The benefits and risks of digital currency

The notion of transactions and trust is being transformed. We’re transitioning from cash, plastic, and third party institutions to bits, biometrics, and digital contracts.

Paper bills and coins have been the primary representation of money since the turn of the 18th century. Since then, money has gradually become digitized with credit and debit cards being the physical manifestation of the transition. Recently, a new transition is taking place; to eliminate the analog aspect of card and completely digitize the entire card system.

The smartphone is enabling this transition.
Today, 85% of global consumer transactions annually are done with paper bills and coins — especially in developing countries. Changing the fundamental transaction behavior of people across the world from the exchange of cash to the transfer of data is already underway. The agent of this change is the smartphone.

These developing nations are “leap frogging” to digital currency adoption.In Africa, India and now Eastern Europe, a service called M-Pesa has replaced banking for millions of people who don’t have a bank account.

New technologies are leading the change.
Digital wallets, near-field communications (NFC), crypto-currencies, and mobile peer-to-peer payments are all aiming to tip the balance away from cash. NFC-enabled mobile phone shipments have grown from 93.2 million in 2011 to 544.7 million to 2015. Mobile payment purchases are also on the rise. Worldwide, they’ve increased from $240 billion in 2011 to $670 billion in 2015.

Digital currencies like Bitcoin are gaining traction, with daily transaction volumes increasing by 81% in 2015, compared to 2014.

Some countries are even going cashless.
A Central Bank survey suggests that less than 15% of Swedes make most payments in cash, and the cash-only economy represents 2% of Sweden’s GDP, compared to 10% in 1990. There are even Swedish businesses that do not accept cash payments, and homeless people sell magazines with card terminals.

Denmark is also quickly approaching a cashless society thanks to an app called MobilePay. Installed on more than 90% of smartphones in Denmark, the app was used by over three million Danes to make more than 90 million transactions. Last year, MobilePay announced a partnership with the official association of the homeless, enabling them to accept donations on their smartphone.

The Indian prime minister, Narendra Modi, announced that all 500 and 1,000 rupee notes have been stripped of their status as legal tender. The removal of the notes has created India’s first digital and cashless village, Akodara, located 60 miles from the northern city of Ahmedabad. Many of the 1,200-people living in Akodara buy their groceries through mobile banking and have little worry when it comes to the demonetization.

Digital currency proliferation comes with benefits and risks.
If paper bills and coins or plastic cards are no longer the physical manifestations of currency, what would happen? I could imagine a future where every internet-connected device becomes a commerce device (i.e. Amazon Echo; Dash buttons). Eventually payments may become invisible and our very presence may be sufficient to conduct a transaction for whatever good or service we desire.

While money laundering and tax evasion could possibly be eradicated, we would become more vulnerable to cyber crime, as any glitch in the system could bring a country’s entire financial infrastructure to its knees. The anonymity afforded by cryptocurrencies like Bitcoin could also be used for evil means like funding terrorism.

The benefits and risks of digital currency are being debated on all sides of the planet — from governments to financial institutions and central banks.

Regardless of how currency evolves from a physical manifestation to bits and biometrics, the notion of transactions and trust will be transformed. We are indeed heading toward a future where the global economy might be run on a global virtual currency managed by a global central bank, powered by consumers who are engines of transactions by their very existence.