March 5, 2018
An increasing number of institutions and regulatory bodies are weighing in on cryptocurrencies – their role, impact, and potential. While opinions vary and sometimes change, the regulatory tide is inevitable and already in designs across nations, with many having working frameworks in place.
The Bank of England is one of the latest institutions to review the pros and cons of cryptocurrencies within the vision on the future of money. A speech by Mark Carney, Governor of the Bank of England, offers three important reasons why cryptocurrencies are presently failing to fulfill the role of money.
How well do cryptocurrencies fulfill the role of money? The short answer is they are failing.
Poor stores of value
Cryptocurrencies are proving to be poor short-term stores of value. Over the past five years, the daily standard deviation of Bitcoin was 10 times that of the sterling. And Bitcoin is one of the more stable cryptocurrencies. Indeed, the average volatility of the top 10 cryptocurrencies by market capitalization was >25X that of the US equities market in 2017. This extreme volatility reflects in part that cryptocurrencies have neither intrinsic value nor any external backing. Their worth rests on beliefs regarding their future supply and demand – ultimately whether they will be successful as money.
The fixed supply rules of cryptocurrencies such as Bitcoin are serious deficiencies. Fundamentally, they would impart a deflationary bias on the economy if such currencies were to be widely adopted. If those who cannot remember the past are condemned to repeat it, recreating a virtual global gold standard would be a criminal act of monetary amnesia.
Inefficient media of exchange
The most fundamental reason to be skeptical about the long-term value of cryptocurrencies is that it is not clear the extent to which they will ever become effective media of exchange. Currently, no major high street or online retailer accepts Bitcoin as payment in the UK, and only a handful of the top 500 US online retailers do. For those who can find someone willing to accept payment for goods and services in cryptocurrencies, the speed and cost of the transaction vary but it is generally slower and more expensive than payments in sterling. That’s because the more heavily used cryptocurrencies face severe capacity constraints compared with other payment systems.
For example, Visa can process up to 65,000 transactions per second globally against just seven per second for Bitcoin. And if you use a debit or credit card in the UK, the transaction is completed in seconds and without the exchange rate risk. In contrast, Bitcoin users can face queues for hours.
Those wanting to get to the front to make time-pressing payments – for last orders, for example – need to offer up a transaction fee sufficiently large to persuade Bitcoin miners, who verify and process transactions, to do so quickly. The fees paid vary through time but reached £40 in late 2017. Fees are currently around £2, but even that is expensive relative to cash, cards or online payments which cost the retailer around 1.5 pence, 8 pence, and 19 pence respectively.
Furthermore, the costs of Bitcoin mining are enormous. Its current annual electricity consumption is estimated by some to be up to 52 terawatt hours – that’s double the electricity consumption of Scotland. In comparison, the global Visa credit card network’s energy use is less than half of 1% of that of Bitcoin despite processing transactions 9000 times more.
Virtually non-existent units of account
There is little evidence of cryptocurrencies being used as units of account. Retailers that quote in Bitcoin usually update at a very high frequency so as to maintain stable prices in traditional currencies such as US dollars or sterling. The bank is not aware of any business that accepts Bitcoins in payments that also maintains its accounts in Bitcoin.
Overall, contactless payments, including those made on a credit and debit card, have seen continued growth over the last 12 months, with a 79% uplift in spending, with ‘touch and go’ now accounting for more than six in ten (62%) electronic transactions up to the £30 spending limit.
The sectors seeing the biggest increases in contactless payments are passenger railways (up 235% YoY) and car parks (up 132%), followed by traditional retailers such as sporting goods stores (up 85%), and clothing stores (up 85%).
Travel is an area where speed and convenience are key for consumers: time is of the essence when rushing to board a train, with ’touch and go’ saving an average of 7 seconds per transaction compared to chip-and-PIN, and 15 when compared to cash.
In London, the rollout of contactless across the TfL travel network from 2012 has played a key role in driving adoption. Other transport operators across the country are now following suit and integrating ‘touch and go’ technology to allow commuters to pay quickly and easily – for instance, bPay recently partnered with Plymouth CityBus to enable commuters to pay for their journeys using contactless across its services.
The surge in popularity of wearable and mobile payments creates exciting opportunities for shoppers and brands alike. Consumers can now choose the type of accessory or device they want and match it to their lifestyle or fashion taste, all while enjoying the speed, ease, and convenience that contactless brings. – Adam Herson, Business Development Director, Barclaycard Mobile Payments
‘Touch and go’ spending is set to rocket 317% by 2021, with contactless payments expected to save UK shoppers almost £1 billion worth of time over the same period. The research also showed that two in five retailers who accept contactless now only accept card payments or plan to become completely cash-free in the next five years.
Microsoft Cognitive Services is home to the company’s hosted AI algorithms. Recently, the company announced advances in several Cognitive Services tools including Microsoft Custom Vision Service, the Face API, and Bing Entity Search.
Joseph Sirosh, who leads the Microsoft’s cloud AI efforts, defined Microsoft Cognitive Services in a company blog post announcing the enhancements, as a collection of cloud-hosted APIs that let developers easily add AI capabilities for vision, speech, language, knowledge, and search into applications, across devices and platforms such as iOS, Android, and Windows.
The idea is to put advanced AI tools within reach of data scientists, developers, and any other interested parties without any of the normal heavy-lifting required to build models and get results with the myriad testing phases that are typically involved in these types of exercises.