Written by Haydn Jones, PwC.
On 3 January 2009 there was just one cryptocurrency, Bitcoin. Today, there are over 17,000, and that number increases rapidly every month. Against that backdrop, there are 193 countries recognised by the United Nations of which 180 use fiat currencies as legal tender. In terms of central bank issued digital currencies (CBDCs) supporting those 193 countries there are three live retail CBDCs, namely the Bahamas, Eastern Caribbean and Nigeria. One more is expected to go live soon in Jamaica, while mainland China is expected to launch a digital yuan during the Winter Olympics. Overall, there are 87 countries in the process of exploring CBDCs.
So why is it that we have an explosion of digital currencies set against what is relatively little change in state-backed digital currencies?
Bitcoin was, in many ways, created as the finished article. When it was taken apart, we discovered it brought together the very essential aspects of commercial transactions: value, payment, ledger, and the possibility of conditional transfer. This gives us the ability to move value on the same ledger upon which it is recorded. This is quite clever, as it’s the first time a technology has had the capability to do this. At the moment, the technology within organisations processes and moves information. It’s only when the messages get to the banks, that value transfer occurs. But what if the live ledger running in the organisation actually recorded and transmitted real units of economic value versus recording a number, representing an asset or liability, or balance in a bank account? That’s very definitely not to say that organisations can be run on Bitcoin, but it’s the underlying principles within the technology underpinning Bitcoin that are potentially so transformative in the way organisations work. However, why isn’t this thinking taking off?
Total market capitalisation of crypto currencies
As the above chart illustrates the size of the crypto currency market has been growing, especially over the last two years. With 17,000 cryptocurrencies implying 17,000 ventures of some kind exploring how this new technology can be applied. That must be a good thing. But in many ways, we are still in the foothills of innovation. Arguably Bitcoin is well understood, has arrived, and the case for holding it can or cannot be made, depending on your appetite for risk. The extent to which Bitcoin has been adopted is a matter of debate, but it represents the largest proportion of the market by capitalization. In fact Bitcoin, despite its recent falls according to CoinGecko, still accounts for just under 40% of the entire cryptocurrency capitalisation – ignoring Non-Fungible Tokens (NFTs).
For the other cryptocurrencies and their utility, be it the same or different to other coins, finding their niche is the challenge. And there are multiple challenges. At one extreme, adoption of a cryptocurrency as a means of payment for an organisation implies competing with existing, perfectly functional payment systems which doubtless big, listed companies will struggle with. At the other extreme, integrating this type of technology within and throughout the organisation to really leverage the value is never going to happen. For the average CTO that would be a difficult strategic project to sponsor. However, the value opportunity remains – radio is a pretty clever invention, but it took a 100 or so years to get to where we are now.
At the simplest level, current software is designed to manage, move and process data – it doesn’t contain intrinsic stores of value. But what if you could build an organisation where the software moved real units of economic value, 24/7 – so combining ledger, payment, value and conditions in one. This would be a bit like putting in a ring main system to support commerce, all integrated in one. Cryptocurrencies have this capability, but they sit outside organisations. Central banks see the opportunity with their own digital
currencies, but their remit is limited to one dimension, namely the value piece. Someone needs to work out how to take what the CBDCs will offer in the form of direct and standardised value transfer and integrate it across and into organisations so that when software executes, it is transmitting real value, triggered by the fulfilment of a set of conditions.
All businesses need an organised way to operate. When the means to generate electricity was first invented, there were many different types of electrical generating suppliers. Eventually we settled on the best design. This is very similar to mobile phones; we’ve abandoned Nokia and Blackberry and are currently wedded to our Androids and Apple. It’s the same with digital currencies. At one end we have CBDCs, where the principal constraint is the requirement to focus on one dimension of the commercial transaction. At the other end of the spectrum, we have over 17,000 digital currencies which are centred around the idea of changing the world. The bit that is missing is building something that a CTO can look at and say: ‘That really does transform the way in which my organisation operates’ and deploy it with confidence.