Blockchain rose to prominence in the wake of the 2008 global financial crisis. Built upon a decentralised system of computer protocols and algorithms— known as ‘distributed ledger technology’— blockchain facilitates financial transactions made over the Internet. This technology has been mobilised to advance hundreds of digital currencies, among them: bitcoin, litecoin, and ethereum.
For nearly a decade, the international community has treaded carefully around questions related to blockchain, which may have disruptive if not destabilising effects for the future of global finance. Increasingly, though, a variety of private sector firms, governments, and financial institutions around the world have opened their minds to the prospects of blockchain. In recent months, ‘blockchain’ has become a buzzword, of sorts. But what exactly is blockchain? What are the benefits and risks of blockchain and the distributed ledger? And when (if ever) will digital currency become a global industry standard?
From Traditional to Digital
To effectively assess the ‘disruptive’ potential of blockchain and digital currency, it is useful to consider how digital currency (i.e. Internet-based exchange operating through distributed ledger technology) differs from traditional forms of currency (i.e. banknotes and coins). Digital currency does not require the physical production of specific banknotes and coins. While many enthusiasts have minted ‘collectible tokens’ and ‘redeemable coins,’ the fundamental functions of digital currency transactions take place over the Internet. Distinct from conventional forms of currency, digital currency is not backed by any kind of financial institution. The value of digital currency is, instead, dependent on the expected value of its future use. Similarly, the value of digital currency is not tied to sovereign currency like the dollar, the pound, or the renminbi. Money supply is not determined by central banks but rather regulated by computer algorithms. At present, digital currency is used to facilitate transactions for e-commerce, peer-to-peer payments, and cross-border money transfers. Unlike traditional online transactions, however, digital currency removes the role of financial intermediaries and ‘middlemen’ such as commercial banks. Most of these transactions also involve encryption technologies that provide relative anonymity to the participants.
Digital currencies are commonly associated with emancipatory aspirations and social activism against ‘big banks’ and ‘big government’— ultimately seeking to remove financial intermediaries and regulation while also providing anonymity through encryption. In considering the challenges facing digital currency and blockchain innovation, there are significant obstacles. While the use of digital currencies continues to expand around the world, there is a relatively limited user base. The use of encryption and anonymizing technologies also raises many questions about international regulation and security. Others point to concerns about the relationship between digital currency and online criminal networks.
Bitcoin and the Dark Web
Among other digital currencies, the successes and failures of bitcoin may offer specific insight into the challenges that face blockchain and digital currency in the years to come. Bitcoin was created by Satoshi Nakamoto in 2008— envisioned as a ‘purely peer-to-peer version of electronic cash’ that operates on the basis of distributed ledger technology. On this basis, blockchain becomes ‘a giant ledger that keeps track of who owns how much bitcoin. The coins themselves are not physical objects, nor even digital files, but entries in the blockchain ledger.’ Like other digital currencies, bitcoin is commonly associated with the phrase, ‘cryptocurrency,’ which indicates the use of encryption technologies to anonymize the identity of users.
While bitcoin has become one of the most successful digital currencies ever created, it goes without saying that many digital currencies are closely related to the ‘dark web’ and online criminal networks. The dark web is a global assemblage of encrypted networks enabled by Tor technologies. Bitcoin is widely referred to as the ‘de facto currency’ of the dark web and used across many dark web ‘marketplaces’ like the Silk Road and Alphabay. According to a recent study, up to 57 per cent of the websites currently using Tor technologies are home to criminal activity such as drug trafficking, illegal arms dealing, and child pornography distribution.
The criminal links to digital currencies like bitcoin have been widely disputed. Technology entrepreneur Marc Andreessen writes: ‘This is a myth, fostered mostly by sensationalistic press coverage and an incomplete understanding of the technology.’ Blockchain engineer Elaine Ou reaffirms: ‘Decentralised currencies arose because people wanted to transact in a digital world without having to ask permission. The extent to which this facilitates criminal activity depends entirely on the prevalence of criminal activity in the real world.’
Many worry that bitcoin cannot move past its dark web roots. But if bitcoin fails, is all digital currency doomed to the same fate? Can blockchain and distributed ledger technology go mainstream?
Digital Currency and the Future of Global Finance
In spite of the challenges and concerns surrounding blockchain and digital currency, there has been increasing interest in digital currency emanating from private sector businesses, financial institutions, and governments around the world.
In the context of the growing digital economy and the so-called ‘Internet of Things,’ digital currencies have been promoted as a new industry standard for online transactions. Many online retailers have started to consider the potential opportunities associated with blockchain and digital currency. In 2014, retailers like Overstock, Microsoft, and Dell introduced platforms to accept digital currencies as a form of online payment. Since 2016, technology giants like Google, IBM, and Amazon have also stepped up their commitments to developing blockchain technologies.
Adding to this momentum, a variety of central banks and commercial banks have also expressed interest in using blockchain technologies. Among them, financial institutions in the United Kingdom, Russia, Canada, Australia, and China have all indicated their intentions to intensify blockchain research in the years ahead. Most of this engagement steers away from discourses about ‘creating’ a new digital currency to replace traditional currencies and focuses instead on the benefits of blockchain and distributed ledger technology for the future of global finance. Earlier this year, the Financial Times reported on these related developments, contending that, ‘Although research is still at an early stage and many puzzles have yet to be worked out…most agree on one thing: that the world is moving towards use of digital currencies.’
While the mainstream integration of blockchain and digital currencies may still be decades away, the viability of these technologies will continue to expand in the coming years. On this basis, governments, businesses, and consumers alike must continue to explore and evaluate the potential risks and opportunities that lie ahead.