer, sharing-focused, and digitised economy is too favourable a concept to just vanish, yet society’s "readiness" for such innovation does not guarantee adoption.

WSBI’s report, Virtual Currencies: Passion, Prospects, and Challenges, released in December 2014 takes stock of developments and highlights strategic findings on virtual currencies.

Regulation on virtual currencies


Considering the scope and depth of the debate, the regulatory attention given to virtual currencies is unlikely to wane. Regulatory responses across the world differ widely, with little consensus so far even on how to classify virtual currency: should it be treated as money, currency, foreign currency, a commodity? Views also differ as to whether new legislation is required, and if it is, for which part of the value chain.

Regulation and the realities of virtual currencies do converge in some areas though. For example, the potential for virtual currencies to be used for tax avoidance, fraud, money-laundering, and terrorist financing is a concern, and many regulators are already cautioning consumers against these risks. 

Regulators need to make a critical decision on how to balance innovation and the potential benefits of virtual currencies with the uncertainty and risk to society. They need to determine to what degree they legislate, and when. Should they legislate the "whole" of what virtual currency could represent, or just the aspects that are of most concern now? They also need to distinguish between trust-less transfer and ledger technology (which mitigates the need for a trusted third party) and the idea of crypto-currency (including what it competes with).

Risks to consumers


Virtual currencies in their current state present significant risks for consumers. Financial institutions should play their role in informing and educating consumers about the pros and cons of virtual currencies, ensuring that they at the very least understand to whom they are extending credit when they buy a virtual currency. 

All stakeholders need to work to avert a digital divide between those that understand (and possibly access) virtual currencies and those that do not. Worker remittances are definitely an area for concern, as this market is cornered by a few money transfer operators that continue to impose, in many remittance corridors, hefty fees on senders and receivers. This has led a number of providers to promote Bitcoin as the ideal alternative for remittances, as it doesn’t demand a transaction fee. 

Unfortunately the volatility of Bitcoin represents a huge risk for people’s money. Until this volatility narrows to reach parity with traditional currencies, Bitcoin should not be used to transfer remittances. Equally, the theoretical unlimited reach and cost-free nature of virtual currencies is prompting a number of debaters to promote them as the ideal vehicle to address financial inclusion. It would be irresponsible at this stage to entertain any illusions among the public that this could be a viable path to pursue – for the same stability and potential for misuse reasons given for remittances.


Push to cashless society


Cash is an area worthy of attention. Some supporters of virtual currency are convinced that their arrival will eliminate demand for traditional cash. Evidence continues to contradict this prediction though, with cash resisting – among certain sections of the population and for certain transactions –even as economies digitise. This shifts the debate to whether the underlying technology will move cash from a physical to a digital form factor. Only unique digital banknotes (of course issued by a central bank) would be exchanged, with no need for physical transport, or fitness or counterfeit checks. This would significantly reduce the cost of cash to society.


Validation will be the biggest disrupter


The technology behind the third-party validation of virtual currencies (the block chain) has received far less attention so far, possibly because it is assumed that it is less of a legislative challenge. However, it may be that this technology holds greater disruptive potential than the virtual currencies themselves, with block-chain validation applicable in any transaction for which two parties require third-party validation, such as transfering property, executing contracts, or managing identity. Around 20% of US GDP is reportedly generated by industries whose main function is to act as a trusted third party; that’s a big market to disrupt. The premise of a technology layer substituting well-established services is a call for stakeholders, including financial institutions, to look at value chains, business models, and positioning, and to learn how to manage "decentralised reputation" – where the bank loses its role of trusted intermediary between the payer and the payee.  This development is significant for savings and retail banks and their role as trusted mediators. It could on the one hand save them huge sums by enabling the coveted principle of "straight through processing," but it could completely undermine the need for their services, leading customers and clients to bypass banks altogether.

ends / all ​
Payments; e-Payments; Payment systems; Regulation; Security; Supervision