Digital currencies have seen a mixed 2014. A number of hacking scandals have rocked the e-currency landscape, as several previously attractive start-ups in the segment have essentially been wiped out by fraudulent behaviour. However, at the same time, more vendors and payment providers have warmed to the idea of a currency like Bitcoin, while governments have started to take this new financial wave more seriously. Potentially, digital currencies can transform the global financlal landscape, providing opportunities for start-ups to build the future of consumer and business fiscal transactions. However, much will depend on global players, such as London corporate finance, and their appetite for financing the industry.
Digital currencies are forms of international money supply outside of traditional banking systems and without physical existence or national limitations. They exist purely as digits online and are controlled through a peer-to-peer network that controls the total amount in circulation. Bitcoin, which was launched in 2009, is the most prevalent digital currency globally.
Digital currencies allow consumers to circumvent levies
The ability to transfer digital currencies between accounts worldwide free of any charge is a potentially major cost-cutter for foreign workers and multinational businesses:
- Of the billions of dollars in global remittance inflows, a sizeable share is sent by low-income workers looking to provide for their families at home. Many are forced to pay a levy on transactions, completed through services such as Western Union. Yet digital currencies can bypass these fees due to the free nature of digital currency exchanges, allowing receivers to attain full payments without charge;
- Consumers travelling abroad can also utilise digital currency payments when purchasing goods and services outside of their home currency, thereby avoiding foreign exchange and ATM cash charges levied by banks and exchange bureaus. This consumer empowerment model removes middlemen fees from the equation, and is increasingly realistic as more people come online and become tech-savvy;
- There are opportunities in the development and facilitation of mobile apps and digital wallets that can utilise currencies such as Bitcoin to process international money transfers and payments;
- However, there are two obstacles to the international money model. The first is the growing regulation and outright bans imposed on digital currencies in some countries (such as China and Russia) due to fears of potential money laundering. The second challenge is competition from existing app providers. For example, in early 2014 Apple blocked most Bitcoin exchange apps on its App Store, partly down to the company readying the launch of its own digital payments model.
Impact on financial institutions
While traditional financial services are unlikely to welcome an undercutting competitor, business can benefit from more frictionless transactions:
- Information and communications technology (ICT) has offered massive opportunities to the financial industry, with offshore services, electronic banking and payment gateways such as PayPal benefitting from direct access to Internet users. Yet increasingly technology is able to undercut traditional practices of levying fees on international money transfers, with digital currency leading the user-friendly practice;
- However, financial institutions are also much more entrenched in regulatory and local legal policies. Banks can claim to provide customer identification, due diligence and transaction monitoring, while digital currencies are still striving to achieve localised norms and are therefore vulnerable to legal challenges;
- Though still unrefined, digital currencies can nonetheless offer global businesses a viable platform for major money transfers, either as a wages payments tool or for business-to-business transactions without incurring banking costs. Similarly, for non-financial businesses, offering international consumers the option of purchasing goods and services without incurring extra costs for fiscal transfers is appealing. For e-commerce retailers, the acceptance of digital currency payments can potentially provide a competitive edge.
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