Cryptocurrencies, why should Europe embrace them ?
In the upcoming G20 Summit 2018, the regulation of cryptocurrencies is on the agenda. Even though Europe still struggles to catch up with the US in most areas of the digital economy, France and Germany worry about the risks related to cryptocurrencies.
In fact, Europe is facing a real risk of falling further behind if it does not embrace the global adoption of cryptocurrencies. With more than 13 million users, the US Coinbase platform exceeds already Charles Schwab, historically one of the most popular brokerage firms in the US.
The crucial problem of the digital transition is the centralization of applications played by the rule of “winner take all”. The funds raised by start-ups in Silicon Valley are usually ten times higher than those observed in Europe. Is Europe to keep its status as a ‘digital colony’ of the United States?
Companies that centralize the most data have a compelling competitive advantage at the dawn of an algorithm-controlled economy. Data is the raw material of artificial intelligence and even the best algorithm in the world cannot be exploited without access to “big data”.
Bitcoin is a breakthrough invention because it finally allows the decentralization of applications, starting with payments, money transfers and certification of electronic documents. However, this invention is often misunderstood because Bitcoin designates at the same time the Bitcoin peer-to-peer network, the protocol that makes the network work, as well as the token granting access to the network.
Let’s try to clarify the debate.
The Bitcoin network: a global, resilient and secure infrastructure
The Bitcoin network is a global messaging and secure database infrastructure. In the absence of any precedent, the only comparable structures are private networks controlled by commercial companies which do not offer the same resilience as an open and decentralized network like Bitcoin. The value of a Bitcoin can drop to zero only if the network evaporates, i.e. if its utility disappears. In other words, as long as the inhabitants of this planet find it useful to transact accross borders, at least occasionally, there will be users, developers and miners to maintain the Bitcoin network and support the demand for the “coin” required for the use case.
The algorithm of “proof of work” (PoW) implemented on the Bitcoin network makes it possible to oppose a physical barrier, in other words an expenditure of energy, to the manipulation of the transaction database (the “blockchain”). The existence of this physical barrier has made the Bitcoin blockchain immutable for over 9 years now. No organization, be it a State or a GAFA, could bring together the financial, operational and legal means that would allow to disrupt permanently this network. This unique and unprecedented property of “resistance to censorship” allows for the decentralization of the Bitcoin network and explains its success. The neutrality of Bitcoin is an essential condition of its opening to all users, without the prerequisites that could be imposed by a central administrator.
This openness fosters financial inclusion as well as innovation.
Bitcoin and other cryptocurrencies
With scaling solutions like Segwit and Lightning Network expected over the next 2–3 years, it is too early to conclude but everything indicates that a decentralized network like Bitcoin can be eco-friendlier and less predatory for added value than traditional systems.
Today, a few precious metals, the US dollar and a few other “fiat” currencies (GBP, EUR, JPY, RMB) serve as global store of value. Bitcoin is clearly positioned as a complementary value with its own qualities, especially well-suited in a digital universe. Unlike other values, such as gold, bitcoin can be exchanged without going through a banking logistics which gives it a distinctive quality in an uncertain geopolitical environment.
The other “cryptocurrencies”, less clearly decentralized and less secure, cannot compete in this field.
Bitcoin is also a programmable currency thanks to the Bitcoin scripting language (called Bitcoin Script) which makes it possible to design transactions with conditional payment clauses, improperly called “smart contracts”.
This language is deliberately incomplete (no “Turing completeness”) for security reasons but allows to consider the Bitcoin network as equipped with an Operating System (OS) to run smart contracts.
Currently however, there are only 3 OS (Windows, OSX, Linux) significantly deployed around the world. Beyond these 3, the marginal utility of a 4th would probably be exceeded by the cost of maintaining applications on this OS. It is therefore difficult to perceive the interest of having more than 3 or 4 global software platforms for the execution of smart contracts, but Bitcoin will be part of it or will be the only one.
Given all the above reasons, neither public authorities, nor European companies, should ignore the Bitcoin and the 2–3 networks derived from its invention.
In order to make the most of this creation of value, only three simple measures are necessary:
- Certification of electronic documents: give legal proof to the signature of a transaction in the Bitcoin blockchain carrying the digital fingerprint of one or more documents. This would reduce the cost of equipment of notaries and trusted third parties, and their customers could check for free, almost instantly, if the documents in question are authentic. Besides this, the certification of identity documents, by associating an actual identity with a pair of public key/Bitcoin private key generated directly by the bearer in complete autonomy, makes possible the inception of a self-sovereign digital identity. The practical consequence of such a break with traditional patterns would be the possibility for everyone to monetize their own data from applications and other private networks.
- Means of payment: recognize the liberating nature of a payment in euro via a Bitcoin transaction. (Bitcoin network or Lightning network). In such a transaction, bitcoins are only used as pivot currency and resold immediately by the collector against euros. The adoption of open, free software payment networks such as Bitcoin and Lightning would balance the power relationship between small-medium businesses and dominant payment networks: credit cards, Paypal, iTunes, etc.
- Taxation: clarify the taxation of capital gains realized by investing in a cryptocurrency by applying the 30% “flat tax”. Today, for an individual, the rate can rise to 62% according to some tax experts, which seems discriminatory and confiscatory with the effect of inciting hoarding or tax evasion.
All these measures will reassure bitcoin users. Europe has nothing to fear from new technologies: by embracing them in an intelligent way, it could create a privileged dreamland for investors.
Pierre Noizat, CEO of Paymium and Blockchain.io