Virtual currencies, the most well-known of which is probably bitcoin, were defined by the European Central Bank in 2012 as “unregulated digital money, which is issued and usually controlled by its developers, and used and accepted among the members of a specific virtual community”. Other countries and institutions define it not as a currency, but as a commodity or property, while still others have banned it outright.
Yet, despite the ambiguity and confusion, there continues to be adoption of new technology and digital innovations to facilitate the movement of money. The US state of California legalised virtual currencies in June 2014; and there are already nine countries in Africa where there are more mobile money accounts than traditional bank accounts.
The increased use and adoption of virtual currencies is irreversible argues Daniel Burrus, technological futurist and business strategist. “There are two types of trends: hard trends and soft trends. Hard trends will happen. Soft trends might happen,” he said. “Virtual currencies are a hard trend. Once it has begun, it’s going to continue.”
Burrus sees the rise of virtual currencies in the context of the “mobile, social, visual and virtual revolution” occurring globally. He asserts that technological advances and human needs will ensure that the development of virtual currencies will accelerate. “If it can be done, it will be done,” said Burrus.
What do Virtual Currencies Mean for Asia?
The speed of innovation is occurring so quickly regulators often do not have time to react, notes Brett King, author and futurist.
“New disruptive plays like bitcoin or Uber [the mobile app that connects passengers with drivers of vehicles for hire] can take so quickly that regulators don’t have time to regulate them effectively, at least before they have reached critical mass,” he said. This has led to countries and regulators either co-opting or reacting against these disruptive innovations.
In Asia, with a few exceptions such as Singapore, which has the first bitcoin ATM in Asia, and Hong Kong, that have adopted more permissive stances, most countries have either banned the use of virtual currencies or warned citizens against them. Burrus explains that this reactionary stance is human nature.
“When you don’t understand something new, you are going to put up barriers and walls,” he said. “I worked with governments and defence contractors five or six years ago on cloud. They were saying: ‘We can’t use the cloud, it’s not secure.’ Today, it’s generally agreed that the cloud is more secure, but it took that time for them to research and put in some parameters around it and policies to control it.”
What Does the Future Hold?
Asian countries may be trying to hold back the tide of virtual currency, but Bob Swarup, author of Money Mania and institutional adviser, argues that they are fighting a losing battle. “The big losers are going to be government institutions,” said Swarup. Virtual currencies offer individuals and organisations the ability to move and access money anywhere in the world. “If you look at the structure of capital flows in Asia, particularly in the aftermath of the Asian currency crisis, most Asian countries implemented pretty strong capital controls. They’re terrified about money flowing out of the country. However, those capital controls are only effective if the transactions are in your currency. The moment those transactions are in an anonymous, online currency – how do you stop it?” he asked.
The other major sector that Swarup believes is likely to be adversely affected in Asia is the financial infrastructure sector. “Banks and similar entities make very good money because of the high margins they currently have on their retail business,” he said – highlighting the banking revenues to be made from foreign exchange and charging on remittances sent back to India from the developed world as an example. This change is likely to be gradual though. While banks that focus on secure lines of credit and payment networks will lose out, King predicts it will take five to 10 years for virtual or alternative currencies to take enough traffic away from these players for the shift to be measurable.
The credit card industry and associated sectors are also likely to be affected. Burrus argues that the rise of various biometric technologies, which can be used to secure identification on mobile devices, will see a jump in the use of virtual currencies. This will disrupt the credit card industry – both the primary players and the technology providers, such as organisations like Gemalto that make the chips used in credit cards.
This change in how people perceive the movement of money represents a shift away from card-based or account-based payments to node-to node principles.
Node-to-node simply means moving money as efficiently as possible between two ‘value stores’. “Today the MasterCard and Visa [payment method and processes] make sense,” said King. “But when you download an app and your card number and identifier is embedded in that app, then a plastic card is not a competitive advantage; neither is a ‘swipe’ or a ‘tap’ mechanism.”
Rather than be supplanted by virtual currency, Burrus sees the major credit players as looking to coopt them. “A credit card is a concept,” argued Burrus, who predicts that American Express and Visa will put virtual credit cards onto tablet and mobile devices, secured by biometrics.
What Should Asian Organisations be Doing?
The transformative effect of virtual currencies has begun, but it is unlikely to supplant the status quo immediately. Burrus advocates assigning a specific group within an organisation to follow regional and global developments. “In this way, your organisation can see problems faced, lessons learnt, and solutions,” he said.
Learning from other institutions is a valuable asset, and any virtual currency initiatives should aim to complement existing strategies and approaches. Burrus suggests looking at early-adopters in the US. “Ask how employees and customers are allowed to use virtual currency. And how does the organisation deal with security?” he said. This due diligence allows organisations to develop best practices and guidelines so that its people, customers and business partners are all aligned with strategies based on known assumptions.
Early adoption also creates market opportunities and first mover advantage. King suggests considering if alternative currencies can give organisations greater access to new markets. He advises organisations to explore whether virtual currencies allow their customers to purchase their goods and services more easily, for example, with less friction than the current banking system.
The process of invention, implementation and adoption of virtual currencies has begun. That they will continue to evolve and be used and adopted seems inexorable. However, given the current opposition across most of Asia to virtual currencies, organisations should look to track and understand developments in order to better anticipate developments before they occur.