Among the many technological revolutions that have intervened since the introduction of money, rapidly evolving information technology mechanisms demonstrated a strong potential to impact the way we deal and reason about money itself.
Going a step further from the concept of fiat money---a currency without intrinsic value---the availability of computers and connectivity has enabled the possibility to have money that is just electronic. Attempts to create such a digital currency can be traced back to the 1990s with the introduction of electronic cash systems such as eCash, which soon went out of service due to a lack of demand, both by consumers and merchants, and technological limitations.
However, as the main limitations of digital currency such as double spending have been resolved with innovative approaches like the development of blockchain technology, new forms of digital currency including Bitcoin have become popular. The diffusion of Bitcoin, officially started in 2008, has been unnoticed for quite a long period, being tagged as 'nerd concept'. However, its increasing adoption rate and market capitalization have surprised many institutional players and captured the attention of businesses, investors and the general public, and consequently of the government and policy makers.
While cryptocurrencies like Bitcoin have been around for some time now, there is still no general agreement on whether they are a risky speculative investment, a store of value, a means for purporting illegal activities, or the close-in-time replacement of fiat currency. However, their use has certainly increased over time, partly due to some of its attractive features.
Bitcoin supporting architecture is distributed by design, hence a single authority cannot run or control it, which makes it a more secure means of transaction. Security is further increased by other mathematical tools and algorithms Bitcoin relies on. Moreover, the easy and quick nature of both national and transnational transactions make Bitcoin a convenient option for businesses and organizations which focus on agility in their operations. Lastly, the supply of ‘coins’ is limited by the underlying algorithms, and once capacity is reached, it cannot be further triggered. Hence, Bitcoin is deflationary and immune to inflation as the availability of bitcoins is limited to 21 million units only.
However, despite proponents of its use, the Bitcoin industry has also experienced strong opposition. Critics argue that there is no ‘real value’ behind such cryptocurrencies which can put the investors acquiring them at risk. Similarly, the grave threat of Bitcoin being used for illegal activities is a serious matter for national security, and if in the wrong hands, the use of cryptocurrencies can have some serious repercussions. Lastly, critics also take opposition to the concentration that is caused by the fact that about 80% of Bitcoin supply is controlled by a handful of entities, and call for regulation of the industry.
A few nations are discussing whether and how to regulate cryptocurrencies, and some of them, including India and China, have threatened to ban Bitcoin transactions, while others, such as the USA and the UK recently discussed the issue. However, a closer look at the perceived risks and cited limitations show that most of the arguments used to discredit Bitcoin can also be used in the case of fiat money, as discussed in the following.
If bitcoins do not have a ‘real value,’ they share this attribute with fiat money, which is dependent on the credibility of the country’s government for its value. This could lead to situations where the fiat money is not even worth the paper it is printed on, as seen in Germany under the Weimar government in the 1930s, or more recently in Venezuela. Inflation rates in Venezuela skyrocketed to 1,698,488% in 2018, taking daily use products out of the purchasing power of the citizens. Bitcoin, because of its deflationary nature, is a better choice for a currency which has no real value. The same logic can be applied to the threat of cryptocurrencies being used for illegal and harmful purposes. Bitcoin is merely a means, just like fiat money, which has actually been used on a relatively larger scale to finance such activities.
From a strategic perspective, cryptocurrencies are a never experienced before phenomenon, triggered by a technology never witnessed before. As such, we are in unchartered territory, with the potential to disrupt the financial domain. From a tactical perspective, it is true that cryptocurrencies do have limitations, but these are not particularly exacerbated with respect to fiat money. It is true that cryptocurrencies do pose a national threat, but singling them out may be influenced by other motives. For instance, the lack of control and decentralization in the case of cryptocurrencies deprive governments of the capability to exercise monetary policies and control the flow of transactions (in particular, international settlement, and national currency manipulation---e.g., competitive devaluation).
It will be interesting to see how the ongoing tug-of-war between this innovation and the policymakers will find a synthesis, and how different stakeholders will participate in this process. A major player in deciding the future for Bitcoin and similar cryptocurrencies will be academic and research institutions that are developing technologies to prevent the illegal use of cryptocurrencies.
Considering this, researchers at Hamad Bin Khalifa University (HBKU) in Qatar are working on several research projects spanning from the security applications of blockchain technologies to FinTech to ensure the safe and efficient use of Bitcoin in the region and globally.
Professor Roberto Di Pietro is a full professor of cybersecurity at Hamad Bin Khalifa University’s College of Science and Engineering, leading the effort to establish a world-class research and innovation center in cybersecurity. He is an expert on FinTech services such as bitcoin, and holds eight patents/provisional patents on security topics, such as blockchain technology.