Tesla recently invested 1.5 billion dollars in bitcoin and Mastercard announced it will accept crypto currencies as payments. The last five years have seen a strong shift toward digital currencies and the blockchain technology that underpins them. What does this mean for banking and finance in the future? Will cash become obsolete as national currencies go digital and how will it all be regulated? Head of Data, Blockchain and Digital Assets at the World Economic Forum, Sheila Warren, recently spoke at the Brookings Center on Regulation and Markets to address these and other questions.
Blockchain technology and bitcoin cryptocurrency are sometimes confused with one another. Cryptocurrencies like Bitcoin have been treated with suspicion because of their underworld origins. While the apparently limitless transparency and energy requirements of blockchain has raised doubts about its security. As Sheila Warren puts it, ‘It’s an open secret that most technology took off because of illicit activity’. But she is equally sure that this is no reason ‘to throw the baby out with the bath water’. Cryptocurrencies and the technology that supports them are ultimately tools that can be used for good or bad. The challenge is how we organise the use of these technologies for good in increasingly borderless domains.
Quick recap
Blockchain is a decentralised technology that removes the need for intermediaries like banks because it substitutes the trust we have in institutions with the trust we have in a network chain of anonymous computers. Each one of these computers automatically makes a record of any and all transactions on the blockchain. This means that a record is both highly public and very difficult to alter. One would have to tamper with each of the separate records in order to compromised the security of the blockchain. It is the decentralized transparency of blockchain technology that gives it its power.
Bitcoin is a digital currency with its own intrinsic value. The most well-known of many cryptocurrencies, it is supported by blockchain technology and may be used as an investment. There are other kinds of digital currencies that are less volatile and more secure. Central bank digital currencies, issued by the central bank of a country is like digital cash. For example, China’s digital yuan. Stable coin is cryptocurrency which is fiat-backed but is not issued by a central bank. These can be pegged to anything e.g. futures markets, commodities markets etc. ‘There is room for all of these things in the ecosystem’, maintains Warren.
‘We’re just starting to unlock the programmability of money’ – Sheila Warren.
These digital currencies can be programmed. This has given rise to Smart contracts in a variety of business areas. Warren points to the insurance industry as a key area for development. For example, if your flight is delayed, a smart contract will ensure that you are reimbursed automatically without the hassle of negotiation with the travel company in question. Crop insurance organised with the help of blockchain would also give individual farmers more control and facilitate their participation in the wider market system. ‘We’re just starting to unlock the programmability of money’ says Warren. This, she believes, is the primary use case for digital currencies. But switching over to such systems will take time and money.
There are of course a variety of other uses to which digital currency and the blockchain technology that underpins it might be put.
Supply chains
A lot of exploration and research has been done around how blockchain can be applied to supply chains. This technology can be used to check the origin of products – this clearly has important implications for bio-products, Fairtrade products and of course, health products like face masks, PCR tests, even vaccines. Blockchain technology can even be used to check emissions and off-set carbon credits. But Warren points out that ‘Blockchain is a team sport’. It really only makes sense to implement this fairly costly, high energy technology when you have a large coalition of organisations that span borders.
Trust and transparency
The decentralized nature of blockchain, perhaps counter-intuitively, provides high levels of trust in its ability to maintain accurate records. This is especially attractive in countries where trust in government institutions, for example, is low. Land titling was an early use case that helped clarify and regulate land ownership claims in an open and systematic way. Governments can also use blockchain to their advantage – for example, tax reporting. PWC recently brought out a report on how blockchain technology can be used to establish a global standard for tax reporting.
Many developing countries are showing increased activity in a variety of blockchain-based initiatives, explains Warren. Simply because the need is often more acute there. She mentions the Bahamas, Cambodia and Bermuda where weak institutions make many basic financial and legal services subject to fraud. Larger countries like China and India are also throwing their economic weight behind these technologies. China has ‘gone very big on digital currencies’ with the creation and promotion of the digital Yuan, explains Warren. While India is working toward a fully digitized identity system. Something which Warren describes as some ‘very serious experimentation that is very important to track.’
Financial inclusion
For those who have no access to basic financial services, technologies like blockchain can facilitate financial inclusion as the smart phone has done in many parts of rural Africa. Cryptocurrencies also have high use in hyperinflationary economies. Stable coin, a reserve-backed digital currency, has huge potential for trading pairs, Warren explains. Its stability and the speed at which it can be traded facilitates the creation of capital markets. Nevertheless, culture plays a large role in the use of any technology and Warren takes pains to point out that different cultures respond to new technologies at different rates and in different ways. For this reason, ‘the idea that cash is going to become obsolete ignores the realities of many people’s lives’.
Regulation
Digital currencies are, by definition, borderless. This makes global regulation both difficult and important. Organisations like the World Economic Forum, the IMF and the World Bank are all looking into this complicated problem. Warren agrees however that ‘it is almost impossible to affect compliance’. In spite of ‘a tremendous amount of desire to regulate digital currencies’ Warren says that she is ‘very hesitant about regulating technology in its pure form’.
The real issue, is, how do we create system that is safe for the average person? Warren believes that we are going to need to fundamentally rethink what we mean by user protection laws and regulations in the process. Who are we protecting exactly? And what is the role of the government in protecting consumers? No one wants to lose their life savings or find that they are being used to fund terrorism. But Warren points out that even in the virtual world, ‘people are findable – it’s pseudonymous, not anonymous’. So although regulation will inevitably lag behind the creation of new technologies, it is not impossible.
Warren admits that the question of how can we make tech regulation more agile, is key. Yet she describes herself as ‘a pragmatic optimist’. ‘There are things that are going to emerge in this crypto-ecosystem that we can not even conceive of yet. And once we have them, we’re not going to know how to live without them!’ laughs Warren.