By Manie Eagar, Co-founder and Chairman, Digital Finance Institute

I was interviewed in 2014 for an analysis of the cryptocurrency industry by a Canadian research firm Technology Strategies International (TSI) for its report: The Future of Virtual Currencies – Alternative futures for virtual currencies and virtual currency technologies.

The report concludes that virtual currencies are likely to be a “major disruptive force” within five years. The report recommends that companies that could be impacted by “Bitcoin 2.0″ applications should begin “preparing themselves now.”

“There was a strong surge in the number of virtual currency announcements shortly after Bitcoin’s market capitalization hit $1 billion,” says Christie Christelis, president of TSI, “and the number of virtual currencies on the market has accelerated since then, exceeding the number of fiat currencies by June 2013.”

The report notes that more than 1,700 virtual currencies have been launched since January 2009. More than 700 are considered active, but only 35 have market valuations of more than $1 million. Bitcoin’s current market cap is over $4.5 billion.

“We will see major disruption across a broad range of industries, mostly, but not exclusively, in the financial services sector.”

TSI says that many of the “altcoins” have aimed to enhance the bitcoin protocol, extend functionality or improve the speed and security of digital currency transactions. 

Bitcoin 2.0 isn’t only about financial innovation

“The idea of decentralized trustless systems is revolutionary,” Christelis says, “but the real potential for disruption comes about through the ability to implement them and find compelling business models. The open protocols on which these virtual currencies are based, together with the highly collaborative innovation processes at work amongst the different develop communities, has created such a stimulating environment for innovation that it is impossible to halt it. And these innovations aren’t only focused on financial applications of virtual currencies.”

These blockchain innovations are often termed Bitcoin 2.0 applications and include smart contracts, colored coins and decentralized autonomous organizations (DAO’s).

What about regulation?

When the Internal Revenue Service tried to regulate bitcoin, officials stated in March 2014 that the IRS will “treat virtual currencies like property such as stocks, and not currency, giving a potential boost to investors but imposing extensive record-keeping rules.”

Christelis said that since virtual currencies are based on a distributed network of computer systems, the government couldn’t regulate it easily.

“There’s nobody to take to court and state that he/she broke the law because there’s no single entity for running the protocol,” he said, “The only way it could be regulated is through the on and off ramps.”

He described this process from this example: If you live in Canada and you want to purchase a bitcoin from Costa Rica, you could do so because it’s decentralized and available globally. The government from the area you live in cannot easily regulate exchanges from overseas.

The only regulation that could be easily enforceable would be exchanges back and forth from the same area — Canada to Canada — and by a certain class of trade (e.g., the purchase of virtual currency from fiat currency).

There’s skepticism and distrust in the entire virtual currency system, which will always be there, Christelis said. But U.S. regulators have generally said it must meet existing laws regarding money laundering, fraud and other issues, while other countries have outlawed it.

“The Department of Justice recognizes that many virtual currency systems offer legitimate financial services and have the potential to promote more efficient global commerce,” Mythili Raman, acting assistant attorney general for the DOJ’s criminal division, told The Wall Street Journal last year. 

The next multi-billion dollar industry

Venture capitalists have invested more than $400 million in companies aimed at “getting in early on the next multi-billion dollar industry.” It also notes that awareness of virtual currencies exceeds 50% amongst online adult consumers in the USA, the UK and Canada, but adoption has been slow to gain traction.  However, about one in five consumers intend to make use of virtual currencies in the future, which given the current low base of usage, suggests very high growth in adoption over the next few years, the report predicts.

He stated, however, that segments like remittances, micropayments and online commerce could see mainstream adoption within the next five years.

“We identified three alternative futures for virtual currencies,” says Christelis “namely, ‘A Trustless World’, ‘Symbiosis’ and ‘Fractured Horizons’. If either of the first two materialize, we will see major disruption across a broad range of industries, mostly, but not exclusively, in the financial services sector,” he says.

Christelis believes that incumbents are “ill-prepared for the disruptive wave that is starting to build” and recommends that immediate action be taken to mitigate the effects of moving to a decentralized, trustless world.

What does this mean for your business?

Regulators have warned money-transfer businesses they must follow the same rules as established financial institutions, including complying with anti-money-laundering laws.

“The idea of decentralized trustless systems is innovative, but the real potential for disruption comes from the ability to implement them and find compelling business models,” Christelis said. “The open protocols on which these virtual currencies are based, together with the highly collaborative innovation processes at work among the different develop communities, has created an environment for innovation that it is impossible to stop it.”

