“It is clear that policymakers and those who advise them do not have a satisfactory conceptual framework for dealing with [this] disruptive impact” says Alec Ross the former senior adviser on innovation to Secretary of State Hillary Clinton and; Jonathan Luff a former international affairs adviser to British Prime Minister David Cameron.
They make an important point – Governments, which are amongst the most powerful institutions in the world, are struggling to come to terms with the disruptive force of technology. This claim is not necessarily surprising, Governments are often behind the curve of change. However, in this instance it has massive implications as the disruption being referred to by Ross and Luff is Bitcoin; a controversial crypto-currency designed to disrupt the power that governments and financial institutions wield over society.
Created by a developer using a psuedonym of Satoshi Nakamoto in 2009, Bitcoin was developed as a result of the near global financial collapse of 2008. The appeal of an alternative digital based currency, is growing substantially and was recently spurred on by the Cyprus Government’s announcement in March 2013 that they would be stripping at least 10% off local bank savings accounts as part of their bailout deal with the IMF and ECB. This action resulted in the barring of individuals from their own personal banking accounts and for several days Cyprian’s where unable to withdraw money even to buy daily essentials. However, those with bitcoins would not have been impacted by this draconian action and financial manipulation. Bitcoin essentially aims to place the power of money in the hands of people not third party institutions. This is because Bitcoin is a decentralised digital currency, meaning that unlike conventional currencies like Sterling, it isn’t issued by a central bank and there is no central authority which oversees or controls it. (Leaner more about how Bitcoin works read here)
Bitcoin offers a means of payment that bypasses banks payment systems and as Satoshi says is a “purely peer-to-peer version of electronic cash and allows online payments to be sent directly from one party to another without going through a financial institution”. No wonder Governments and financial institutions are scrambling to understand the impact of this disruptive force. The currency and its influence is growing rapidly. The market valuation of the total stock of Bitcoins already exceeds $1 billion and more than 7,500 legitimate businesses are using a single BitCoin payment processor (BitPay). In the suburb of Kreuzberg, Berlin, Bitcoin is now the favoured medium of exchange in real shops and bars, taking the currency out of the virtual and into the real world as a legitimate form of payment (watch the excellent video). In UK, drinkers in an east London can now buy drinks with the digital currency in Britain’s first Bitcoin pub.
The initial response by the US government specifically the US Treasury Department has been one of fear mongering and the use of disinformation and propaganda to slate the digital currency as a currency used by drug dealers and criminals. Scratch below the surface of this argument and you discover that cash provides far more anonymity to criminals that Bitcoin does and as James Ball a journalist with the newspaper The Guardian says:
“coverage tends to focus either on the surging value of each coin (currently about $130 or £85) or the fact that Bitcoins are quite a handy way to buy drugs online, using the Silk Road website. Both are of interest, but are roughly akin to focusing on how the aeroplane might disrupt the hot-air balloon industry: it’s true, but drastically misses the true potential of an innovation to change the world – for good or for ill”
Professor Jon Rushman, of Warwick Business School, adds weight to this line of argument saying:
“It [Bitcoin] needs publicity for its qualities as a neutral and universally accessible currency with a transparent exchange rate and immunity from central bank manipulation.”
The reality and understandable fear of powerful institutions is summed up by Jon Matonis, the incoming executive director of the Bitcoin Foundation who has says: “attempting to regulate Bitcoin would be like trying to regulate the specifications of air guitars” Funny but true, the genie is out of the jar.
Technology is transforming finance. For the individual, there is a growing choice of options available for receiving, holding, transferring and spending the money that we earn. Of particular interest is how developing world may use Bitcoin technology to leapfrog the legacy payment systems created by established economies. As Ross and Luff say:
“With virtual currencies like BitCoin now operable without the need for a bank account, why would you open one? We need to ask whether the 5bn people coming online in the next five years will want to use our conventional financial tools and systems. We have hardly made a persuasive case for them in recent years. This phenomenon is part of a wider trend towards networked and globalised power structures that tend to undermine the nation state-based systems to which we have grown accustomed. Last week, the world’s most powerful nations grappled with the complexity of a global tax system. But almost unnoticed, the rise of digital currencies like BitCoin threatens to render obsolete even the modest progress made by the G8. BitCoin’s distributed network structure makes it hard for any one country or group of countries to regulate its activities. This is one of the currency’s main appeals for some early users, and it is only a matter of time before larger players begin to exploit the opportunities presented by immediate and secure value transfer, delivered anonymously and at next-to-zero cost…Unless the issues that BitCoin raises are addressed in a thoughtful and proactive manner by existing authorities, the disintermediating power of technology is likely to have a disruptive impact on currency systems…the effect could be as significant for governments as the rise of social media has been for individuals.
At TomorrowToday we examine and share strategic insights on the impact of disruptive forces in business and institutions. Bitcoin represents one of the most powerful and dynamic developments in recent years. As a disruptive force Bitcoin (or another form of digital currency) has the ability to totally transform government and financial institutions.
The 16th of July is Bastille Day in France. Today’s revolutionaries, of which there are a growing number, are disillusioned by the current economic and financial system and they may find in Bitcoin the ability to storm their own Bastille. Regulators and financial institutions are rightly concerned, but their belief that draconian regulation will get the genie back into the bottle is misguided. Digital currencies are here to stay and regulators would be better advices to work with Bitcoin foundations, trusts and operators to find a way that leverages the positive benefits of the currency.