Cryptocurrency has exploded in popularity since Bitcoin was invented in 2008. But what exactly is cryptocurrency, and how will it impact the future of society? We caught up with David Thompson, Chief Technology and Information Offer, to find out his thoughts.
What is cryptocurrency, and what is it used for?
Cryptocurrencies are an electronic form of value used some individuals to transfer value. Think of it as a bag of corn, or silver—a commodity that you can exchange for a service or a product. Cryptocurrencies confuse a lot of people because they aren’t fiat currencies. They are sometimes considered to be a currency, an investment vehicle or a commodity. So, for example, if you want to go get a car wash, I don’t think your car wash is going to accept a commodity like a bag of corn. They want fiat currency.
In our current ecosystem, say the United States, there’s a very limited use for cryptocurrencies. I personally pay someone to come to my home and empty out my sprinkler systems. He accepts Bitcoin, which is one form of cryptocurrency. It normally would cost me $75 dollars in fiat currency, but I pay him in Bitcoin.
The people who have created this and are behind it think that a global economy may want to have a single currency, and that having everything electronic—and not paper—can reduce overhead, the chances of theft and so on. But cryptocurrency only has potential if the world comes together in a utopian society and central banks no longer want to modify or manipulate their currencies.
What are some of the advantages and disadvantages of using cryptocurrency?
One of the advantages of cryptocurrency is that you can choose to store it electronically. You can move cryptocurrency onto paper by printing the encrypted hash. No one can use that currency without its codes. Many people in the early days of cryptocurrencies would print them out and store them so no one could steal them.
There are two sides to a cryptocurrency code—a public code and a private code. The private code gives your cryptocurrency its unique value, and the public code allows you to transfer it to others. Just as if I stole your wallet and took your dollars out of it, I could hack into your PC or open your safe to steal your private cryptocurrency codes.
The disadvantage is that there is no global ecosystem so it is very limited usage. It may be easy to use, but there are not many places to use it.
Is cryptocurrency secure, and can it be stolen?
Cryptocurrency is as secure as you are. There are many people that take security very seriously. Their hard drives are encrypted, they have multi-factor or two-factor authentication, and many people have very complex passwords. So if you have in-depth defense it can be quite secure to use cryptocurrency.
On the flip side, if you don’t use passwords with complexity, multi-factor authentication, and you don’t encrypt your hard drive, a hacker could break into your electronic device and steal a file that has your cryptocurrency codes. And that has happened in the public domain. There have been many large global cryptocurrency exchanges that have had $70 to $100 million of cryptocurrency stolen. You would think these professional exchanges would have security, but there have been very large thefts of cryptocurrency that have been very public.
What do you think the future holds when it comes to cryptocurrency?
If you take Kenya for example, where they created MPesa—MPesa is a digital wallet that allows fiat currency to be moved from an individual to a vendor, from a vendor to a bank, and moved amongst the ecosystem—there’s an ecosystem around MPesa. If you think about a society that wants to completely adopt cryptocurrency for its entire ecosystem—you could take a small country, controlled maybe by a central bank with a set price and a set exchange rate—there could be a real use for cryptocurrency because it would reduce the cost of printing, distribution, security, and many things. So you could see a highly optimized ecosystem with cryptocurrency, but there are still a lot of weaknesses and challenges with cryptocurrency, and you have to protect it just like fiat currency. I do think there are advantages and efficiencies, and it’s truly a digital currency, but I think we are a long way from that.
Are there any other digital currencies besides Bitcoin that are being created? Will any of them catch on?
It’s best to use just one terminology—cryptocurrency. There are many different types of cryptocurrencies. Each has a specific identity, and denomination, or value. There’s Bitcoin, Namecoin, Litecoin, Dotcoin and many others.
There are so many people out there creating cryptocurrencies from different forums. Namecoin, for example, is a cryptocurrency where gamers trade value for cryptocurrency to buy games. That works in a closed loop society for a very specific purpose. But in the end, many of the folks want to take this cryptocurrency and convert it to a fiat currency. And that’s where the rub is. Who’s going to give you a fiat currency for that Namecoin that you and your buddy just created?
What determines the price or a value of a cryptocurrency?
Let’s take Bitcoin for example. There is a market place for Bitcoin. There are people out there willing to buy Bitcoin and willing to bid on Bitcoin. That has ranged from $1 in the early days to a high of around $750 in June 2016.
There’s been a lot of speculation in Bitcoin, and the price has fluctuated dramatically with a lot of volatility. The price is set by the marketplace, by individuals on the global Internet who are willing to pay fiat currency for Bitcoin or exchange Bitcoins with each other for a traded value.
What do you see of the role of cryptocurrency on spending in the future?
Some nation states are seeing dramatic shifts in their societies and are exploring a move to a cryptocurrency. It may become a vehicle for electronic control of currency versus physical controls like fiat currency. So you could see a small country moving to cryptocurrency at some point to take some of those other elements out of their society. It’s a pretty complex task. There are some Nordic countries evaluating this as an option.
There are some countries looking at the Blockchain, which is the ledger technology that cryptocurrencies are exchanged on—they’re looking to put that technology in place to record birth certificates, or to record smart contracts, or to record deeds on this public ledger. I do think we’re a long way away from seeing the Blockchain being used by other countries.
What’s Western Union’s opinion?
For us to move into cryptocurrency, we would have to cooperate with regulators or be a part of the regulation structure over cryptocurrency. I do think we as a company would not be operating in cryptocurrency until it became regulated, and there would be a need for regulation over cross-border movement or a cross-border compliance structure.