For years, there’s been a binary debate around cryptocurrencies and blockchain technologies. For the sceptics, they’re a fad, representing nothing more than technological solutions in search of a problem. For the evangelists, this is an unstoppable train that represents an opportunity to turn the traditional financial system on its head by creating a more equitable playing field, which transfers power from the few to the many.
I believe the evangelists are right … with one extremely important caveat.
Let’s start with QR Codes
Before exploring the likely futures of non-fungible tokens (NFTs), Cryptocurrencies and other blockchain-enabled services, let’s first consider the analogous example of QR codes.
Most of you have, by now, probably used Zapper, Snapscan or Masterpass. I, like hundreds of thousands of other South Africans, use at least one of these services many times every week.
We collectively do this for three reasons. Firstly, they offer us some sort of utility, which in this case boils down to providing a mechanism to pay for our goods and services, without having to touch a point of sale device.
The second requirement is that these products need to be simple, easy and quick to use. In other words they have to be less frictional than other alternatives such as cash or card.
I like the fact that these systems calculate the tip. I also like the fact I don’t have to remember a pin, or stop at a cash machine, or wait for a busy waiter to bring a card reader. These might be small points, but nonetheless I feel that my life is enriched somehow.
The third requirement is trust. The providers have managed to offer a service which I now believe in and which I feel safe using. This trust took time to build, but it wasn’t built around me having any knowledge about the underlying technologies, protocols or protections.
The trust came from observing others use the service and being curious. I can vaguely remember watching someone use their phone to pay for a coffee, in a chain with a brand I already trusted, and then asking them what they were doing. The person I asked was evangelical about the experience, so I downloaded the app and tried for myself.
Since then the level of trust has just grown as I’ve only had positive experiences and have seen no examples of fraudulent transactions or incorrect amounts being debited from my accounts.
This is an important point as it highlights that building trust doesn’t require the understanding of technical facts. It’s built around experiences and beliefs, which quite often are based around observing the experiences and beliefs of those around you.
Any company that offers a frictionless, trustworthy and beneficial product or service will be able to create a market, and if that product or service is scarce, they’ll be able to charge a higher price for that offering.
Without scarcity, there is no incentive for someone to spend the time developing a business to service that consumers want or need.
Air, for example, is an abundant resource, so at least for now there is no business case for someone to start producing it.
Zapper, Snapscan and Masterpass on the other hand identified a gap where there was enough scarcity to justify the costs of building these services.
So it should be no surprise that from a standing start there are now over $30-billion worth of transactions using these services in South Africa alone.
NFTs, crypto, and decentralised finance
How does this all relate to cryptocurrencies, NFTs, and the broader field of decentralised finance?
Let’s start with NFTs, which have received plenty of media attention lately. NFTs are becoming popular as a mechanism to buy digital artefacts, such as music or graphics, in a way that maintains the provenance of the asset you’ve purchased. Put another way, they digitally replicate the process of buying an oil painting or a first press vinyl record.
As such, they open up the opportunity to create significant online markets for a wide variety of digital assets. For example Beeple recently sold a piece of digital-artwork, through Christie’s for $69-million.
That may seem like a crazy price, but it’s justifiable if you believe that NFTs, Christie’s, and Beeple’s art is scarce, trustworthy, frictionless and provides utility.
The utility, as with any artwork, is more emotional than practical. Presumably, the buyer feels pride in owning this artefact. They are looking forward to observing it, sharing it and talking about it.
The price is further escalated because the buyer believes that NFTs make this item scarce or, in this case, unique. There might be copies and backups, but only this particular digitally encrypted version is to be classified as the original. It appeals in the same way a signed painting would.
The trust comes from the fact the buyer believes that the provenance is protected by the NFT technology, no doubt helped by the stamp of approval from Christie’s.
And in this case, the friction involved in purchasing the artwork has been reduced to an acceptable level, perhaps because Christie’s handled the process for the buyer and seller.
