Why are we yet to see mass adoption of cryptocurrencies? As a start, cryptocurrencies are difficult to trade; most coins are only useful as speculative vehicles or as extremely volatile alternatives to gold; and the lack of regulation terrifies consumers and businesses alike.
To get a more complete answer, you need to break down the history of cryptocurrencies. We think of it as three distinct waves:
The first wave — “Anoncoins”
The first wave begins with Bitcoin, then the coins that more or less replicated its central principles.
Launched right after (and in reaction to) the Global Financial Crisis (2008–09), Bitcoin did what a lot of innovative technologies do when they launched — it confused the hell out of people. It became widely talked about in the media, and successfully impressed and scared the population in equal measures.
Contrary to trends that other innovative technologies of the past have followed, Bitcoin continues to scare, even years after its inception. Some of this fear stems from the relatively complex nature of blockchain technology. But on a deeper level, there’s an ethical challenge for many, because they feel the technology sits as comfortably in the black market (Silk Road) as it does on legal exchanges.
Obviously, Bitcoin and other “anoncoins” (e.g. Ethereum) have grown far beyond the days when Silk Road was popular. But it’s also true that the same dedication to decentralization and anonymity that made them such promising alternatives to centralized currencies and financial institutions also fractures their utility.
Why won’t everyday users adopt anoncoins? Because of Youbit. Because of Mt. Gox. Because Apple Co-founder Steve Wozniack had seven Bitcoins stolen by someone who bought them with a stolen credit card, which was then cancelled — and that person will never be caught.
People are risk averse. So adoption will happen only when the population receives everything they currently cherish, and more. They will not eagerly sacrifice things such as the ability to cancel a malicious transaction or have stolen money returned.
Every cryptocurrency that resists all forms of regulation and identification allows for an entry into unrecognised transactions. But seemingly any cryptocurrency that offered regulation and identification would lose the initial appeal of crypto — they would have adopted two things that render them as inefficient as any traditional currency. This is the central paradox of anoncoins.
The second wave — the institutional response
The next wave of cryptocurrencies saw this problem, and sought to fix it. Ripple is a great example. These coins want to be adopted by the centralized financial institutions that anoncoins were first developed to bypass.
The flaw of these coins that prevents their widespread adoption is actually baked in, so to speak. The initial appeal of cryptocurrency was its purity. The maths of the blockchain avoids the corruption inherent when humans are in control, and enables a level of trust that has never been seen before.
But coins like Ripple rely on centralized permissioned networks to govern outcomes (Ripple also has the problem that XRP came pre-mined and vast amounts are owned by the developers). So Ripple is not really decentralized and don’t have that trust or offer the world of innovation that true decentralization does.
Let’s not be overly harsh. There are good reasons why crypto purists don’t think much of Ripple, but there are also many reasons why crypto pragmatists support it. Ripple has already had an impact on mainstream audiences, it’s engaged in meaningful talks with financial institutions, and it would be a much less centralized alternative to all other currencies controlled by banks at present.
Despite this promising story, it’s highly doubtful that banks will actually adopt it. Several outlets (see MIT Tech Review for one) have pointed this out — mentioning that Ripplenet might be popular but XRP just isn’t — however there’s another argument to add to theirs.
As we speak, countries all over the world are building their own digital currencies. (Some are labelling them cryptocurrencies but that’s like confusing tofurkey for turkey. Nobody is trying to fool you, so why are you getting fooled?) Financial institutions will mostly be happy to wait for that to happen — because there’s certainly no urgent need for XRP.
In this sense, Ripple is a precursor to true bank coins. It’s done everything a cryptocurrency can to get their approval, but still hasn’t been adopted. On the other hand, when central banks release their fiat digital currencies people will have no choice but to adopt it. A new norm will have been set. Much like Facebook wants to be the Internet in some countries, fiat digital currencies will be “cryptocurrencies” wherever they’re minted.
According to one estimate, we have 24 months until the first ones arrive.
The third wave — decentralized commerce
So far we’ve covered why cryptocurrencies haven’t been widely adopted. Now let’s talk about how that will change.
Some people, when they first looked at Bitcoin, saw the decentralized future. They saw a world where not just finance, but all industries no longer had to live with the largest institutions aggregating all the power for themselves.
The next wave of cryptocurrency will achieve this vision. These coins solve the main problems that prevent mainstream adoption of crypto by delivering confidential identified use and jurisdictional compliance. These are the keys to being useful to both businesses and everyday people while staying true to decentralization.
These decentralized coins understand that users need to be identified, but have their ID under their control in a way that’s both secure and private. By having this sort of identified use, it’s possible to give regulators the ability to monitor suspicious transactions but do so without giving them wholesale access to all transactions. All law-abiding users will be able to transact without being watched. The system that enables this is called “confidential compliance”.
So too they will solve a key pain point for businesses — the transparent nature of public blockchains means it’s possible to know which businesses are which, as well as the financial decisions they’re making. Appropriately, the system that solves this is called “confidential coexistence”.
By eliminating the regulatory issue in this way, decentralized commerce solves the paradox of anoncoins and the systems and coins that allow it will attain the utility they couldn’t. In that way, they fulfill the initial promise of cryptocurrencies.
When your parents can login and register simply, and access useful services with cryptocurrencies immediately, that’s when you’ll see mass adoption.