Since Bitcoin's inception in 2009, cryptocurrencies have quickly become a critical part of the global economy. Ethereum, Ripple, Litecoin—these digital monies are transforming the way currency is exchanged world-wide. And, according to some sources, the way money is thought of entirely.
The timing of Bitcoin's debut tells an important part of the story. The year 2009 was the bottom of the global financial crisis; public trust in the banking system was floundering. People wanted an alternative means of currency that they had control over.
Thus the birth of the first cryptocurrency: Bitcoin. The technology behind it is entirely decentralized, meaning transactions are validated by participants in the network, not a trusted central authority (i.e., a bank). It's a revolutionary way to verify and settle transactions-one that, according to Kogod Professor Catalin Stefanescu, holds the potential to create an entirely new foundation for the field of finance.
Cryptocurrencies hold only part of the potential impact, though. "It's the technology behind cryptocurrencies that's innovative—it's all about what Bitcoin is built on," Stefanescu says. "Distributed ledger technology is powerful."
Distributed ledger technology, a digital accounting method based on electronic records, or "ledgers," eliminates the need for an intermediary. This is the biggest difference from traditional accounting—no banks are involved. Instead, digital records are stored and mitigated within databases spread among thousands of computers.
One of the most wide-spread uses of distributed ledger technology is Blockchain, which cryptocurrencies are built upon. In a Blockchain, each time an entry is made—like when someone trades a Bitcoin—an entry is made in the ledger. Each ledger connects and builds upon another, eventually creating a chain of encoded transactions.
Blockchain's financial implications, for both banks and consumers, are significant. Cryptocurrencies certainly lessen central banks' control over the money supply, and affect their role in the financial system. And transferring money is considerably faster—and affordable—because no middle-man is involved.
According to some experts, the technology holds the promise of defeating cyberfraud and hacking. Banks are vulnerable to fraud because they are centralized, which makes hacking much easier. Blockchain's massive, decentralized peer-to-peer network constantly verifies transactions, putting the task of cyber-protection in the hands of thousands.
"This is a bigger trend in the technology world," Stefanescu says. "Verification is quickly moving from centralized to decentralized, and Blockchain's one of the strongest examples of it."
With change, though, also comes apprehension. And with Blockchain technology and cryptocurrency, there's plenty of it.
A major trending concern is what will happen to the global banking system. It's certainly an understandable anxiety, given the fact that the proliferation of cryptocurrency does hold the potential of rendering banks obsolete.
Instead of banks combatting cryptocurrency, though, they're actually embracing it.
It makes sense—why fight it, especially if it's proven as more secure and efficient than traditional currency? Banks (and financial firms) are considering holding Bitcoin and/or Ethereum, and, down the road, even issuing their own cryptocurrency. Many already back many of the cryptocurrencies, as seen through support of organizations such as the Enterprise Ethereum Alliance.
Another worry is that cryptocurrency will be used for bad, not good. Since they're largely in the public's hands, some authorities—specifically the FBI—stress that criminals or terrorists could easily take advantage of their accessibility.
According to David Carlisle, formerly of the DOT's office of Terrorism and Financial Intelligence, this would happen with or without cryptocurrencies, though. People will find a way to manipulate the system with or without Bitcoin. Cryptocurrency simply gives them another tool to use.
"Cryptocurrencies are at the beginning. Yes, some people will misuse them-especially issues of new cryptocurrencies, like Initial Coin Offerings, that have been deemed fraudulent by the SEC. I am sure we can find ways to limit such cases, though," Stefanescu says. "This isn't a reason for not having it. Especially the technology."
Looking ahead, Stefanescu predicts major changes in the finance world, since "finance is all about the middle man. And cryptocurrency is all about reducing the importance of the middle man."
He anticipates more investment in Blockchain technology from banks, exchanges (like the Australian Stock Market) and companies. Cryptocurrencies will drastically change banks' business models, Stefanescu says, so of course people want to invest in them.
Alas, it's likely Bitcoin will fizzle out as the world's leading cryptocurrency. With the recent rise of Ethereum, it arguably already has. It's like MySpace and Facebook, Stefanescu says. One came first and dominated the market, then eventually yielded to its younger, more tech-savvy competition. "It'll be interesting to see who wins out.
Whatever Bitcoin's fate, its impact thus far is indisputable. And, as new cryptocurrencies continue to surface, it's nearly certain their decentralized power will only compound Bitcoin's.
Blockchain technology is here to stay—for better or for worse. …what does this mean for the future of finance?
Only time—and money—will tell.
Learn more about Kogod Professor Catalin Stefanescu and his work in the finance world, and beyond.