The latest free guide in our business knowledge series looks at the increasingly important world of virtual currencies and transformative blockchain technology.
Cryptocurrencies, particularly Bitcoin and Ethereum, have hit the headlines over the last 12 months, as unprecedented demand has led to exponential growth in market capitalisation, transaction levels and value. This, in turn, has led to interest from the financial establishment and the trading of futures contracts on some of the world’s leading derivatives exchanges.
Some commentators have pointed to a classic pattern of ‘investment mania’ and predict that the bubble will burst, and soon. Even companies such as Kodak have recently announced blockchain projects, which have led to huge jumps in share price that don’t appear in any way value-led, in their case, KodakCoin, a payment system for the use of licensed photography.
Regulatory grey area
One of the primary attractions of cryptocurrencies is that they exist across international borders, operating outside of traditional banking controls and with a secure cloak of anonymity. Those three magic ingredients make this type of peer-to-peer payment system attractive to those seeking to launder the proceeds of crime. However, the distributed ledger technology that underpins all cryptocurrencies also has huge potential to revolutionise a number of industries, driving efficiencies in traditionally human-led transactions.
IBM have developed an ‘enterprise-ready’ blockchain platform to enable the development of business networks and applications; in his annual speech, Facebook’s Mark Zuckerberg has announced that the social media giant will look at encryption technology to “see how best to use them in our services.” It is no longer a question of if, but how and when.
New UK/EU Regulation on the way
The UK Government is keen to regulate these new currencies, and in a recent statement to parliament, the Treasury Minister said:
“The UK Government is currently negotiating amendments to the 4th Anti-Money Laundering Directive that will bring virtual currency exchange platforms and custodian wallet providers into Anti-Money Laundering and Counter-Terrorist Financing regulation, which will result in these firms’ activities being overseen by national competent authorities for these areas. The Government supports the intention behind these amendments. We expect these negotiations to conclude at EU level in late 2017/early 2018.”
There is no denying the impressive impact that cryptocurrencies have had in terms of investment activity, but they have yet to significantly influence the way we pay for things, which is still being driven by partnerships between Fintech developers and mainstream banks. The true test of cryptocurrency will be the response of developers and mining communities to overarching government regulation, and whether the format can be legitimised into mainstream public use once the initial investor frenzy cools. A key issue is the price volatility of the market, which tends towards speculative investment rather than genuine transactional use. You can already buy a coffee with Bitcoin in London, it’s just that three months down the line you might be able to buy a car with the same amount.
We will be publishing a second cryptocurrency edition shortly, which looks at developments in Cryptocurrency Regulation & Disputes. However, in the meantime, everything you need to know to understand the business basics of blockchain technology can be found in our freely available guide, which can be downloaded via our Insight section here.