Image by Antana via Creative Commons
How revolutionary technology is re-inventing banking, business and life
Many times technology is at the heart of disruption. We saw in the previous section, how e-commerce disrupted the retail sector. At the heart of this disruption is the Internet and online sales transactions. Let’s take a look at another related technology that could change, not only the face of banking and business, but civilization itself.
Funny Money
The way we pay for things has evolved over the centuries. We could go back to when we traded chickens for beans, and then at some point we decided gold held value. The story of our next disruptor begins there: with trust. Humans began eventually to trust that gold has value, and based on this trust the concept of money was born. The reality is that gold is a naturally occurring metal that really has very little intrinsic value compared to its price.
When the USA got off the gold standard in 1976, it was a great step towards today’s up-and-coming disruptor: Bitcoin. Bitcoin is digital money or crypto-currency. In many ways it is just like the US dollar, as its value is based on the market supply, demand and trust. What differentiates Bitcoin from other currencies is that Bitcoin is peer-to-peer only and not backed by any country, bank or financial institution.
According to Mark Andressen at The New York Times:
“Bitcoin at its most fundamental level is a breakthrough in computer science – one that builds on 20 years of research into cryptographic currency, and 40 years of research in cryptography, by thousands of researchers around the world.”
Pull Your Head Out Of The Sand And Look Up
Many people who dismiss digital currency don’t like to admit that we already use it. Think about how many transactions are performed digitally these days. Between PayPal and credit cards alone, people get paid, spend, sell and save without ever seeing a single physical penny. How many millions, if not billions, of dollars are traded everyday by online stock trading platforms? Bitcoin merely takes this same concept and eliminates the middleman which is characteristic of all disruptive technology.
If price is any indicator, this Price of One Bitcoin chart from Jordan Cooper’s blog should tell us something:
Also, when things go sour in emerging markets, investors seem to be flocking to Bitcoin as a safe haven as reported by investing.com. Rising price despite global economic uncertainty all points towards established and increasing trust in this disruptive digital currency.
Big Man In The Middle
In this case, the middleman is the Federal Reserve of the United States of America, or any other central bank of any other country. If you extrapolate this to its logical conclusion, Bitcoin challenges all world banks, private banks and currencies. If all money went peer-to-peer digital, then there would be no need for banks at all – at least as far as institutions go that store or move money, physical or digital.
The Alec Ross and Jonathan Luff of Telegraph puts it this way:
“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.”
Now even though it is unlikely that Bitcoin will completely replace world currencies, it has already made waves showing that it is a viable competitor. A whole host of startups are already beginning to cash in on the currency, and it looks like just the start of a major change.
It’s Cheaper And Simpler
One of the great advantages of Bitcoin is that transactions are peer-to-peer. This means that there are virtually no transaction fees. If you want to buy something online using Bitcoin, you deal directly with the seller. The transaction comes out of your virtual wallet that you alone control.
At a recent hearing on Bitcoin was held by New York State´s top financial regulator Benjamin M. Lawsky. The New York Times Nathaniel Popper reported that Even Mr. Lawsky complained that it takes three days for his bank to transfer money to pay a credit card bill at the same bank. All of this kind of delay and the fees that go along with it are eliminated by Bitcoin.
Risks, What Risks?
Many point to the anonymity and risk of fraud surrounding Bitcoin, but these problems are inherent to any currency. Maria Bustillos recently wrote in The New Yorker:
“Cash is also anonymous; it is also used in money laundering and illegal transactions. Like bitcoins, stolen cash is difficult to recover, and a cash transaction can’t readily be traced back to the source. Nor is there immediate recourse for the reversal of transactions, as with credit-card chargebacks or bank refunds when one’s identity has been stolen. However, I find it difficult to believe that anyone who has written critically of the dangers of bitcoin would prefer an economy where private cash transactions are illegal.”
The computer power that goes behind verifying transactions is generated by computer wizards that do the work in exchange for, you guessed it, Bitcoin. This is called “mining” and an entire sub-industry has evolved to support this activity. The Huffington Post, Sunny Freeman reported recently just how incredibly complex and competitive this activity has become.
Peanuts?
The rapidly increasing total value of all Bitcoin is around $10 billion. That may be peanuts when it comes to the total global economy, but remember when the Internet was just getting started? Mark Andressen wrote for the New York Times:
“Critics of Bitcoin point to limited usage by ordinary consumers and merchants, but that same criticism was leveled against PCs and the Internet at the same stage. Every day, more and more consumers and merchants are buying, using and selling Bitcoin, all around the world. The overall numbers are still small, but they are growing quickly. And ease of use for all participants is rapidly increasing as Bitcoin tools and technologies are improved. Remember, it used to be technically challenging to even get on the Internet. Now it’s not.”
The Beginning Of The World As We Know It
Bitcoin fulfills many characteristics of disruptive technology such as being simpler, cheaper, faster and – most importantly – putting power in the hands of people. Already many startups, like Bitcoin insurance companies and payment platforms, are getting on board to take advantage of the new currency.
The other key factor is that the existing competitors, central banks, have no way to fight back. No county can impose upon another country the obligation to accept its currency as the new digital money. Bitcoin, being from no-place, has the upper hand. This does not mean it will escape regulation, but Bitcoin’s independence is guaranteed. Even though the founder of Bitcoin is anonymous, the currency’s ever-rising price is a testimony to its current and future worth – and to the eroding trust in current solutions.
We opened this section by saying that civilization can be changed by disruptive technology. Could the potential end to our current method of banking, buying and selling be any more revolutionary?