What should your business do? Christelis advises that you should:

  • Organize and learn about virtual currency to build insight on how it could affect your business. Although it’s not guaranteed to affect your business, having the understanding of the possible impact will be helpful.
  • Build the skills and capacity within your business to implement virtual currencies. Have your R&D department tinker with it to see if your business could handle the impact. You’ll have to devote the time and resources — in specific cases — to see if it will work.
  • Start building and implementing new processes and business models to include virtual currencies. This may not happen until much later on, but having all the necessities will allow you to be one step ahead.

Newer virtual currency companies are already looking into different applications of the currency in areas such as “smart contracts, colored coins and decentralized autonomous organizations,” according to the report. Christelis said the direction that virtual currencies will take will depend on government regulation.

The five potential phases of Bitcoin adoption

In a recent interview with John Mauldin of Forbes, Barry Silbert, founder of the Bitcoin Investment Trust and one of the most active venture capitalists in the industry (with investments in over 30 Bitcoin-related portfolio companies through the Bitcoin Opportunity Corp.), stated that he believes the rise of Bitcoin from 2009 to 2014 is just the beginning… and the virtual payment system may be approaching a big inflection point as Wall Street takes the baton from Silicon Valley. Silbert thinks about Bitcoin adoption in five general phases.

(1) Experimentation Phase. (2009–2010)

No real value associated with Bitcoin. Hackers and developers playing around with the source code. Experimenting with Bitcoin as a medium of exchange.

(2) Early Adopters Phase. (2011–2013)

Interest from investors and entrepreneurs started to grow with substantial press coverage in the wake of the Silk Road bust. First generation of Bitcoin-related companies (exchanges, merchant processors, wallet providers, etc.) started. Potential began to shine through poor management.

(3) Venture Capital Phase. (2013–Present)

World-class VCs started investing in Bitcoin companies and rapid ramp-up is already outpacing the early days of the Internet. VCs poured more than $90 million into Bitcoin-related businesses in 2013 and more than $300 million in 2014 (compared to $250 million invested in Internet-related businesses in 1995).

(4) Wall Street Phase. (2015?)

Institutional investors, banks, and broker-dealers begin moving money into Bitcoin. Rising price and volume (in addition to development of derivatives) become the catalyst for mass adoption as retail investment follows.

(5) Global Consumer Adoption Phase. (?)

Only happens if (i) companies continue to innovate and make it easier for consumers to buy, hold, and spend Bitcoin, (ii) volume expands dramatically so that large merchants can start accepting payment in Bitcoin, and (iii) Bitcoin awareness continues to rise with these developments.

Brave new world – Bitcoin as a complementary currency

Bitcoin will become an optional selection amongst a number of alternative digital finance. Its main competition will be highly innovative and accelerating adoption of ‘airtime tokens’ offered by mobile phone companies and ‘digital money tokens’ offered by mainstream and alternative financial service providers emerging from the convergence of digital banking, mobile commerce and cryptocurrency platforms.

Financial regulators and compliance efforts will focus on the bridging capabilities of these new technologies across platforms, jurisdictions and commercial and social applications.

Prof Jem Bendell author of Healing Capitalism, believes that “It is possible to organize an entirely new structure of money, banking, and finance; one that is interest-free, decentralized, and controlled, not by banks or central governments, but by individuals and businesses that associate and organize themselves into moneyless trading networks.”

“There are reportedly more than 400,000 companies worldwide who trade more than $12 billion dollars’ worth of goods and services annually without the use of any national currency. All forms of business can begin to accept complementary currencies as payment, and offer to pay their employees partly in a complementary currency. They can be active in the cryptocurrency field, promoting applications that empower communities and small firms, rather than speculative activity.”

For example: “Mobile phone companies can help scale complementary currencies by collaborating on SMS payment systems. Retail banks can open accounts in complementary currencies. All firms can integrate complementary currencies into their philanthropy and community engagement. Firms can switch their accounts to financial institutions that practise full reserve banking, including building societies and mutual associations. Firms can encourage local governments to issue their own mutual credit systems, and for all governments to tax transactions in complementary currencies in those same currencies, not national money.”

He continues: “Like Facebook, QQ, Twitter, LinkedIn and other networks that are purely social, I predict that some moneyless trading networks will grow exponentially and provide significant daily alternatives to bank-issued money. The vibrant field of innovation in cryptographic currencies is already enabling new experiments in self-issued credit systems, such as RipplePay, which can be used to transact personal promises of all manner of currencies without the money actually changing hands.”

In conclusion, during my interview I highlighted that complementary currencies might become dominant in emerging markets, whilst in established markets, they will enter initially as complementary and ultimately competitive alternatives to the current offerings with Bitcoin as the leading complementary currency.