Will future works sell for so much? Probably not. There must be some extra value for the buyer; in this case as it was the first transaction and received huge publicity. Perhaps the next Beeple piece will only sell for half the price or a third or even less.
What is clear though is that the four requirements of a market are in place. It’s easy to imagine the creation of many Amazon-style commerce sites that allow for one-click purchases with gazillions of different digital artefacts on offer. You and I might not appreciate them. But we are not important. It’s the billions of other people that see value in these things who matter.
Finally, what about bitcoin and cryptocurrencies in general?
Well, Coinbase, a crypto exchange, just listed and was valued at around US$85-billion. Bitcoin’s price meanwhile recently hit a record $63 000. And Tesla decided to purchase US$1.5-billion worth of cryptocurrencies for treasury management purposes.
Why? Because crypto, like NFTs and QR payment systems, and more broadly like gold, rands, and dollars, is demonstrating it holds these four critical attributes.
Coinbase is perhaps the most trusted crypto exchange: it’s super-easy to use (download the app and try it) and there are millions of participants who see value or utility.
For some, the utility comes from the satisfaction of playing a part in disrupting the banking industry or fighting back against big government. Others are simply in love with the technology. Still others believe that crypto is the “new gold” and therefore has to be in their investment portfolio.
Trust comes in multiple forms, but the whole point of the technology is to create trust by ensuring there are no central players to control the system and using technologies to ensure bad actors can’t buy enough computing power to disrupt the flow.
And of course, scarcity is built into the system in the limited supply of coins, the limited number of trusted exchanges, and the limited number of decent apps needed to acquire the various currencies.
It’s hardly surprising then that Bitcoin and infrastructure providers are seeing significant increases in valuations.
What’s the future?
I believe the final outcome will be determined by two competing forces, with diametrically opposed views.
First, without some extreme intervention, these markets will continue to grow as there is obviously utility in the offering.
Over time, it’s easy to imagine cryptocurrencies becoming popular mediums of exchange and investment vehicles or for NFTs to allow for the creation of big online stores for digital products.
It’s equally easy to imagine that competition will increase, reducing scarcity, and friction will be reduced as technologies mutate; and trust will be enhanced as more people participate.
This might mean that Coinbase finds it difficult to maintain its massive valuation, as margins are compressed. It may mean that Bitcoin slides in value as people use either, or Dogcoin or some other variant that burns less dinosaurs.
But without other interventions, I can’t see anything stopping this continued exponential adoption, which in turn makes the utilisation easier, faster and cheaper for everyone.
But significant interventions are guaranteed
But there will be interventions, and they will be significant. The most significant of all will come from governments around the world.
We can expect a patchwork quilt of new laws and regulations that vary from country to country.
There is nothing new here. In South Africa for example we are well used to exchange controls, which is a completely foreign concept to, say, British and European populations.
We should expect some governments to look to block these new offerings in their entirety. Others will look to manage and regulate. Others still will perhaps look to partner and develop solutions that they hope will benefit their populations.
But in all cases the government reactions will be set around control. And it’s this dynamic that will determine the future of crypto, NFTs and decentralised finance in general.
Governments that attempt to partner with the fintech’s developing these businesses will place themselves in the best position to maximise the benefits these technologies bring. The potential benefits are huge.
Those governments that decide to block and control, face the risk of creating environments that lead to their countries becoming uncompetitive globally and deepening the growing levels of resentment and distrust that are already well documented.
Most governments and central banks have already spent a significant amount of time analysing the implications of blockchain-enabled technologies. That fact alone should tell you that this isn’t a fad. It is absolutely and unequivocally a phenomenon.
There will be winners and losers at all levels and it’s going to be fascinating to see how this journey unfolds over the coming decade.
Colin Iles is the Founder of Colin Iles. He will be a speaker at the Huawei Road to Digital Transformation FSI Series. The financial series provides a platform for decision makers in the financial services to gather, share their thoughts ideas and listen to trends that will shape the ICT landscape in the future.