This story is part of a series about the evolution of money.
For many people, cryptocurrencies remain an enigma. We’re told by pundits that they’re risky, possibly present a financial bubble, and are accessible only to wealthy tech savants. But the reality is that cryptocurrencies are here because they fill a need. We need an alternative to the current global currency system. All of us–consumers, technologists, investors, regulators—understandably have many questions about cryptocurrencies: When will Bitcoin go mainstream? How long could it take for Facebook to make Libra commonplace? Will cash cease to exist?
Any technology goes through four core steps on the path to adoption: innovation, the entrance of risk takers, rejection by the establishment, and the eventual distribution of trust. Here’s how this framework applies to cryptocurrencies.
The first building block for mass adoption is the application of an existing technology to create an innovation. The initial work around cryptography and blockchain took place in 1991, with the intent to timestamp and verify digital documents. But the innovative application of that technology as the blockchain for a cryptocurrency ledger didn’t happen until 2008, when Bitcoin emerged. Libra was announced by Facebook nearly a decade later.
Innovations only develop momentum if they achieve the most critical purpose of technology: saving time and/or money for users. Blockchain has potential to reduce the friction and cost of transactions, despite obstacles posed by national borders and entrenched financial intermediaries. This is a powerful combination.
2. Entrance of risk takers
There’s a reason so much money is flowing into fintech. The global payments system processes $50+ trillion every year, so it’s no surprise that venture funding for fintech companies surged 120% last year.
Risk takers often serve as the eyes and ears for emerging trends, but an explosion of investment into cryptocurrencies underscores the realization that they save time and money. We’re at a crossroads. The financial establishment needs to make hard decisions about how much loss in revenue it is willing to accept in order to either get on this train or fight it, in what is likely to be an uphill battle.
3. Rejection by the establishment
When you hear the White House and the Fed dismiss cryptocurrencies, it’s understandable. Why would the Fed support an innovation that raises the prospect that the U.S. dollar could lose its safe haven status? Why would major financial institutions want to accept a world in which they have a diminished role? While major institutions like Visa, PayPal, and others have joined Facebook’s Libra association, some are already treading lightly—hoping cryptocurrencies’ potential turns out to be less than it seems.
The strength of the establishment’s resistance is perhaps the best indicator of any innovation’s potential. There are many recent examples: production studios dismiss Netflix, tech bellwethers question Facebook, or Blackberry blows off Apple. A common component is that incumbents don’t acknowledge their business model is in jeopardy. But the innovation’s inherent time and cost savings typically drives adoption anyways. Consider how Uber won over regulators in NYC thanks to public support. Cryptocurrencies should eventually be no different.
4. Distribution of Trust
This is by far the longest and most challenging aspect of getting any technology widely adopted. It’s not the people funding it who need to trust it, but rather the everyday user. This is even more important for currencies, where trust is the defining characteristic. It’s this trust element that should eventually give Libra the edge over Bitcoin. Here are our thoughts on each:
Bitcoin: The digital currency is roughly analogous to gold. It offers two similar advantages: a fixed supply, and anonymity for the holder. Like gold, only so much Bitcoin can be mined, and the market dictates its value based on supply and demand. And the anonymity it provides is a tremendous asset in today’s security- and privacy-sensitive world.
But the security Bitcoin provides precludes counterparty transparency. Not knowing who’s on the other side of any transaction—or the likelihood of them honoring the terms of any deal—presents risk. Bitcoin also falls short of what the market desires most: predictability in a store of value. The time users spend dealing with these shortcomings reminds us of the inefficiency presented by country-specific currencies. Bitcoin has security positives, but its use is likely to be limited, at least for the time being.
Libra: Historically, trust in a currency is established over time, through being backed by some sort of known assets—typically commodities or precious metals. The beauty of Libra is that its inventors promise it will be backed by a basket of different bonds from different countries. This diversification should protect users from country-specific political risk and resulting valuation swings. As a result, Libra would have the characteristics of past successful currencies. It will offer consistent value and transactional transparency, while removing many of the limitations of our current currency system.
The beneficiaries of the current system realize this and will challenge it. The opponents range from the global financial institutions that stand to be disrupted, to governments, which stand to lose power and control. At the moment, Libra is only an idea, and one that’s getting so much resistance from the existing establishment that nobody knows whether it will ever really get off the ground. But something like it eventually will. Ultimately, Libra carries the trust characteristics necessary for adoption. And trust matters above all else.
Based on the history of monetary evolution, we’re just beginning this process. Numerous solutions will emerge, and we may not yet even have seen the one that will win. But the genie is out of the bottle. So while the final solution may take a long time to emerge, there’s no going back.