In recent years, cryptocurrency—and in particular, Bitcoin—has demonstrated its value, now boasting 14 million Bitcoins in circulation. Investors speculating in the future possibilities of this new technology have driven most of the current market capitalization, and this is likely to remain the case until a certain measure of price stability and market acceptance is achieved. Apart from the declared price of cryptocurrency, those invested in it appear to be relying on a perceived “inherent value” of cryptocurrency. This includes the technology and network itself, the integrity of the cryptographic code and the decentralized network.
The blockchain public ledger technology (which underlies cryptocurrency) has the potential to disrupt a wide variety of transactions, in addition to the traditional payments system. These include stocks, bonds and other financial assets for which records are stored digitally and for which currently there is a need for a trusted third party to provide verification of the transaction.
In our view, the cryptocurrency market will develop at a pace set by the key participants, characterized by likely growth spurts of legitimacy from one or more of these participants in what we call “credentialising moments.” For the market to reach the next phase in its evolution toward mainstream acceptance and stable expansion, each of the five key market participants—merchants and consumers, tech developers, investors, financial institutions and regulators—will play a role.
For consumers, cryptocurrencies offer cheaper and faster peer-to-peer payment options than those offered by traditional money services businesses, without the need to provide personal details. While cryptocurrencies continue to gain some acceptance as a payment option, price volatility and the opportunity for speculative investments encourage consumers not to use cryptocurrency to purchase goods and services but rather to trade it.
Only 6% of respondents to PwC’s 2015 Consumer Cryptocurrency Survey say they are either “very” or “extremely” familiar with cryptocurrencies. We anticipate that familiarity will increase as consumers begin to have access to innovative offerings and services not otherwise available through traditional payment systems.
From the perspective of businesses and merchants, cryptocurrencies offer low transaction fees and lower volatility risk resulting from nearly instantaneous settlement, and they eliminate the possibility of chargebacks (the demand by a credit card provider that a retailer make good on the loss of a fraudulent or disputed transaction).
Many talented tech developers have devoted their efforts to cryptocurrency mining, while others have focused on more entrepreneurial pursuits such as developing exchanges, wallet services and alternative cryptocurrencies. In our view, the cryptocurrency market has only started to attract talent with the depth, breadth and market focus needed to take the industry to the next level. For the market to gain mainstream acceptance, however, consumers and corporations will need to see cryptocurrency as a user-friendly solution to their common transactions. Also, the industry will need to develop cybersecurity technology and protocols.
Investors generally appear to be confident about the opportunities associated with cryptocurrencies and cryptography. The “inherent value” of the underlying technology, discussed above, gives these investors good reason to be optimistic. As a result, only recently have some of the more established cryptocurrency companies attracted institutional investors and Wall Street attention.
Traditionally, banks have connected those with money to those who need it. But in recent years, this middleman position has been diluted, and disintermediation in the banking sector has evolved rapidly. This has resulted from the rise of Internet banking; increased consumer usage of alternative payment methods like Amazon gift cards, Apple Pay and Google Wallet; and advances in mobile payments.
Government attitudes around the world are inconsistent when it comes to the classification, treatment and legality of cryptocurrency. Regulations are also evolving at different paces in different regions.
In our view, cryptocurrency represents the beginning of a new phase of technology-driven markets that have the potential to disrupt conventional market strategies, longstanding business practices and established regulatory perspectives—all to the benefit of consumers and broader macroeconomic efficiency. Cryptocurrencies carry groundbreaking potential to allow consumers access to a global payment system—anywhere, anytime—in which participation is restricted only by access to technology, rather than by factors such as having a credit history or a bank account.
The discussion is no longer one of whether cryptocurrency will survive, but rather how it will evolve—and when it will reach maturity.
Daniel L. Tannebaum
Global Financial Services Sanctions Leader, PwC US
Tax, PwC US
US Assurance FinTech Leader, PwC US