Cryptocurrency, or the future of payments

Coins and paper money are history. In the new reality, currency will consist of only digital series of letters and numbers, or 'cryptocurrency'. Soon, there will be no more banks. At least, this is what some would have us believe. Is this really true? And, what is the bank’s role if cryptocurrency accounts for a larger proportion of money flows?

The opportunities and dangers of virtual cash

Bitcoins are probably the best known form of cryptocurrency. The basis of this new currency system consists of a huge public ledger in which special software updates all transactions automatically. A set of accounts, in fact. A copy of these accounts is on every computer forming part of the bitcoin network. There are thousands of them. Six times an hour, the system adds a file or 'block' to the accounts containing all the new payments. These blocks collectively form a chain, so this is why the technology is known as 'block chain'. Each computer has to agree to a new payment, and the technology blocks any transaction that is not correct in advance. This means that no human checks are needed, and the question of whether a person is trustworthy or not is no longer an issue. The technology actually takes over the human role of supervisor. What’s more, every transaction is public and can be checked, although it is anonymous, thus safeguarding privacy. Payments can only be made with the unique digital signature that every bitcoin owner has.

The intermediary will disappear

'Actually cryptotechnology excludes intermediaries – that is, banks and governments,' says Roel Steenbergen, who works in Rabobank IT's innovation arm. 'The participants place their trust fully in the technology instead of in people and institutions. There is no central issuing institution. Ownership and transfers are completely anonymous and by definition avoid supervision by parties such as the government and the Netherlands Authority for the Financial Markets (the AFM). Cryptocurrency involves serious risks, some of which have not been identified, such as in the areas of security and legislation. Rabobank's policy is only to use applications that are 100 percent reliable and sound. However, it is very important for the bank to stay in touch with the rapid and promising developments in the field of IT.

The coin and the technology

Bitcoins are one of these promising developments. Steenbergen: 'We often use the term bitcoin to describe both the currency and the technology behind it, the block chain. The block chain technology is however completely separate from the bitcoin. A virtual currency is in fact no more than an application of the block chain. In practice, the block chain is making many other applications possible as well. One promising development for example is 'smart contracts'. Contracts for issuing bank guarantees or verifying data currently have to be processed by a large number of people. Flesh and blood human beings have to check the boxes to indicate approval on every form. This is a time-consuming process. These processes can be operated much faster, more efficiently and more intelligently if you can embed them in a block chain. All the checks are then made fully automatically.'

More of an opportunity than a threat

Should the bank fear this new, virtual currency? 'The new technology will do away with the need for trusted third parties, such as banks or civil-law notaries,' says Steenbergen. 'Instead of today’s payments system in which people play a big role, there will be a fully automated system based on a smart mathematical model that makes transactions checkable and indisputable. Whether this will be the only payments system in the future remains to be seen. We are seeing only the beginning of a new phenomenon that according to the experts and investors can be compared to the mid-1990s when the Internet took off. There are more and more user-friendly applications still to come. We see this as more of an opportunity than a threat. Recently we have seen an increasing number of parties in today’s financial sector and the supervisors experimenting with this technology. The old and the new world have to and will find each other – this is what parties on all sides are looking for. For now, paper money and coinage will continue to exist as normal. I do not see this disappearing. Cryptocurrency will exist alongside the other forms of money we are familiar with.'

Numbers and letters

Bitcoin accounts consist of 'addresses' that are composed of a random series of numbers and letters, such as 5Bt7vbKL8WsFtGcvbER8f5EmUI63oiuu78R. Anyone who wants to can instantly open an anonymous account. The account is secured by a digital signature.