One of the greatest struggles that cryptocurrencies have faced, as they have emerged over the past decade, is persuading the general public that they can indeed be used for regular everyday transactions. Consumers have to be sure that these cryptocurrencies are capable of storing and transferring value. Yet this question of value has long been divisive and perplexing within the field of economics. Austrian economist, Carl Menger, always maintained that the economic value of any good or service was purely subjective. As he remarked in his Principles of Economics,
…I [have] observed that value is nothing inherent in goods and that it is not a property of goods… Neither is value an independent thing … The measure of value is entirely subjective in nature, and for this reason a good can have great value to one economizing individual, little value to another, and no value at all to a third.
For those advocating for the mass adoption of Bitcoin, this is a very practical question. Obviously, economic agents, such as consumers, will only be willing to adopt blockchain based currencies if there is a clear benefit of them doing so. And yet, within the crypto-sphere, fierce debate has raged as to why cryptocurrencies such as Bitcoin should be worth anything at all. Some have argued (as the Commodity Futures Trading Commission did in September 2015) that Bitcoin is a commodity, others that it is a currency, whilst still more have contended that Bitcoin is a commodity that can be conveniently used for transaction thus making it a hybrid commodity-currency.
However, in a sense these esoteric arguments are irrelevant. An economic agent will make a decision based upon the sole criterion of whether or not he will benefit from it. An economic decision maker does not, and in fact (due to the sheer volume of decisions) cannot, weigh up lengthy and tedious academic papers before making every mundane transaction.
Therefore, what is required for cryptocurrencies to gain traction is not for economists to argue over technical definitions, but rather that the case for cryptocurrencies is clearly made to consumers.
Listed below are the key obstacles that must be overcome before regular consumers can begin to use cryptocurrencies.
1. Legal Ambiguity and Fraud
As has previously been written on this site, the precise legal status of Bitcoin is far from clear. Different countries have adopted completely different stances on the issue. Some countries such as Russia and China have either completely, or partially, banned cryptocurrencies. Most European countries have taken a more ambivalent stance and have attempted to encourage users to use cryptocurrencies within some form of regulatory framework. To further complicate matters, as lawmakers across the globe gradually become more educated on the precise nature of cryptocurrencies, these laws are expected to frequently evolve.
Of course, there are no such regulatory ambiguities for fiat currencies, which have been used in some form for centuries. Thus the very real possibility of a sudden and harsh change in government policy towards cryptocurrency is a risk that the fiat user does not have to bear.
2. Transaction Fees and Lag
In the early days of Bitcoin a common claim that was often made, particularly by the early adopter Roger Ver, was that Bitcoin allowed a user to send value “quickly, to anyone and to anywhere, almost for free.”
Yet, as Bitcoin and other cryptocurrencies have matured it has become clear that this is simply not the case.
The website howmuch.net conducted a study that estimated how fast transactions could be conducted relative to more traditional payment methods such as PayPal or Visa.
Their results are listed below.
|Rank||Payment System||Transactions Per Second|
Clearly, businesses cannot sell their goods for cryptocurrencies if it is unclear as to how long it would take for the transactions to be confirmed on the blockchain. In fact, in the aftermath of the spike in transaction costs and speed, active cryptocurrency usage has drastically reduced. As the US Senate Committee on Banking heard in October of this year, the number of transactions on cryptocurrency exchanges has plummeted by more than 50 percent. Whilst there are approximately 30 million wallet holders worldwide, only a fraction of them are active. For instance, a study by the Cambridge Centre for Alternative Finance found that only around 25% could be considered active. Fundamentally, well established payment providers such as Visa or PayPal can integrate their services to vendors quickly and cheaply. There are, currently, no cryptocurrency equivalents for vendors to use.
The other great issue with using Bitcoin for day to day purchases is the unpredictable transaction costs. Earlier this year Bitcoin transactions were so expensive that even the North American Bitcoin Conference refused to take Bitcoin as payment. The conference organizer Moe Levin complained that, “transaction fees on the Bitcoin blockchain exceed $30 at certain times of the day.”
