We are living in interesting times. The current generation of humans will be the last to hear the clinking of coins as they cascade through the inner workings of a vending machine. Worn notes festooned with portraits, artwork and holograms will soon only exist in museums and private collections, and the concept of physical currency will seem quaint and passé. Cash and coins are disappearing at a rapid pace just as payphones vanished from the street corners of the world.
The driver of this trend is not cryptocurrencies. Fiat currencies have largely migrated to the virtual realm already; economists estimate that today only 8% of the world’s equivalent of $96 trillion in fiat currency exists as physical cash. The rest exists as binary information stored on bank and stock exchange computers around the world.
And more virtual cash is conjured into existence everyday. With each mortgage taken out from a bank, the equivalent of the loan is digitally manufactured by the bank’s computers. The promise to repay the loan (or perpetually pay interest on it) becomes the justification for the loan’s existence, thus adding to the world’s total supply of virtual money.
Cryptocurrencies, of which there are over 1600 types, total the equivalent of $100 billion as of December 2018, a paltry 0.1% of the world’s total money supply. Yet this figure still exceeds the annual GDP of 147 countries.
Who needs cash?
In addition to the inconvenience of bulky paper notes and heavy coins which are susceptible to counterfeiting, cash makes us targets of theft. Withdrawing cash from teller machines is usually subject to a fee, and retailers stocking cash are vulnerable to robbery. The US Treasury Department now allows US businesses to refuse to accept notes above $20 for security reasons, a situation that has become common in the USA.
Cash is also a vector for disease; the fibrous surface of paper money which passes through thousands of hands over a lifespan of up to 4 years is often teeming with bacteria, mold and other pathogens. Coins, which typically remain in circulation for 15 years, are just as bad; apparently there are more germs on a £1 coin than a toilet seat.
Practical use cases for physical cash are slowly disappearing. One that will always remain, however, is as a traceless vehicle for corporate and political corruption or money laundering.
The root of all evil
The conversion of currency from physical to virtual enables developers of financial technology to more easily identify unscrupulous online transactions and implicate criminal elements attempting to move ill-gotten gains to obscure offshore locations.
Unlike the case of investigating isolated cases of illegal activity based on suitcases full of cash, the same efforts applied in the digital realm exposes not just single transactions, but the entire history of transactions conducted by the same individual. The slightest slip-up reveals the complete history of transactions, with bullet-proof evidence indelibly carved in blockchain-based digital stone.
By applying powerful computer processing, AI and cryptographic techniques, a new arsenal of electronic weapons are being developed to track down illicit activity conducted over banking networks and the internet. And cryptocurrencies are not immune; contrary to popular belief that cryptocurrency transactions are anonymous, quite the opposite is true.
In the case of Bitcoin, transactions are immutably and permanently recorded on a publicly visible ledger, and online merchants accepting Bitcoin routinely leak data that exposes not only entire transaction histories, but user identities as well. A tenuous fig leaf of pseudo identity is all that protects Bitcoin users from exposing their dirty laundry to the entire world.
The US National Security Agency is purported to have already developed a system that identifies Bitcoin users according to classified documents leaked by whistleblower Edward Snowden while working at the NSA. The extensive list of cryptocurrency thefts that have occurred since 2011 is clear evidence that “secure” cryptocurrency exchanges are anything but.
One of the most archaic and inefficient financial transactions conducted today is moving money from one location to another. Such a basic transaction often requires days and involves the senders and receivers bank, plus intermediary banks. The process is coordinated by SWIFT (Society for Worldwide Interbank Financial Communication), bringing the total number of involved parties to seven. And fees are charged all along the way.
Performing the same transaction via blockchain based cryptocurrencies reduces the number of parties down to two; the sender and receiver. Intermediaries who exist solely to provide trust that the transaction will go through are replaced by an immutable digital ledger that guarantees the transfer of funds takes place instantly, accurately, and transparently.
Today, each of us are involved in countless transactions conducted on a regular basis; salaries are paid, rent and mortgages payments sent, monthly utility and credit card bills settled, student loans amortized, etc. Most of these transactions require manual intervention at various financial institutions; accountants and settlement clerks are required to ensure the accuracy of thousands of aggregated transactions, as well as identify potential fraudulent activity.
Third-party online payment facilitators such as PayPal ensure the successful purchase of goods, but charge hefty fees to merchants and for currency exchange service. Credit cards such as Mastercard and Visa typically add 1.5% charge to all purchases, while charging merchants 2% for the luxury of their service.
It would be fair to say that the current state of affairs is slow, inefficient and expensive. This is one sector of our economy that is ripe for disruption. Since money is effectively data, why can’t we send funds to our family members the same way we send them an email? Blockchain technology promises to make this possibility a reality by replacing human trust and manual settlement services with machine trust and automated smart contracts.
As this process will disrupt many well-established financial institutions, and even eliminate some of them, change will be resisted. But change will come, and probably sooner than we think.
Initium — backing the pioneers of fintech
As the financial industry comes to terms with the migration of money to virtual and cryptocurrencies, a wide range of new products and services will grow around the ecosystem to ensure fast, secure and low-cost purchases, transactions and money transfer services. Fintechs in these sectors will become the new tech giants of tomorrow, as (virtual) money truly does make the world go round.
Initium Group, a new breed of bank focusing on innovative firms in the new digital economy, is looking forward to providing fintechs with the core banking services they will need to launch their products and services across Europe, the Middle East and Asia. It is Initium’s philosophy that the traditional banks of today are impeding the growth of the fintech sector due to their sheer size and business inertia. It is Initium’s goal to anticipate the growth of this sector and fill the banking service void left by legacy banks who may also feel threatened by the disruption of their core businesses.