In-depth

Should you still care about cryptocurrencies?

The business case for Bitcoin never quite materialised, and chances are it never will

by: IT Pro team

6 Mar 2019

A collection of various coins with cryptocurrency logos embedded onto them

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Over the last decade, a swathe of businesses pivoted their financial development plans to contend with the emerging waves of cryptocurrency. The adoption of digital currencies - such as Bitcoin - however, has generally been ignored by wider industries.

The idea of cryptocurrency works to ease a number of impracticalities associated with traditional forms of money, in that cryptocurrency eliminates note manufacturing costs, abolishes unnecessary exchange fees, and provides added convenience where funds can be sent in a single click.

With Bitcoin now in its 11th year of existence, however, interest in the volatile currency is perhaps lower than it's ever been. As industries continue to figure out precisely what digital currencies are good for, we're still waiting on that widespread adoption that was always promised

Where crypto makes a difference

The cryptocurrency hype has now vanished, along with the fear of missing out - businesses no longer feel that sense of urgency to get involved. Analysts expect to continue to see a number of businesses adopt cryptocurrencies this year for specific use cases, but many companies are either still waiting for real value to appear, or are apathetic to its existence.

One such use case still gaining traction is the use of digital currencies to replace or supplement traditional monetary asset systems, "which today bloat with inefficiencies, particularly in the developing world," says Michael Fluhr, a partner at law firm Squire Patton Boggs.

"While money and asset transfer in wealthier countries is often sufficiently timely and cheap that it does not rouse our attention, in developing areas money or asset transfer can take days and require non-trivial expense... Some dream of a world in which money or securities can fly quickly and cheaply from one individual or business to another, anywhere in the world, without third-party intermediary friction."

Gartner research director Fabio Chesini believes digital currency's ability to enable more fluidity across border exchange is what will help it finally go mainstream.

"Cryptocurrencies bring a new pool of liquidity into the game. It's a new asset class that can empower cross-border payments. Depending on adoption volumes this could even impact the international balance of payment for different currencies," he points out.

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Loyalty schemes could soon take on a form more akin to Bitcoin than a reward point

Organisations are also looking at "trading in asset-backed crypto tokens", such as a proxy digital Dollar, to allow transactions to "circumvent traditional payment rails", according to IDC research director Craig Wentworth. It's this idea of getting around traditionally slow-moving systems that will prove to be revolutionary, he explains, though it's believed it will be a very long time before we see widespread changes.

Yet cryptocurrencies still have a bright future when it comes to replacing non-currency tokens like loyalty points that customers often associate with supermarkets, airlines, and even coffee shops.

"Loyalty schemes are closed groups with large user bases," explains Ian Robertson, an IET Fellow and visiting professor of Computer Science at the University of Warwick. "The move to a cryptocurrency could offer greater flexibility and means for the exchange of value.

Facebook plans to release its own form of cryptocurrency, called Libra, sometime in 2020. Although Libra was initially described to rely primarily on its own, new cryptocurrency, recent reports speculate that Facebook has had difficulty convincing banks and global financial regulators as to the strength of the currency’s privacy. It is expected that a reinvented Libra will rely primarily on established forms of currency, making the system more akin to a medium for money exchange.

Pushback against crypto

Cryptocurrencies do have many benefits, including anonymity and cost-efficiency, but there are still several roadblocks holding back adoption. The learning curve for incorporating cryptocurrencies into businesses is steep, and the inherent volatility introduces too much unpredictability.

"The cost to accept them is hard to justify," James Wester, IDC Insights research director tells IT Pro. "It's difficult to use a currency where the value fluctuates so wildly on a regular basis - plus there's a lack of demand. There simply isn't a large groundswell of consumers or businesses looking to use cryptocurrencies to make payments."

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Many countries are seeking to limit the use of cryptocurrencies, or ban them outright

The global arena features combatants with conflicting ideas as to whether or not the adoption of cryptocurrency is safe, practical, and perhaps most importantly, possible to regulate. Surveys from South Korea - one of the world’s most devoted adoptees of Bitcoin - showed that more than one-third of the country’s workers were active investors in bitcoin.

Emerging legislation from South Korea, passed on 5 March 2020, provides a framework that would authorise the nation’s financial regulators to oversee the industry and develop rules to prevent money laundering.

"Governance models need to evolve to become more transparent in order for society to understand how cryptocurrencies are run to strengthen trust and perception of this ecosystem," notes Gartner's Chesini. "Another key thing to consider is the customer experience. Easy access and interoperability are needed to improve customer perspectives around cryptocurrency and facilitate mass adoption."

And while most of Europe, Japan, Singapore, and Hong Kong have established similar policies to regulating consumer and business use of cryptocurrency, a slew of opposing nations - China and India, the two most heavily populated nations - have enacted legislation banning, or at least heavily limiting cryptocurrency. In the case of India, however, its supreme court recently overturned the national ban.

Do we even need blockchain?

So while enterprises sit back and watch what's happening around cryptocurrencies, their real interest right now is in the technology behind them and the digital services they can offer.

There are several consortia developing and using blockchain technologies and associated applications. Some of these applications involve cryptocurrencies and public blockchain, but more are interested in using private blockchain technology for other applications.

"Many of these are in the financial sector - FX trading, future and options trading, hedging," Robertson explains. "The Bank of England is using blockchain for gold ownership and transfers and the German Central Bank for bank-to-bank settlement.

Almost all are only at the trial stage. They're also being used for energy trading and supply chain management - similar closed group bidding and sales functions."

Unfortunately, even blockchain suffers from the same overhype that plagued cryptocurrencies, and many uses for the technology are in reality just over-complicated solutions to a business problem, or a solution to a problem that doesn't exist in the first place. It's therefore hugely important to consider whether your problem or opportunity really does have blockchain affinity.

"85% of the 'so-called' blockchain projects don't actually need a blockchain," Gartner's Chesini explains. "When you go through the route of pure distributed ledger technology, whatever you do with blockchain you're likely better off solving the problem with other technologies."

Where should you spend your time and money?

Chesini identifies two 'blockchain worlds' that most businesses occupy. First is the 'blockchain-inspired' environment, where the notion of private blockchain excites companies enough to develop their own projects that may not necessarily include the technology itself.

The second is the 'blockchain complete' world, which incorporates entire public blockchain and asset-based tokenisation projects - the all-in strategy. He advises that in order for businesses to really start seeing value, they should keep a foot in each.

"The sweet spot is where you place yourself between the two worlds - work on blockchain-inspired projects while you look at how you're going to transition towards blockchain complete," he advises. "For example, start working in the private permissions space, but with the perspective on how you can integrate this with blockchain complete in the future.

"If you're too early you might lose a lot of money, but the same goes for those who come to the party too late. Keep looking at both worlds and how you can bring them together."