As anyone who studies the history of money will tell you, trust powers the financial system. Innovations and technology are frequently slow to catch on in the financial world because it takes so long to build the necessary reservoir of trust, but the recent popularity of Bitcoin shows that we might be at a tipping point for crypto-currency, the technical name for Bitcoin-style currency.
The 2015 Edelman Trust Barometer shows that only 40 percent of the general global population trusts in cyber currency or Bitcoin technology. That makes it the least trusted technology sector, coming in more than 10 points lower than trust in cyber security technology, eCommerce technology or smart home technology.
Recently, I attended the “Bitcoin and Future of Payments Technology” fireside chat with Larry Summers, former US Department of Treasury Secretary (1999 – 2001) and current President Emeritus and Charles W. Eliot University Professor at Harvard University, at the Museum of American Finance in New York.
Here are three key insights into why Summers thinks Bitcoin could be a catalytic step to transforming the payments system:
- Crypto-currency Eliminates Key Inefficiencies in the Market
There are frictions in today’s payment system like transaction fees around buying a house or credit card interest rates that make the industry ripe for disruption. In a similar way that Uber, Airbnb and LendingTree have harnessed the power of well-managed networks to change the way we consume, Bitcoin and crypto-currency may be the solution to how we pay.
- Bitcoin Might Solve a Specific Trust Problem Related to Communication
Bitcoin is structured as a peer-to-peer network that does not require centralized control in the way the Federal Reserve controls the dollar or the European Central Bank controls the Euro. As Bitcoin’s website explains: “Trust in Bitcoin comes from the fact that it requires no trust at all… [It’s] fully open-source and decentralized… No organization or individual can control Bitcoin, and the network remains secure even if not all of its users can be trusted.” As Summers explained, the Bitcoin design could solve a fundamental problem in commerce called the Byzantine Generals Problem. The idea is that in certain transactions, two individuals need to agree on the terms and to accept that the other person also agrees. In current payment systems, it can be a challenge to secure confirmation of that agreement. Bitcoin might eliminate this challenge by using an open-ledger design to cut out the middle men.
- Regulation Could Accelerate Adoption
If Bitcoin ever accounts for a major part of the economy, Summers said, it will be because of regulation. He points out that that if there had never been an FAA, there never would have been wide-spread commercial air travel in the United States. Government can help by implementing policy that provides reassurance and safe guards and by providing legitimacy that makes growth and innovation possible.
Global Payments System in the Midst of Transformation
It remains unclear if Bitcoin will be the winning solution, but it could be the first step in a series of inventions in the crypto-currency space that transform the payments system. Summers pointed out that it is “often the case that people who are centrally involved in inventing things do not correctly prophecy where they’re all going to go.”
Kate Clark is an account supervisor in the Financial Services practice at Edelman New York.
Image by Jason Benjamin.