Why should we care about cryptocurrency? The business case for taking a closer look
CIOs are charged with sorting the innovation wheat from the chaff -- and with so many systems and services to consider, some tech chiefs feel cryptocurrencies are unlikely to be a key element of their digital transformation strategies any time soon.
Take the example of one IT leader who I spoke with recently: "We're pushing the boundaries in other areas, such as artificial intelligence, but Bitcoin and other cryptocurrencies are not on our radar at the moment."
While the use of some emerging technologies -- such as using the cloud to help people collaborate or using big data to run analytics -- can often be related to a clear business case, the most obvious use of cryptocurrencies -- paying for goods and services -- still isn't as widespread as many observers might have anticipated when Bitcoin launched in 2009.
Estimates suggest about 15,000 businesses worldwide accept Bitcoin, with around 2,300 of those businesses operating in the US. Those figures sound impressive, but it's also worth bearing in mind that many blue-chip firms still don't accept cryptocurrencies as payment.
For every Microsoft, which allows users to pay for services using Bitcoin, and leisure, travel and food companies -- such as Starbucks, Pavilion Hotels & Resorts, and airBaltic -- that are pushing cryptocurrency trials in a range of areas, there's a host of big-name brands that are proving slower to take the plunge.
So, what's the reason for this hesitancy? One issue is crypto volatility, which is often attributed to the way these currencies are traded, with their value determined by what market participants are prepared to pay.
This volatility makes it tough for executives to take a hands-on approach to cryptocurrency. Research suggests finance chiefs are wary of adding an asset to the balance sheet that could fluctuate considerably. As many as 84% of finance executives say they believe that holding Bitcoin poses a financial risk due to its inherent volatility, according to analyst firm Gartner.
Another explanation for big-brand hesitancy is the wide range of cryptocurrencies. No-one can be sure right now how the future of digital currency will pan out. While Bitcoin is the most visible digital token, it is by no means the only one: analyst Forrester estimates there are currently about 7,000 cryptocurrencies.
The short history of the internet has shown that early success does not guarantee long-term victory. Investment bank UBS warns that, just as Netscape and Myspace were eventually superseded, so Bitcoin and some of its other popular counterparts could be usurped by better designed versions.
UBS also warns that the value of cryptocurrencies could drop suddenly as the regulatory environment stiffens. Last year, China's central bank announced that all transactions of cryptocurrencies were illegal, effectively banning digital tokens such as Bitcoin.
While total anonymity and legal immunity have been central to the development of cryptocurrencies so far, asset manager Amundi suggests G7 regulators are determined to regulate the ecosystem. The firm says this regulation is likely to lead to an adjustment of the price of currencies such as Bitcoin -- and possibly in a brutal way.
Add in significant environmental concerns over the huge energy required to mine currencies -- estimates suggest that the global mining of bitcoins consumes more electricity annually than the whole of Argentina -- and it becomes easier to see why some risk-averse executives might be wary of getting involved in cryptocurrencies.
So, just over a decade since Bitcoin was first minded, crypto -- despite many currencies enjoying a rapid rise in value -- is still struggling for enterprise acceptance. While all kinds of digital currencies could become an important payment mechanism in the future, analyst firm Forrester suggests the primary use of cryptocurrencies now is as a speculative investment.
However, it's also important to recognise that cryptocurrency and blockchain -- which is the decentralized, immutable, public ledger on which Bitcoin is based -- are still at a nascent stage of development. Yes, executives will encounter numerous challenges as they introduce this new payment mechanism, but there's also huge momentum behind cryptocurrencies.
For every major organisation that is hesitant about accepting and storing Bitcoin, there's another that is exploring how cryptocurrencies might represent the future of money.
British charity the Royal National Lifeboat Institution (RNLI) started accepting Bitcoin donations more than seven years ago. RNLI's research into future trends at the time suggested digital currency could have a big impact at some point in the future and the organisation wanted to be prepared for that eventuality.
More specifically, the charity became aware that using Bitcoin could expose the RNLI to new audiences. And that's a key point: while many individuals, institutions and even nation states are hesitant about embracing cryptocurrencies, there's also millions of people around the globe that hold, trade and use these digital tokens every day.
It's also important to recognise that the rise of cryptocurrencies is about more than simply speculating or providing new ways to pay for goods and services. Alongside the development of public currencies, there's a range of private developments being undertaken by organisations across all sectors.
SEE: The CIO has a new set of priorities and problems: Here's what's on their to-do list
James Wester, research director at analyst firm IDC, says his organisation is now seeing strong interest and investment by corporations, financial institutions and even governments in areas such as cryptocurrencies, digital assets and decentralized finance that they previously viewed with some uncertainty.
IDC says organisations spent almost $6.6 billion on blockchain solutions last year, an increase of more than 50% compared to 2020. The analyst says blockchain spending will continue to grow strongly through 2024, with an annual growth rate of 48%. The leading use case for blockchain is cross-border payments, which use distributed ledger technology to track and trace settlements.
As Amundi's report suggests, while there are still major challenges to overcome, a fully decentralized and disintermediated cryptocurrency system could enable the development of global payment systems that are faster, cheaper and more inclusive than current systems.
Such developments mean CIOs and their C-suite counterparts would be wise to explore the potential impact of cryptocurrencies in their own sectors. That's something that resonates with Adam Miller, group head of IT at Markerstudy, who says his insurance firm is watching developments in crypto and the blockchain closely.
The company has run small pilots internally. While they're not pushing further developments now, Miller says it is something they will certainly continue to monitor -- and he says other CIOs should make a move when they believe the time is right.
"If you've got an opportunity off the back of it, then you certainly should be having a more in-depth involvement," he says. "If it's something that's likely to come in and impact your sector, you need to understand what's going on. Whether or not you choose to do anything about it now is down to your individual circumstances."