There’s been much hype about, and financial speculation in, cryptocurrencies like Bitcoin and Ethereum and the blockchain technology that underlies them. Prominent futurist Don Tapscott says they represent “a profound technological shift that will transform the way the world does business—and everything else.” Legendary billionaire investor Warren Buffett characterizes private cryptocurrencies as “rat poison squared.”
But what are they? Will private cryptocurrencies replace our public national currencies, and how could blockchain technology affect public services? Are cryptocurrencies revolutionary, or over-hyped rubbish?
Cryptocurrencies are virtual currencies that use “blockchain” technology (a series of encrypted records of each transaction). These computer records independently verify the authenticity of the currency, the asset being bought or sold, and each transaction. This means that instead of using a centralized ledger system, such as a land titles office or a central currency payments system, digital currencies make use of a secured, encrypted “distributed ledger.”
This blockchain technology provides the security that the currency isn’t counterfeit, but because it is encrypted, it does so at the loss of a centralized ledger and the guarantees that are provided by public and private authorities through banks, stock and bond registries, deposit insurance, credit card and other payment system safeguards. Unlike with other forms of currency, there is no public record. If someone’s cryptocurrency is stolen or lost, it’s gone. While blockchain technology has useful applications, there’s a reason we have centralized and publicly regulated ledger systems to guard against corruption and fraud.
Cryptocurrencies are now largely being used to facilitate illegal transactions that people want to keep secret, and more recently for profit-seeking speculation. Because there’s no centralized, public transaction record, cryptocurrencies can also be used to avoid paying taxes and other debts.
Private cryptocurrencies have another downside: they’re very energy intensive. Their value isn’t backed by a trusted central authority, such as a central bank. Instead, the value of cryptocurrencies relies on the enormous amount of computer power expended in creating them. In Iceland, more energy is now used in “mining” or creating cryptocurrencies than in powering its homes. Central banks are exploring introducing cryptocurrencies with blockchain technology that could be used more legitimately and without the waste in resources involved in producing them.
Blockchain technology has many other applications that could not only significantly affect the financial services industry, but also the way we deliver public services and engage with government. Electronic blockchain records could be used to significantly speed up land registration, provide a digital identity for accessing government services, record health records, and for voting. As with any technology, there’s positive and negative potential. The challenge will be to harness blockchain technology for the public good, and not just for private profit.