Digital Currencies: The Big Picture
Last week I had a conversation with the Vice President of the Central Bank of Argentina about digital currencies and financial innovation. He was fairly skeptical of bitcoin and, to be honest, most of his arguments were correct. However, the conversation took a turn when I talked about bitcoin as the first chapter of a larger story.
Prior to our conversation, the Vice President shared a set of initiatives that the Central Bank will promote to foster financial innovation in Argentina. Today’s Argentinian fintech industry is underdeveloped. Big banks and payment processors hold a monopoly on financial products and services. New players are restricted to enter the market to offer new and innovative solutions. As a result, Argentinians can’t access products like Paypal or Stripe (nor build their Argentinian counterparts). The monopoly is so strong that banks and payment processors played an important role in preventing Uber from operating in Argentina by refusing to process their client’s credit card transactions.
The Central Bank is now looking into ways of breaking this monopoly and opening the field to new players. While these are great news, they portray a deeper issue on how the current system works.
To participate in the financial industry today, you either need to have strong connections with banks, or depend on the good will of regulators — or lobbyists — to open the door for you. Today, 95% of the world’s money lives in computer servers, yet only a small group of people has access to build digital products that interact with it.
Here lies the true potential of digital currencies: they are the foundation for an open financial system. Since they are not controlled by any country or company, anyone is free to participate and build financial products and services. It doesn’t matter if you are a high executive in a bank, a hot silicon valley startup, or a 20-year-old Argentinian entrepreneur. If you have an idea, you can build it and offer it to the world without asking for permission.
As we’ve witnessed with the internet, the more people enter the game, the more products and innovation we’ll see in the financial industry. In the same way, digital currencies are inherently global. Anyone can access and build new products and services, no matter where they are. This levels the game and creates new opportunities for anyone in the world to seize.
As with the Vice President of the Central Bank, most of the debate around digital currencies is focused on bitcoin’s anonymity, high volatility, fixed monetary policy and low adoption. He might be right on pointing out that these features will prevent bitcoin from becoming a widely adopted currency. Yet these features made bitcoin popular and fostered its growth within a small group of early adopters.
The larger story is that bitcoin, and its underlying blockchain technology, paved the way for a new and better way of keeping track of who owns what. There are now multiple digital currencies using bitcoin’s core technology, but each with their own custom rules and features. They act as open financial platforms, enabling new products and services that were previously impossible or too expensive to accomplish.
Over the last few years, multiple applications have emerged on top of these digital currencies. From investment funds to storage networks, entrepreneurs are devising new and innovative products and business models. Over $1.3bn have been invested in digital currency startups by VCs, institutional investors and crowdfundings so far. We’ve witnessed great ideas come to life and tremendous scandals. And this is just getting started.