Everyone, not just experts in finance, have heard about Bitcoin at least once. The press is writing about it because of the currency’s sharp fluctuations – following the quick rise (+2300% in one year) to a value of 19,814 dollars, in December 2017, in less than two months, it dropped to just a little above 6,000 dollars – and for its unmanageability which is both scary and fascinating.
However, Bitcoin is not the only protagonist. From its initial launch in 2009, many more cryptocurrencies have been invented, thus called because they are digital currencies that have been made safe through cryptographic techniques. Today there are almost 900, totaling a worth of approximately 400 billion dollars (as of February 12, 2018), of which Bitcoin represents 35% of overall market capitalization.
It’s not so much the size of the phenomenon that attracted the attention of the media and governments, as the strongly innovative characteristics. Satoshi Nakamoto’s – the inventor of Bitcoin whose identity is still secret – paper, published in 2008 to explain the rationale of this new digital currency, contains a clear declaration of war against traditional currencies. In fact, as opposed to a traditional currency, users can exchange money with each other without having to go through financial intermediaries and trade rules are written in an open source software that can be publicly verified.
In addition to disintermediating traditional systems, Cryptocurrencies have some very innovative characteristics, real “super powers” that make them potentially more advanced than the traditional systems we are used to. Currency programmability, possibility of making transactions from multiple sources of liquidity and sending payments to different recipients, traceability and verification of all transactions by all network participants, are just some of the innovations introduced by cryptocurrencies.
However, cryptocurrencies have revealed some weaknesses that make replacing traditional currencies still impossible: high volatility (too risky to use them for payments in real life economy); difficult to acquire (to purchase cryptocurrencies it is necessary to interface directly with online exchanges, a complex process for the average user); not regulated, cryptocurrencies are not recognized in the same way by all jurisdictions.
After the initial foreboding due to these systems’ disintermediation, the most avant-garde governments and central banks began studying cryptocurrencies hoping to wrest their secrets and make their own currencies and payment systems more efficient.
Over 30 central banks worldwide launched testing or research projects to apply cryptocurrencies’ “super powers” to traditional currencies, to avoid abdicating their role as controllers of monetary systems and trying in this way to create “supervised cryptocurrencies” (an oxymoron that cannot please cryptocurrency purists). Among major projects the most outstanding are those driven by the Bank of Canada and the Monetary Authority of Singapore that have completed some preliminary bank-to-bank transfer tests. Other projects more targeted to consumers have been developed by countries such as Barbados, Arab Emirates, Sweden and Estonia. Central Banks of other countries, such as Russia and the United States, are, instead, still in a preliminary phase of evaluating the opportunity of starting projects in this direction.
But what about the European Central Bank? We hope that Europe can also soon be added to the list of those who have studied the phenomenon and, without necessarily having to develop a new cryptocurrency, will adopt the tools to consciously pursue a strategy. Who knows if the “Cryptoeuro” will ever exist? For now it is only a nice name promoted by Reply and driven forward in collaboration with the Blockchain & Distributed Ledger Observatory of the Politecnico di Milano, and the participation of the Associazione Italiana Prestatori Servizi di Pagamento (APSP) (Payment Service Providers Association) that focuses on investigating if a supervised cryptocurrency system can provide benefits to make payment processes in certain industry sectors more efficient (e.g. energy, insurance, banking) that are currently inefficient due to lack of ‘programmable’ payment systems (results to be presented in Milan on April 17).