Create a FutureProof® Plan for the Cryptocurrency-Driven Economy
Our financial system is under tremendous pressure, putting global economies at the kind of inflection point where watershed moments and risks arise. As we look at the future of money, we see a virtual system in which economic connections are frictionless, human-to-human, disintermediated and entirely cashless.
The Earth is home to seven billion people. We’re more connected than ever, commerce crosses every boundary, and the demand for currency is insatiable. We’re experiencing a burgeoning movement, post-Great Recession (circa 2008), that has resurrected the concept of eCash and introduced a smorgasbord of virtual currencies (including cryptocurrencies), such as Bitcoin, Ether, Ripple, and others that are powered by a distributed ledger – blockchain technology.
This cryptocurrency craze has attracted the attention of consumers and companies alike. Why?
Many blame intermediaries like regulators, banks, credit card service providers, payment processors, and automated clearinghouse merchants that authenticate and grant permission (regulate) for you and me to use our money to buy something we want or need. Others will add that the inability to access the traditional financial system for funds to purchase goods or create a venture (without offering up ownership) has accelerated the creation and adoption of new forms of currency – digital tokens, crypto, and even ICO (initial coin offering).
Good or bad? The upside of virtual currencies.
The current rise of cryptocurrencies is offering hope (and fear) in anticipation of the next wave in financial systems and networks. In the coming decade, we expect to see even more connectivity and disintermediation in transactions between economies, organizations, and individuals. The “Internet of Money” is obfuscating the boundaries between currency and data, and erasing the barriers between people and institutions engaged in financial transactions (e.g., automated clearinghouse merchants).
There is immense opportunity for regulators, governments, and businesses to take advantage and gain from the emergence of low-cost, open source cryptocurrencies. If they don’t, their role can quickly diminish. Already, there have been cases of governments creating sovereign currency alternatives (like Sweden’s e-krona, Venezuela’s ‘Petro,’ and the estcoin in Estonia). Businesses like Numerai (the San Francisco-based hedge fund), are flirting with digital tokens to crowdsource funding, data scientists, and overall computing power to reward successful trading algorithms.
Enticing characteristics like seamlessness, transaction speed, accessibility, and fundamental human-to-human trust have emboldened the case for cryptocurrency assets. The status quo is vanishing, replaced by virtual currencies that are frictionless, offering new opportunities for wealth creation (as is seen in the rise of new millionaires and billionaires whose wealth is in digital currency investments).
What about banks, regulators, etc.?
Virtual currency (cryptocurrencies included) will become more prevalent. As it does, we expect banks, financial intermediaries, and regulators will play a role – albeit an evolving one.
Currently, financial institutions are on the front end of the innovation curve, investing primarily in blockchain based consumer finance products and platforms. Sovereign banks and regulators like the Bank of England and U.S. Commodities and Futures Trading Commission (CFTC) have created versions of cryptocurrencies and fintech products within their labs (e.g., LabCFTC). Not only are they propelled by the needs and desires of their customers and citizens, but they are pushed by competition from non-bank financial, social networks and digital-first retail companies like Amazon that have proven their ability to gain customer loyalty and trust.
The risks and rewards of participating in the virtual economy.
Cryptocurrency is still very much in its nascent stage. There’s a lot of concern about its long-term validity. For example, Microsoft’s guidance for allowing customers to use Bitcoin as payment for Xbox games and Windows apps flip-flopped in a matter of weeks. The technology first disabled use of Bitcoin citing its volatility, but recently reinstituted it. Nevertheless, the infallibility of virtual currencies as secure financial platforms has yet to be unproven.
For companies operating in this uncertain environment, the looming question is what does virtual currency, cryptocurrency, ICOs, and a cashless world mean for your business – your workforce, consumers, and suppliers?
There are opportunities for innovation – juxtaposed to risks – especially as organizations consider and design digital transformation strategies, including their financial systems (internal and customer facing). People will be more connected and empowered by a plethora of frictionless, virtual currencies that are blockchain-based. So will hackers, fraudsters, rent seekers, and thieves. With no structured intermediaries like banks or regulators, and while transactions occur outside the purview of banks and regulators, virtual currencies and other financial systems operating within the ‘shadow’ banking arena are potentially susceptible to threats and vulnerabilities. (Remember the Mt. Gox, DAO crypto-exchanges and NiceHash and Tether digital wallet hacks?)
To take advantage of the emerging, fluid, virtual (and cryptocurrency) landscape, organizations should focus on three fundamental efforts, centered on mitigating risk and positioning your entity for future profitability:
- Don’t get trapped in the crypto craze! Appreciate and stay aware of the trends and nuances, but also maintain a risk-informed outlook. Already, we have seen evidence of digital wallets and digital currency exchanges compromised by bugs, ransomware, and financial Trojans. Crypto hacking is estimated to rake in $200 million industry for hackers while costing businesses and governments $11.3 billion.
- Start now. If you haven’t already, gather key stakeholders to construct different, data backed scenarios to see what a future world would look like with (or without) virtual currencies, intermediaries, and regulators; as well as their implications to your organization, workforce, consumers, and suppliers. List the strategic risks and opportunities of participating in the virtual economy. Consider what type of digital transformation emboldens your overall business value and enterprise. Afterwards, structure your operations and your relationships with your workforce, consumers, and suppliers so you can continue to act nimbly as the market changes.
- Design, test, and implement a flexible, secure technology platform that can integrate with various financial systems in the future. There are already more than 1,700 digital and cryptocurrencies. Customers are adopting and using them more and more every day. The companies flexible enough to accept those currencies (with sound security parameters) will reap tremendous advantages over those that continue to insist on traditional cash- and card-based payment platforms.
The most important thing you can do is to stay actively informed about the changing financial landscape and your place in it.
Find answers to questions like what the changing state of commerce and money means to your financial ecosystem (workforce, consumers, and suppliers)? What would a currency specific to your organization entail? What will the role of reputation and trust play in the evolution of value exchange? We expect the digital financial revolution will continue to shape the global economy for the next three decades. Position your company to monitor and anticipate developments, and to implement ongoing digital transformation to stay at the forefront of wealth creation.
It’s time to adapt to the future of money.
 David Chaum, Digicash
 Bloomberg Technology
- Technology Scouting and Adoption