According to the authors of Barclays’ annual Equity Gilt Study for 2018, there are four huge hurdles cryptocurrencies, and the wider crypto technology space must overcome, before they can be considered to be truly mainstream,
The Equity Gilt study, a massive report chronicling the bank’s thoughts on important topics in the world of global finance and economics, this year focuses on technology, particularly crypto and artificial intelligence — two subjects that many in markets believe have the potential to cause substantial disruption.
Crypto technologies such as blockchain, as well as cryptocurrencies, Barclays argued are “interesting” and “innovative,” but still need to be proved to be actually useful.
“The title summarizes it all in fact,” Marvin Barth, Barclays’ global head of FX strategy, said at an event to launch the report. “Crypto technologies are a solution still seeking a problem.”
He continued: “The bottom line here is that these are interesting, innovative technologies and they do enable solutions to a bunch of different problems we have encountered in finance and money before, but we already have solutions that are in place that seem to work pretty darn well. What these technologies are facing, is effectively overcoming four critical problems.”
The four challenges, Barth, along with fellow authors Joseph Abate, Zoso Davies, and Tomasz Wieladek argue are as follows:
- Acceptance and trust — Basically whether or not the wider population will learn to accept the use of crypto tech in their day-to-day lives.
- Sovereignty and regulation — Crypto technologies also need to be adopted, or at least accepted, by governments, and need to be subject to regulations that don’t overarch their abiding purpose.
- Privacy — The technology needs to provide privacy of a higher level than that of existing tech. “Privacy actually cuts both ways with these technologies,” Barth noted.
- Irreversibility — The current technologies for blockchains are irreversible, which is not always a desirable feature in every aspect of commerce.
The report’s authors note:
“At present, existing technologies appear to be sufficiently good, or even better, to deter broad crypto technology adoption in money and finance,”
To see whether or not crypto tech might be widely adopted, Barth told journalists that the bank:
“tried to look at cryptocurrencies, which are most developed, as a sort of case study for how do these critical challenges fit into their adoption. We did this via a cross country study, where we look at proxies for demand for cryptocurrencies across countries, and what are the characteristics of those countries that seem to be leading this demand. One of the interesting things we’ve seen is that contrary to some of the evangelists for cryptocurrencies, actually inflation doesn’t seem to be a big issue that causes demand,” he said. “It really is about trust and opportunity within societies.”
Countries where cryptocurrencies have so far been most highly adopted for their actual purpose, rather than for simply trying to make money, are largely developing nations, where there is less trust in financial and governmental institutions.
“The places where we see the largest adjusted demand for these currencies tend to be low trust societies or developing countries with few other investment opportunities,”
Essentially, the societies where there will be long term demand for cryptocurrencies are those where it actually solves an existing social problem — such as a lack of trust in financial institutions.
“You don’t have trust? Well here’s a way to create trust through blockchain and a distributed ledger that allows people to check their transactions,”
“That doesn’t apply in advanced societies,” he added, pointing to the fact that there is seemingly little desire to replace mainstream currencies in major economies.
Central bankers in such economies have also heavily criticised cryptocurrencies, with Bank of England Governor Mark Carney among the loudest voices.
Carney warned back in March that the digital currency could be heading for a “pretty brutal reckoning.”
Another argument where bitcoin falls down, Barth pointed out, is in terms of the speed of payments, something often cited by crypto acolytes as one of their major advantages.
“A lot of people say ‘These will be so much faster than the international payments we have now.’ It’s not clear that there is a Pareto achievement — that is that these are more desirable than what we have in place in terms of speed and complications,”
Barclays is not, Barth said, a: “slow behemoth who can’t figure out technology and how to transfer money in a short period of time,” but faces serious regulatory barriers which stop it from undertaking ultra fast transactions.
“We can do it like that,” he said, clicking his fingers.
“The issue is that we have regulations that require us to check who we’re sending it to, who it’s coming from, and whether they’re money laundering or not.”