The world’s first coins were developed around the 7th century BC in Iron Age Anatolia, a kingdom located in modern-day Turkey. Many centuries later we still have the option to use cash, which, though well past its sell by date at least offers privacy – unlike digital payments.
If we imagine a probable future scenario where cash is no longer in circulation, every payment you ever make in your life will be stored in multiple searchable databases. And there are very good reasons why this is not a good idea.
Personally, you may not want people to know about your transactions for a host of legitimate reasons. And on a wider level, things can go wrong, even with benevolent governments, as we have seen throughout history. If the only way to make payments is with a mobile device, then you will have no alternative than to being always tracked. Leaving your phone at home will not be an option.
I am afraid of society going in that direction and we should be very cautious about giving away our rights as they are difficult to reclaim.
Cryptos to the rescue?
Cryptocurrencies have the potential to combine the convenience of digital payments with the privacy of cash. But if they became the dominant means of exchange that leaves some big questions. For starters, what would happen to banks, and who would provide credit? In authoritarian societies, governments would most likely be the only providers of credit scores – with frightening implications for our civil liberties.
And would banks and governments even allow cryptos to succeed outside the present system as decentralised currencies, or will they eventually intervene to regulate and launch their own alternatives?
One possible scenario is for cryptocurrencies to be used as interbank money – the clearing and settlement of money between banks and Central Banks. You could have a crypto wallet that uses Central Bank money, which would save the banks and solve some of the privacy issues that currently exist.
There are several hurdles to overcome before any of this happens. One big development will be around electricity consumption. With the more centralised system that I just outlined, the process would be more energy efficient. Alternatively, a fully decentralised model, where the cryptos use a ‘proof-of-work’ concept to verify transactions, is energy intensive.
Another good use case is for attesting documents, which is currently a convoluted process that could be done instantaneously on a blockchain.
But even in this scenario we may be able to find a more useful by-product for these calculations. For example, Primecoin has a proof-of-work system that searches for prime numbers. Though this is still essentially useless, we can imagine a future where the whole network could provide a useful computational service to society.
I am also confident that blockchain, the architecture that underpins cryptocurrencies, will eventually be used more widely.
To share a couple of examples, the clearing and settlement process for buying shares is complex and takes two days, whereas on a blockchain it could be done almost in real time with central depository agents. Another good use case is for attesting documents, which is currently a convoluted process that could be done instantaneously on a blockchain. The technology to do this is complex and needs to mature, but it will happen because it is so useful.
Where next?
For these reasons I would not rule out the success of our present cryptocurrencies as they have already shown an ability to evolve quickly. In terms of their value, I think about what will happen in 2050, rather than focusing on today. And by then, the deficiencies that people talk about now, such as power consumption and slow transactions, will not be an issue. The number of transactions that people make in the coming years will not grow exponentially, but computing power hopefully will do.
The volatility of cryptocurrency prices does not unduly concern me. Firstly, it is a Western-centric view that ignores the fact that many of the world’s currencies are unstable. And in any case Bitcoin, which leads the market, was never designed to have a stable price in 2021. It was built on the idea that there would be a convergence of price by 2140 when all Bitcoins have been mined.
The volatility of cryptocurrency prices is a Western-centric view that ignores the fact that many of the world’s currencies are unstable.
I am not willing to predict a price for the coming months or years, but I do know that money has been driven entirely by trust since the end of the Bretton Woods system in 1971. And I see a lot of people who have a full, unconditional trust in cryptos. On the other hand, my 11-year-old son is interested in Bitcoin, which tells me that there might be something wrong with the current prices.
I remain convinced that the biggest threat to cryptocurrencies is government regulation. They will probably step in to regulate as soon as cryptos become a systematic financial risk or a threat to the system. The question is, what will this regulation look like, and what will it mean for our societies?
Where are Bitcoins mined?
There is an urban myth that China is where most Bitcoin mining takes place, but this has been not substantiated by any significant evidence. To learn more, I modified the source code of Bitcoin and then connected to as many so-called full Bitcoin nodes as possible. This allows me to listen when somebody announces that a Bitcoin is mined. I don’t hear it directly from the miner, but I can measure where the latency is shortest.
There is an urban myth that China is where most Bitcoin mining takes place, but this has been not substantiated by any significant evidence.
My research points to Venezuela dominating the Bitcoin mining industry. Is that because electricity is very cheap? Or is it a government-sanctioned operation to obtain hard currency? Second on the list is Denmark. I have no idea why this would be the case other than it probably does not cost much to cool the computers seeing as it is a cold country. My research plan for this summer is to try to combine my findings with macroeconomic and geographic data to explain the drivers of Bitcoin mining.
Visiting Professor of Economics at NYUAD Raša Karapandža
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