Jack Dorsey, (investor in Lightning Labs and the Chief Executive Officer of both Twitter and Square) had some strong statements in regards to the leading cryptocurrency, bitcoin, the other day. He seems to have a positive outlook on where the cryptocurrency will be headed in the next few years and believes that bitcoin has a high chance of being the global currency within a decade “, stating it could happen “probably over ten years, but it could go faster,”. The bitcoin global currency theory is an interesting one, let’s further see what Dorsey has to say on the matter.
In an interview with The Times, Dorsey commented:
The world ultimately will have a single currency. The internet will have a single currency. I personally believe that it will be bitcoin.
This can certainly be categorized as a bold statement in times of regulatory uncertainty, constant FUD, lack of use in bitcoin as a currency due to high fees and other reasons, as well as dithering on the part of many government officials with some embracing the digital asset, some remaining neutral and some bashing it.
So how is Bitcoin looking as a global currency in regards to regulations, technology and adoption & value?
Bitcoin Global Currency, G20 and Regulations
The statement by Dorsey also comes at time when the Financial Stability Board (FSB) sent a letter in advance of the G20 summit stating that current penetration of crypto does not pose much of a threat to financial stability.
“Responding to the concerns of members, the FSB has undertaken a review of the financial stability risks posed by the rapid growth of crypto-assets. The FSB’s initial assessment is that crypto-assets do not pose risks to global financial stability at this time. The market continues to evolve rapidly, however, and this initial assessment could change if crypto-assets were to become significantly more widely used or interconnected with the core of the regulated financial system.”
Thus, it seems that at this present point, global leaders are thinking more about the use of bitcoin in illicit activities and money laundering as opposed to disrupting the global financial system.
Comments like this one by the secretary of the treasury are more commonly heard “I want to make sure that these are not used by bad guys, that they don’t turn into Swiss numbered bank accounts,” Mnuchin said, adding that the department wants to “make sure consumers understand the issues surrounding cryptocurrencies.“
According to CNBC
The Argentine central banker outlined a summer deadline for G-20 members to have “specific recommendations on what to do” and said task forces are working to submit proposals by July.
These regulatory recommendations would be around addressing the aspects of consumer and investor protection, as well as their use to shield illicit activity and for money laundering and terrorist financing. This would have effects on the infrastructure of the crypto economy, which could encompass wallet providers (potentially classified as banks), wallets, initial coin offerings, taxation (forks, buys and sells), exchanges (security, AML, KYC, etc) and more.
Yet, at the present moment, in regards to regulations, no drastic implementations are in progress.
Bitcoin Global Currency : Technology
The current set up of bitcoin is, for lack of better words, clunky. Users, especially new ones, have not had the greatest experience with bitcoin sends and receives in the recent past. A couple of significant issues present were the slow transaction times, leaving users to wonder if their crypto asset reached its destination, while another major issue was the aspect of high average transaction fees. The average transaction fee in July 2016 was 0.166, the transaction fee in July 2017 ranged from $1-$2 and then spiked up to as high as $55.16 in late December 2017. The average transaction fee currently is $1.681 according to bitinfocharts.
These aspects have made it to where the community has changed the narrative from calling it a digital currency to digital gold, a store of value, rather than a medium of exchange.
Dorsey, echoes this sentiment, he’s noted that bitcoin in its current form doesn’t have the prowess to become the global currency, he’s noted that the digital currency is slow and expensive in his talk with The Times. This is probably where Dorsey sees a potential to add value, companies like Square can help to facilitate the purchase of bitcoin, providing more ease of use and simplicity. With applications like Square who’ve provided merchants with an easier way to transact, supporting bitcoin, can possibly help pave the way for more adoption.
In regards to technical solutions to these fees, a growing interest and contribution by many developers have been to the solution called the Lightning Network.
The issues of high fees and slow transaction times should be resolved by the Lightning Network, a solution which Lightning Labs has been contributing to, a company which might be the leading player in the implementation for the Bitcoin network. Elizabeth Stark, the leader at Lightning Labs explained the current situation of the blockchain network on Bloomberg by stating:
“Think of the bitcoin blockchain like a road, and there are a lot of cars that want to get in the road but it turns out right now that there is a lot of congestion and a lot of traffic. The way that fees on bitcoin work is that you can pay for priority to go faster on the road, right now there is a market of people paying to do so, segregated witness should remove some of the traffic on the road, or batching.”
According to Stark, Lightning Network is software layer on top of bitcoin that makes sending a receiving bitcoin far more efficient. Lightning creates a layer 2 where you don’t have to broadcast every transaction, you don’t have to send them all to the blockchain but you can transact instantly and have instant settlement. Instant settlement, being one factor that matters to traders, allowing them to see their funds transferred instantly as opposed to ‘who knows when’ . Yet another additional key feature that lightning brings is the opportunity for swaps, trade currencies without having to use an exchange.
This long awaited implementation has progressed but is still being tested and should be deployed soon. There is no word, as of this time, on when it will officially be deployed.
Ok, great from a technical standpoint, it is becoming better and faster. What about from a psychological standpoint?
Bitcoin Global Currency : Adoption and Value
The Lightning Network implementation will allow users to be able to send money quickly and cheaply but will people want to use bitcoin to buy goods and services? Do they have an incentive to right now, when the price fluctuates so quickly ? Why would people want to spend it when it has the potential to bring them more returns by hodling? Also, why would businesses want to accept the currency if there is such volatility in its value?
The simple answer is stable bitcoin. But what will make stable bitcoin a reality helping to make bitcoin a global currency ?
Lower volatility, meaning less interest in speculation and investment more in seeing it keep a stable value for every day use. Yet, this doesn’t seem to be the case at the present moment, many still long for the highs it reached in December, and many more yearn for the moon and lambos.
First, it would help to understand the underpinning economics of bitcoin.
Fundamentally, it’s deflationary, its finite, there’s only a set amount of bitcoin that will ever be produced. This is opposed to the dollar which is inflationary, it is printed out as necessary, through programs like quantitative easing and is controlled through centralized institutions like central banks and federal reserves.
Second, there’s costs to generating bitcoin, one can’t simply print them out. Miners have to conduct the computational work to keep the system going and generate new bitcoins. This means that the price of a bitcoin should continue to rise as more resources are expended for mining ever elusive bitcoin rewards (rewards are decreased over time and complexity increases). The price should rise, that is, until that last precious bitcoin is mined and until then, we’ll have varying amounts of volatility.
When will this day be? It should take place sometime in the year of 2140.
When the aspect of sitting on bitcoin, waiting for its price to to rise is taken out of the picture, there’s much more incentive for one to spend it and current implementations allow for that spending.
Yet, does this mean that there will be minimal spending until that time? Not necessarily, there may be other ways to incentivize adoption and use for both parties, businesses and consumers.
There would have to be the integration of acceptance for cryptocurrencies across marketplaces and shops. Businesses would have to have some way of hedging against potential value declines, thus being able to forecast and manage money flows properly.
For consumers, incentives such as businesses offering discounts to consumers for purchasing goods with their bitcoins may be one form of doing so.
Stark adds that she sees “Lightning can function as a checking account with instant settlements, so your bitcoin on the blockchain can be like your savings account and then for your day to day trading you use lighting and withdraw back to the blockchain.”
The promise of bitcoin was peer to peer electronic cash . We’ve gotten the new asset class of digital gold instead. We’re now figuring out how to give the currency more utility.
What other factors do you think affect the bitcoin global currency theory?
Let us know!