Knowledge Gap and Ease of Use
The key aim of Bitcoin, constantly emphasised in Satoshi Nakamoto’s white paper, is to decentralise currency. This would, Nakamoto said, reduce the possibility of governments controlling or manipulating money. In the past, Nakamoto argued, fiat currencies could in principle be devalued, without the consent of the users, by a powerful centralised authority such as a central bank. Citizens who used fiat currencies had to simply have faith or trust that this centralised financial power would not be abused.
However, it could be said that in a world in which a cryptocurrency like Bitcoin was widely used, the old centralised financial power of the central bank would simply be replaced by a new centralised knowledge power of the computer programmer and cryptographer.
A small fraction of people use cryptocurrencies and only a small fraction of this subsection understand cryptocurrencies. A 2015 PWC survey found that 83 percent of people are either only slightly familiar or not at all familiar with cryptocurrencies. In truth this figure is probably far higher. For instance, to understand Bitcoin as described by Satoshi Nakamoto in the white paper, one has to be familiar with college level cryptography, computer science and economics. As Kosala Hemachandra, the co-founder of the leading online wallet service for Ethereum, MyEtherWallet, told this site, a financial product is useless if it is too overwhelmingly complicated for the average user.
Thus, in a sense, the average cryptocurrency user, when using services that interact with the blockchain, is forced to simply trust that the system is as safe and reliable as the experts tell him it is. This centralisation of technical knowledge, where users are not entirely sure what is and is not safe, has led to an unprecedented amount of fraud in the crypto sphere. As economist Nouriel Roubini recently claimed in his testimony to the US Senate Committee on Banking, “a recent study showed that 81% of all ICOs were scams in the first place, 11% of them are dead or failing while only 8% of them are traded in exchanges.”
Of course, whilst it could be counter argued that the fiat system is equally complex for the everyday user, it is clear that serious education is required before cryptocurrencies become more mainstream. And, of course, the man on the street will only invest time and energy into this education if the benefits of doing so are clear to him.
One final issue is that of deflation. As cryptocurrency prices have increased by hundreds of percentage points per year, it may be logical for owners to simply hold the currency rather than spend it. This can create a vicious circle. Cryptocurrencies are valuable because they can be used in transactions. But if a growing percentage of cryptocurrency users are merely hoping to sell at a later date rather than for use in regular transactions then the inherent value of cryptocurrencies becomes questionable.
In the race to create a crypto equivalent to Visa or MasterCard several solutions have emerged. Bitpay, founded in 2011, is a company that allows business to use cryptocurrencies for financial transactions without the price volatility that has plagued the industry since its inception. Bitpay instantly converts the customer’s cryptocurrency before depositing the amount in the business’s bank account. Whilst fiat currencies can take up to 3% as commission per transaction, Bitpay charges a simple 1% flat settlement charge. By December 2016 Bitpay was processing 200,000 bitcoin transaction per month and had received funding from (among others) Peter Thiel’s Founders Fund.
Pundi X, a start-up targeting the Asian markets, has developed the “XPOS,” which is a device that allows stores to “buy, sell and accept cryptocurrency.” Users, however, must use the company’s XPASS card which is topped up in order to carry out transactions. The XPASS card contains the user’s encrypted private key.
There are many other such companies offering similar services including Revel Systems (who offer firms a range of secure, but easy to use, hardware) and the Danish firm Coinify. Yet these genuinely innovative companies face all the same systematic risks as the individual user. At any time, a change in legislation or a sudden price move could derail the viability of the fundamental services that these companies offer. Back in 2014, Apple suddenly expelled all cryptocurrency apps from their App Store. These are issues that regular payment processors simply do not have to face. This sense of uncertainty simply cannot be sustained in the long run; the underlying challenges that continue to stunt the growth of the crypto sphere will have to be tackled before crypto payment solution become mainstream.
Yehudah is currently studying Banking and International Finance at the Cass Business School in London. Yehudah is particularly interested in how cryptocurrencies can increase economic freedom and prosperity in the developing world.