Cryptocurrencies have been around since 2009. Despite examples of real-world use, they have so far not taken off as a mainstream payment system.
According to a report of the online trading platform and eToro and the Imperial College of London, this may change in the future. The report is titled Cryptocurrencies: Overcoming Barriers to Trust and Adoption and authored by Professor William Knottenbelt from Imperial College London and Dr. Zeynep Gurguc from Imperial College Business School. It argues that cryptocurrencies fulfill one of three characteristics of fiat money and identifies six challenges.
The Roles of Currencies
The Imperial College researchers list three roles currencies should fulfill:
- Store of value: Money should hold value. It should serve as a means of saving your income and accumulated wealth for future use. If a currency proves inflationary, it loses this important property. Despite volatility, cryptocurrencies have been highly deflationary over the years. This clearly means that they have been an excellent store of value so far.
- Medium of Exchange: In order for a currency to be useful, it should also act as a medium of exchange, meaning it should be used to buy things. According to the report, cryptocurrencies do not fulfill this role yet, although it could be argued that the use for payment is on the rise.
- Unit of Accounting: Finally, currencies should be used as a unit of accounting, meaning prices should be expressed in the currency. In the case of cryptocurrencies, this is definitely not the case yet. Those merchants and professionals accepting cryptocurrencies tend to bill in fiat currencies and receive payment through gateways that provide the conversion.
The report argues that six challenges need to be resolved to achieve all three of the above roles for cryptocurrencies:
- Scalability: We have explained the scalability problem in detail before. In summary, blockchains just scale badly. For something like Bitcoin to reach the transaction throughput we are used to by the Visa system, for example, important changes are required.
- Usability: Let’s face it, cryptocurrency wallets have improved a lot, but it is still hard for non-technical users to figure out how to use them.
- Regulation: There is a lot of uncertainty over regulations right now. We just don’t know what will be legal with regards to cryptocurrencies.
- Volatility: The volatility of cryptocurrencies is one of the main reasons they are currently not used as a unit of accounting. Merchants would have to change price tags every day.
- Incentives: The consensus mechanisms of blockchains are based on financial incentives. For example, Bitcoin miners maintain the network because doing so they make a profit. However, these financial incentives can have unwanted side effects, such as concentrating mining power in places where energy is cheap.
- Privacy: As we have pointed out before, most cryptocurrencies are much less private than commonly claimed. In fact, it is quite easy to profile a Bitcoin user and follow the flow of transactions.
The recently published research by the eToro and Imperial College is an interesting read and nicely summarizes the challenges faced by cryptocurrencies.