Reports of bitcoin’s demise have been greatly exaggerated at Davos. At least, that’s the view from the Swiss bitcoin sector, which has shrugged off recent internal squabbling and an avalanche of criticism from both the traditional banking sector and fintech pioneers.
The digital crypto-currency has always had its doubters who fear it could provide a platform for money laundering, terrorism and a host of other unsavoury activities. But a new round of pessimism descended on bitcoin last week when high-profile Zurich-based developer Mike Hearn announced on his blog that he was quitting the project.
“The fundamentals are broken and whatever happens to the price in the short term, the long term trend should probably be downwards. I will no longer be taking part in Bitcoin development and have sold all my coins,” he wrote.
“It has failed because the community has failed. What was meant to be a new, decentralised form of money that lacked ‘systemically important institutions’ and ‘too big to fail’ has become something even worse: a system completely controlled by just a handful of people. Worse still, the network is on the brink of technical collapse.”
Guido Rudolphi, who plans to create the world’s first bitcoin bank in Switzerland, disagrees. Hearn is disillusioned because his particular vision for bitcoin did not take off, he told swissinfo.ch.
“I am not for one second concerned for bitcoin. It is not doomed,” he countered. “This whole discussion reminds me of the time the internet started. We have had these discussions about bitcoin before, but they have never been filled with such drama.”
Cyber boys bashed
Some of the statistics appear to back up Rudolphi’s argument, at least in the short-term. Bitcoin transactions plummeted in mid-January, according to blockchain.info, but soon recovered to normal patterns of around 210,000 transactions a day. And the number of people opening My Wallet accounts, which stores bitcoins, has continued unabated on the same upward trajectory (5.8 million at the time of writing).
Delegates at the World Economic Forum’s (WEF) annual meeting in Davos, however, remain unconvinced. Davos heard one financial professional after another ring the funeral bell for bitcoin. Some of the criticism came from familiar sources: the established banks that perhaps have something to fear from a new, borderless digital monetary system replacing familiar national currencies.
“The cyber boys…believe that this is something that can just work on its own and allow a seamless web of costless transactions around the world. Forget it,” Willem Buiter, chief economist at United States bank Citi, told the Financial Times.
But perhaps more surprising was the sound of fintech entrepreneuers – from Ripple’s Chris Larsen, to TransferGo’s Daumantas Dvilinskas and TransferWise’s Taavet Hinrikus also hammering nails into bitcoin’s coffin at WEF.
Larsen credited the concept of bitcoin for sparking a new era of innovation in the financial industry, creating what he calls the “internet of value” – a new digital financial system that promises to improve the lot of consumers. But he feels that the digital finance train will now speed on without bitcoin.
“It set off a chain reaction of incredibly smart minds and incredible amounts of capital that is now being investing into this internet of value movement,” Larsen told swissinfo.ch in Davos. “It probably isn’t the technology that is going to power [it] for a lot of technical reasons.”
The biggest technical challenge facing bitcoin right now is speed. The bitcoin network can only process seven transactions a second, compared to 24,000 by Visa.
To summarise the argument from the financial industry (both old and new players) in Davos: the underlying technology that transmits cyber-currencies and other information, blockchain, is alive and well and could be the future of finance. But the crypto-currency bitcoin has failed to adapt fast enough. It is too slow to transmit and has lost credibility through money laundering scandals.
But the bitcoin community says that the argument should be moved around 180 degrees. It is the old system of transferring payments and wealth around the world that is broken, not the new kid on the block. They point to the continued volatility of traditional fiat currencies (no more so than in Switzerland) as proof that it is the established financial system that has had its day.
“The death of bitcoin has been predicted countless times over the last seven years,” Johann Gevers, a board member at Bitcoin Association Switzerland and founder of Zug-based digital payment transfer system Monetas, told swissinfo.ch. “Yet it keeps rising again and again, phoenix-like, getting stronger every time.”
“Economic logic dictates that bitcoin will succeed. I'm certain that crypto-currency not only has a future but will one day become the world’s dominant reserve currency.”
The only questions still open to Gevers are: how long this will take and in what incarnation bitcoin will take the lead. . Many new kinds of cryptocurrencies have sprung up in the wake of bitcoin, and Gevers believes they will keep evolving until a dominant standard emerges.
In his future scenario, bitcoin – or something like it – will become the dominant currency of world trade, with other currencies settling into niche roles (like frequent flyer miles, local community currencies, or online gaming tokens).
In his view, the answer to the problem of slow transaction times of bitcoin could be solved by a separation of technical functions. Blockchain could continue to be used as a secure and efficient storage system for crypto-currencies, and a range of other valuable digitalised information such as land ownership rights, while responsibility for transactions would be delegated to a separate, faster system.
Gevers’s company offers just such a transaction service. Other players in the bitcoin community, such as Guido Rudolphi, believe that technical solutions can be found to speed up the transaction function of blockchain. This divergence of opinion on which way to go has been blamed on the abrupt departure of Mike Hearn from the bitcoin project.
Consumer is king
The resultant squabbling has been seized on by bitcoin detractors. But there is no doubt that the technological revolution of digital finance is moving on apace. While bitcoin tries to crack its own challenges, a consortium of powerful global banks is collaborating on its own blockchain project.
But speed is not everything, according to Rudolphi. “A few companies have jumped on the train. They want bitcoin technology without using bitcoin. My prediction is that they will fail,” he told swissinfo.ch. “There are people who have invested money and want it to go faster. I understand that from a capital point of view. But from a technology standpoint I would rather see it growing slower whilst remaining secure.”
At the end of the day, all actors can agree on one thing: it is the consumer who will decide.