Whether you call them digital or virtual currencies, youre aware of Bitcoin, Litecoin and the thousands of other decentralized currencies created by algorithms.
With the Bitcoin bubble of 2013 and early 2014 having popped, it looks like another run is underway. April saw prices around $320 and this week, prices hovered around $600. This blog is not intended to look at reasons to make a speculative investment in Bitcoin, but rather at the potential practical uses for virtual currencies and the ultimate impact they could have on the global economy.
Virtual currencies are traded in numerous currencies, but the US dollar looks like it will be the de facto means of exchange. Similar to commodities such as gold, oil and agriculture, pegging virtual currencies to a single worldwide currency will help legitimize this nascent segment. Pegging to a single currency will enable funds and payments to have a transparent value and move freely across borders, making it easier to change from virtual currencies to a fiat currency.
A pegged currency will make it more difficult for the nationalization of banking and payments infrastructures. This is essential in developing markets, which may turn to manipulating their currency. If the use of virtual currencies is widely adopted in the burgeoning middle classes, power will be transferred to the people rather than to potentially protectionist and nationalistic governments. In years past, governments have devalued their currency and wealth has been destroyed. Virtual currencies could help protect the wealth of the people.
Despite the publicity blitzes of the Sacramento Kings, Overstock and Expedia, the real value in virtual currencies is in the emerging markets to store wealth. The dampening of nationalization of assets and the reduction in the power of central governments due to wealth being transferred could cause governments to overreact and impose stringent regulations and laws on virtual currencies. However, the free market will win and trust in nations central governments will erode due to these actions. This could lead to virtual currencies becoming an alternative to the existing fiat currencies.
Storing value in emerging markets is one practical use case. Others include business-to-business payments and cross-border remittances between and within companies, as discussed by Erin McCune at Glenbrook. My own view is that this could have real implications for fast settlement of funds between two entities. Imagine if a large global conglomerate such as GE, IBM or Google could make intra-money transfers in seconds? The exchange risk is negligible as the virtual currency could be exchanged for a fiat currency upon receipt.
The big question remainshow will incumbent providers react to this burgeoning threat?
Paul McMeekin leads business intelligence and market research at ACI Worldwide (ACIW).