By Philip Benton
Recently I attended a talk here in London about digital currencies and how they could be the answer to our economic woes and the key to rebuilding our broken society.
I went in with an open mind, keen to broaden my interest in the curious world of crypto currencies, but somehow came out with more questions than answers.
The talk was hosted by ex-investment banker Simon Dixon and Max Keiser of The Keiser Report fame. The opening remarks focused on how the financial world used to look pre-2007 (BC) and what it looks now post-crisis (AD). Apart from the melodramatic links to the birth of Christ, a lot of the things said were informative and with due cause.
Pre-2007, in order for a start-up business to secure funding their options were limited to a rich family member or a bank. To acquire an initial bank loan, you needed a lengthy business plan and to convince a bank manager (with no vested interest in your company) why your business idea would work. Further investment options (business angel, venture capitalist etc) were generally only available to a select few or if you managed to impress Bannatyne and co. on Dragons’ Den.
Then on September 15th 2008, Lehman Brothers filed for bankruptcy and took down half of the world’s financial institutions with it. Banks were unable (or unwilling) to lend to emerging businesses desperate for finance to expand their company and help rebuild the economy.
The very essence of crowd-funding was born out of this situation. Rather than source the cash from a select few at a bank, companies could offer the general public an opportunity to invest in their company that wanted to see the business succeed and be rewarded through receiving the goods/services for a cut price. Crowd-funding is essentially financing through a community, which is exactly what is required when times are hard.
If you want to look at the financial crisis as a positive, then innovations like crowd-funding is certainly that. And having demonstrated that it’s possible to raise a cash injection for businesses without bank finance, there is now a group of radicals looking to take banks out of the financial equation altogether… through the use of digital currencies.
During the meeting, there were a number of other participants sharing their ‘cryptocurrency stories’. In theory, the idea of digital currency sounds simple. You store the money electronically via a ‘digital wallet’ (removing the need for a bank), you make payments using your mobile phone through the digital wallet (removing the need for expensive card providers like Visa and Mastercard) and every transaction is transparent as it will be listed on a public ledger accessible by all (the world wide web).
However, in practice it’s anything but simple to implement. The most well-known digital currency, Bitcoin, has suffered from huge volatility in the value of the currency, ranging from $500 – $5 in a matter of months. Many merchants that do accept Bitcoin as a payment are converting bitcoins back into local currency every day from fear of the huge swings in valuation.
Bitcoin is best described as an asset at this point as opposed to a workable currency. Many people who possess bitcoins are blindly hoping it will become a worthwhile investment which appreciates in value – this is not a hallmark of rebuilding our economy as was suggested in the beginning of the talk.
It must be said, however, that the enthusiasm for digital currency is not just coming from a select group of anti-establishment revolutionaries but also from the heart of the world’s tech centre Silicon Valley. Many investors are banking on the success of Bitcoin and other crpytocurrencies by building an ecosystem behind the scenes which will provide the infrastructure required to ensure digital currencies are workable.
I heard a lot of propaganda as to how digital currencies could destabilise the banking system and offer consumers an alternative. Although the banking crisis led to the development of credible alternatives such as crowd-funding and peer-to-peer lending, I believe digital currencies should look to leverage banks as a way of offering the service to the mainstream.
I’m not talking about the ‘too big to fail banks’ but to partner with challenger banks, Metro Bank for example, who are returning to the days of what banks were initially set up to do, investing in local businesses which provide a service to their local communities. These communities may now stretch past your postcode or even international border but the principle still applies.
The very essence of digital currencies is that they are decentralised but unless a centralised authority is able to manage and regulate the system, it simply won’t work. Digital currency can’t replace cash if it is continually exposed to such risky variations in its valuation, it needs to be stabilised so it doesn’t suffer huge swings in de/inflation which has crippled other currencies but most importantly the people who use it.
I’m a believer in the power of communities and its ability to change society. This very newspaper wouldn’t be in existence if it wasn’t for the contributions of a global network of talented writers changing the way we consume news. For me, the biggest difference digital currencies can make is to reach out to the 2.5 billion people without access to a bank account (according to the World Bank) and transform their lives.
Digital currencies shouldn’t just be about rebuilding our economy; it should be about creating those economies which don’t exist yet.