The other chapters of this book discuss the details and inner workings of crypto currencies. This short chapter simply takes a look at the opportunity and the risk inherent in adopting a new way of exchanging value or transacting trade. This chapter is also going to dispense with the hyperbole surrounding crypto currency—there will be no discussion of revolutionary technology, new economic paradigms, or disrupting history; rather, this chapter simply wants to look at this new medium of exchange and how it may or may not do anything more than provide another alternative to people for the buying and selling of goods and services.
Historical Backdrop
Crypto currency is simply the latest method for people to buy and sell goods and services. Before there were any currencies, people bartered between themselves either exchanging things of value between themselves or exchanging services for things of value. As time progressed, certain items of value, such as precious metals (gold, silver) or commodities (grains, livestock) were used as a medium of exchange. In the next iteration of exchange, coins of various size, shapes, and materials were utilized as money, and most coins had intrinsic value based on the materials they were composed of. Eventually paper currency became the standard of exchange. At various times, paper currency has been backed by land, precious metals, or other items of value. In the twentieth century until the Great Depression, most of the industrialized nations of the world used the Gold Standard to back their currencies, where the value of their currencies was related to the value of the gold they held in storage to back those currencies. After WWII the “gold exchange standard” was established by the Bretton Woods Agreement, setting the official exchange rate at $35 per ounce of gold. In 1971, the US moved off of the gold exchange standard, allowing supply and demand to determine the value of its currency. Since then, the relative value of currencies has been backed not by one particular asset, but by governments’ creditworthiness and the faith of the public in their ability to pay back any debts owed by them. The abandonment of the gold standard helped alleviate the need for governments to stockpile large supplies of gold, but it also forced countries to seek new means to guarantee stability for their currencies as they “floated” freely against one another.
Over the past few decades, new financial instruments such as options, swaps, and futures have allowed currencies to be exchanged in new ways. For consumers, the introduction of credit cards, debit cards, and other means of transferring money (wire transfers) has increased the velocity and volume of currency or money transfer. In the modern era, currency has evolved from being physical to being digital as well. Now, unlike sovereign currencies, crypto currencies do not have physical form on paper; they are digital and are exchanged or traded in electronic digital environments.
Crypto Currency Wallet Security
At their heart, crypto currencies currently reside on a vast network of peer-to-peer computers with an immutable, distributed database called the blockchain. This is all well described in other chapters. While the cryptography of the network appears secure, the means of accessing the network—crypto currency wallets—may not be any more secure than credit cards. A crypto currency wallet is a software application that stores the public and private keys that interface with the blockchain. If your crypto currency wallet is compromised you could lose your crypto currency. Some crypto currency wallets are desktop wallets designed for use on PCs. If your computer is hacked your crypto currency is at risk. Some crypto currency wallets are cloud-based and accessible from computers anywhere, but clouds like credit cards are managed by a third party, so hacking and theft are a possibility just like they are with any database controlled by a third party. Mobile wallets designed for smartphones are convenient, but smartphones can be hacked, lost, or stolen. There are also hardware wallets housed in devices such as USBs which are highly secure, unless the USB is lost, stolen, or damaged. Lastly, there are paper crypto currency wallets that are essentially paper copies of your public and private keys, so they are no more secure than paper currency.
Given the above, crypto currency wallets do not appear to provide any more security, depending on the form of the wallet, than other data you store on your computer, in the cloud, on your smart phone, or in your own personal physical wallet. So, while the blockchain itself may be secure and immutable as a distributed ledger, the means of accessing the blockchain, the crypto currency wallet, is no more secure than other methods of exchanging goods and services. If your private key is lost or compromised, your crypto currency is at risk.
The Next Block in the Chain
At present, crypto currencies will not replace sovereign currencies as the primary medium for exchange of goods and services. However, crypto currencies are a viable complement as an alternative medium of exchange for anyone with access to a computer or smartphone. Perhaps the biggest challenge is acceptance and use by both consumers and sellers of goods and services. Multiple sovereign governments are building and/or improving the legal frameworks and infrastructure for the growth, development, and safety of crypto currencies. In similar fashion to security regulation, government regulators will need to ensure that money laundering, fraud, and predatory or criminal activities are controlled or eliminated. Simultaneously, vendors or sellers of goods and services will need to accept crypto currencies and be protected in the same way as they are when consumers use credit cards. At present, a credit card transaction takes a few seconds to be approved and executed; the typical Bitcoin transaction takes roughly ten minutes for the blockchain to be validated. This may be a significant issue if crypto currencies are to be widely accepted and used by the general public. This is not unexpected; it is simply another step in the evolution of the blockchain, and of how we transact business.