Best wishes to the beginner attempting to understand bitcoin, cryptocurrencies, and the blockchain. As banking and technology expert Igor Pejic points out, these themes generate both false optimism and reflexive anxiety. In this brief introduction, Pejic works hard to dismiss the hype while providing an unbiased assessment of the technology’s possibilities and risks. For example, despite all the hype around bitcoin, Pejic sees no chance of it replacing government-issued money or destabilising major banks, but he does see serious dangers to payment providers. This is a valuable and entertaining book for both technophiles and technophobes.
Bitcoin was just an opening salvo in the development of blockchain technology.
Blockchain is a distributed ledger technology that has the potential to completely transform businesses that rely on recordkeeping, particularly the financial services industry. The technology enables coins and assets to travel across a peer-to-peer network that is not controlled by central banks or regulated entities. Traditional bankers are getting nervous. JPMorgan Chase CEO Jamie Dimon told shareholders in 2015 that “Silicon Valley is coming.” Fintech startups are pouring into this promising new market. Tech executives, venture capitalists, and the media are all anticipating a “gold rush.” However, the flood of opinions regarding this new technology is accompanied by a lack of intellectual rigour or clear-eyed analysis.
Financial agencies are keeping a close eye on payment-transaction companies such as PayPal. By adding a layer to the established payment system, it snatched up a profitable segment of the financial industry. Blockchain both threatens and promises to be significantly more disruptive. It may allow for a significant revamp of the payment processing method. However, disappointment has already tainted the promise. One of the benefits of blockchain is that it is secure and resistant to hacking. However, the Mount Gox scam in 2014 resulted in the loss of $450 million in bitcoins. Even the terminology used to describe bitcoin is perplexing. Owners use “keys” to access their digital currency stored in “wallets,” but these are imaginary concepts rather than actual objects.
Myth: Blockchain will be as significant a disruptor as the internet was.
Blockchain supporters see it as a solution for all problems in the world. However, while the technology’s potential is enormous, it need refinement. One apparent barrier is scale: despite bitcoin’s market valuation hitting $164 billion in early 2018, cryptocurrencies are just not prepared to handle the demand that would result from a sudden surge in usage.
Another barrier is that blockchain technology have yet to achieve user-friendliness that is appealing to mass users. Take a look at the cryptographic mechanism that powers blockchain. A password reset is not an option. To preserve access to your Bitcoin, you must remember a public address that is 32 characters long. If you forget or misplace it, your blockchain asset is gone forever. Consider these odd ways of representing bitcoin values: Even the most math-literate consumers grab for their calculators during bargain searching when items are priced in bitcoin amounts such as 0.2267.
Myth: Blockchain will bring down traditional banks.
The truth is that blockchain poses significant risks to organisations that merely transfer money from one location to another, such as Western Union and PayPal. Western Union is a major player in the $500 billion remittance sector, charging high fees ranging from 7% to 30%. In 2018, PayPal generated $13 billion in revenue from payment processing. The core promise of blockchain is to eliminate fees and impediments to money flow. In order to compete with the banking system, blockchain providers would need to dethrone incumbents that not only transfer money (through transactions), but also hold value (via checking accounts) and lend value (through loans).
Blockchain technology appears to be a threat to banks. After all, regulated financial institutions and their shaky network of brick-and-mortar locations appear to be on the decline. And banks are no longer producers of new ideas. Banks could previously afford periods of trial and error when introducing new innovations such as ATMs. With so many fintech start-ups circling them, banks are no longer willing to take risks or invest extensively in new technology.
Myth: Banks’ main threat comes from fintech start-ups.
Fintechs have drawn a flood of investment, with approximately $47 billion invested in 2015, and the number of unicorn fintech companies, those valued at $1 billion or more, has soared. The attraction is clear: Fintechs, unlike the sclerotic incumbents they want to replace, are not burdened by costly legacy technology or cumbersome loan-approval processes. A peer-to-peer network may approve a loan in seconds, but a bank’s lending committee may take weeks to approve a credit. Furthermore, the 2008 financial crisis fueled a reaction against banks, who are now commonly viewed as greedy by many people. All of this lays the groundwork for fintechs to take off.
However, fintechs are now more of a nuisance to incumbent banks than an existential danger. Mainstream banks have gathered large volumes of data about their clients, including credit histories, spending patterns, and account balances. This type of “client familiarity” is a significant advantage. The established financial institutions have it, but the newcomers do not. The problem is exemplified by Apple Pay’s poor performance. When the product debuted in 2014, credit card companies and major banks immediately agreed to pay Apple a 0.15 percent transaction charge merely to be a part of the exciting new offering. Despite the hoopla, customer acceptance of Apple Pay remained low as of late 2017.
Myth: Blockchain will narrow the global wealth gap.
Blockchain, like all great technology advances, has the potential for both good and bad. Perhaps the most intriguing aspect of blockchain is its usage by criminals for unlawful purposes. Law enforcement is struggling to track bitcoin’s use in a variety of crimes, including terrorism, money laundering, and cyberattacks. On the other hand, some people may profit from blockchain’s anti-authoritarian bent: Blockchain enables the financial support of independent media outlets that oppose autocratic rulers in harsh environments. As a result, blockchain can be a force for good by allowing the oppressed to voice up.
Unfortunately, bitcoin and other cryptocurrencies have yet to live up to their full promise in Africa and Latin America. There are real barriers to bitcoin adoption as a means of circumventing the current banking system. For starters, many of the one billion unbanked smartphone users are using outdated devices that do not support the most recent apps. It is just not viable to utilise bitcoin on their ancient cellphones. Furthermore, cryptocurrencies are difficult to utilise, and their brand awareness among the poor is low. Furthermore, cryptocurrencies offer nothing to provide individuals with credit.
Blockchain does promise to tackle one key issue for the world’s poor: exorbitant remittance fees. In 2015, remittances sent home by Haitians working abroad accounted for one-quarter of Haiti’s GDP; in the Philippines, remittances from Filipino migrants accounted for 10% of GDP. Blockchain promises to eliminate high fees, increasing income in developing countries. Abra, a blockchain firm, leverages bitcoin and Litecoin to make cross-border payments cheaper. Of fact, the majority of cryptocurrency transactions to date have been neither frictionless nor free. The average cost of a bitcoin transaction in December 2017 was $28.