Cryptocurrencies like bitcoin, were created in part as a means of avoiding traditional banking, with its regulatory framework, KYC requirements and high transaction fees. Ironic then that six of the world’s leading banks have now partnered with a number of other financial institutions to create their own cryptocurrency.
The science of cryptography was born during the Second World War out of the need to secure communications that could not be intercepted by the enemy – think of German Enigma machines and codebreakers such as Alan Turing. Moving to the digital age, cryptography has evolved to become a way of securing information and money online, as well as a means of communication as well.
Evolving from this, and starting with Bitcoin in 2009, cryptocurrencies have been created, a form of digital money designed to be secure and, in most cases, anonymous, because information about transfers and purchases is processed using virtually uncrackable code.
A cryptocurrency uses decentralised technology to let users store money and make secure payments online without the need to go through a bank, or even use their name. Running on a distributed public ledger – a consensus of shared, replicated and synchronised digital data which is spread across multiple sites, countries or institutions – also known as a blockchain, a record is maintained of all transactions which is held and updated by all currency holders.
It is the blockchain concept which the banks have been studying, particularly from the viewpoint of security. Banks not only have to keep money secure, they need to keep transaction records safe, whilst ensuring the verification process does not delay the movement of capital.
Swiss banking giant UBS, began exploring the clearing and settling global transactions over a blockchain back in 2015 using a digital coin – known as the “utility settlement coin” – and they have now been joined on the project by Barclays, HSBC, Credit Suisse, MUFG, State Street and Canadian Imperial Bank of Commerce.
The new cryptocurrency is planned for an initial limited release towards the end of 2018, and the banks have already begun discussing the cryptocoin with central bank regulators.
The anonymity and security of a cryptocurrency are both its major strength and, for its detractors, its major weakness. For its proponents it allows online trade to flourish free from the threat of government manipulation or high transaction fees, whilst its decentralised nature means it is available to everyone, with no need for users to have a bank account. Opponents, on the other hand, will point out that bitcoin has become the currency of choice for drug dealers and other criminals.
With the major banks now planning their own digital coin, it perhaps is a symbol that cryptocurrencies are no longer a fad, and can be considered legitimate. At the same time, such banks and financial institutions must work with central banks, which implies a degree of supervision and regulatory oversight which is the antithesis of the concept behind a cryptocurrency.
Russia has announced plans to restrict the trading of bitcoin to qualified investors, whilst several states in the US, including California, Illinois and Florida, are looking to implement new rules for businesses offering digital currency services.
It is worth remembering that bitcoin was created as recently as 2009, and that the market for cryptocurrencies has been volatile, with wild periods of growth followed by sudden slumps. Nevertheless, the underlying trends are upwards. In April this year, the total market capitalisation for all cryptocurrencies was US $25 billion; two months later that figure had grown to over US $100 billion. There are now over 900 cryptocurrencies available on the internet.
It looks then that cryptocurrencies are here to stay but whether those who buy, sell, or own them will have to accept a degree of legal or financial oversight that is against all the fundamental principle of a digital currency – that those who hold or trade them remain anonymous – is yet to be seen.