Last month marked 12 years since someone was first recorded as buying physical goods – two pizzas – using cryptocurrency.
As the oft-repeated anecdote goes, on 22 May 2010 when the transaction took place, the 10,000 Bitcoins paid by programmer Laszlo Hanyecz translated into around $41. If Mr Hanyecz had kept the Bitcoins and sold them at their peak last year, he’d have earned himself around $690 million.
This neat piece of trivia about expensive pizzas captured the public’s imagination and became shorthand for the volatility that has characterized cryptocurrencies as speculative investments. Their wild value appreciation rivals the infamous Dutch tulip mania in the mid-1600s, during which the rarest bulbs traded for up to six times the average annual salary.
This narrative of cryptocurrencies as high risk and volatile has been further fueled recently as nearly £250 billion was wiped off cryptocurrencies in a matter of days last month as a result of investor panic. Various commentators have declared the crypto project as ‘dead’, and regulators are warning consumers against pouring money into these unregulated assets.
And we agree – no-one should be betting the house on crypto. But it should also be remembered that crypto wasn’t originally intended as an investment vehicle. I predict that within the medium term, crypto’s positioning will change and we will begin to consider it as a safe, useful and reliable way of tending.
Today’s fiat currencies, long divorced from the gold standard and often embodied in plastic form, are already a far cry from the bartering systems, precious metals and promissory notes that enabled the exchange of value in the past.
Digital currency is just the latest stage in that evolution, which I believe will ultimately fulfill the basic functions of money as a store of value, a means of exchange and a unit of account.
The birth of the ‘grown up’ cryptocurrencies
Perhaps the most important factor in the development of cryptocurrency is the emergence of stablecoins.
These are cryptocurrencies that are pegged to stable assets – such as sterling or the US dollar – and are intended to offer the steady value of centrally-issued money in digital format.
Collateralised stablecoins – when structured correctly – can avoid the volatility of traditional cryptocurrencies because the issuers, although private entities, hold and monitor reserves to ensure they can always be redeemed for an equal value of the currency they represent.
At this point it would be remiss not to remark on the recent (and spectacular) failure of TerraUSD to maintain its ‘peg’. While I believe stablecoins will continue to play an increasingly important role in global finance, the Terra collapse shows us the risks inherent to algorithmic stablecoins.
It also adds weight to the case for regulation in this space. Currently subject to fairly light-touch regulation, governments all over the world, including in the UK, have signaled that they are preparing to bring stablecoins inside the regulatory perimeter.
I welcome this move but urge regulatory authorities around the world to establish sensible frameworks that provide the protections expected in traditional finance, without stifling the innovation that flourishes within the crypto industry.
While a relatively recent development, the majority of crypto service providers already have to adhere to KYC, AML and CFT checks – paving the way for institutional adoption.
Meanwhile, the world’s central banks are also designing their own versions of stablecoins, known as central bank digital currencies (CBDCs). Governments in the EU, the UK and China are investigating the benefits offered by CBDCs, while the US administration launched a review of CBDCs in October 2021.
Whether public CBDCs or private stablecoins end up dominating the market is yet to be seen. But what is clear is that the world’s largest economies are demonstrating a willingness to consider the benefits offered by digital currencies.
How businesses and consumers benefit
Of course, crypto as a spendable tender is not sustainable unless it can demonstrate discernible benefits that strengthen its position against fiat currency rivals. Those benefits will continue to become more and more apparent. Because cryptocurrency bypasses third parties, there is the potential for these transactions to become much faster and much cheaper than those sent via traditional payment rails.
Crypto transactions could also offer a far more efficient means of transferring value cross-border. Foreign exchange fees are a constant headache, and the fluctuating value of fiat currencies can leave people and businesses inadvertently paying more (or receiving less) whenever they need to send funds overseas. Cryptocurrency could minimize ‘value leakage’ and ensure recipients keep more of the money sent to them. This is especially important considering the growth of remittances and their recovery post-Covid. World Bank data shows remittance flows to low- and middle-income countries will grow by 4.2 percent this year to reach $630 billion.
A useful way to conceptualize the puzzle around cryptocurrency payment adoption is the ‘blockchain trilemma’, often cited by those working in this sector.
This refers to the idea that blockchain technology can inherently only tackle two out of three of decentralisation, security and scalability. So, we can have a system that is fully decentralized and scalable, but then you sacrifice security, or one that is decentralized and secure, but not scalable, and so on.
Work is now underway that seeks to maximize each of these points without sacrificing the others.
But already in existence are blockchains that have addressed scalability and security and have therefore made it cheaper and safer to transact, though they do still tend to be overseen by a centralized (or, at least, semi-centralized) entity.
In my view, where we’re talking about payment efficiency, decentralization is probably not the biggest priority. I think it would be fair to sacrifice some decentralization in order to be able to make more efficient and less expensive payments.
Another topical benefit relates to supply chain stability: post-Covid, businesses need to find better ways of creating robust supply chains without hobbling their own finances. Blockchain technology, particularly smart contracts, offers a promising method of effectively and efficiently performing this historically challenging task.
The barriers to adoption
Reputation remains a key challenge, especially as people are naturally influenced by relentless coverage of cryptocurrencies as investments. Reputational rehabilitation will come via properly regulated ecosystems, stablecoins and CBDCs.
Meanwhile, the technology and infrastructure to make crypto spendable is already there, meaning people can, should they wish, use cryptocurrency for everyday transactions. It is no longer necessary for a given merchant to even accept crypto – a ‘crypto debit card’ can convert digital assets instantly at point of sale.
Over time, as more banks and financial institutions begin to apply for crypto licenses, and these currencies become increasingly adopted, the perception that the crypto space is feral will begin to shift.
All this points towards a future in which paying for pizza with crypto is not a scaremongering anecdote, but a part of everyday life.