Could a cryptocurrency replace the credit card?

There is always speculation about what the future holds for us. It is fascinating to dream about having a flying car or being able to teleport to another point on the planet in mere seconds. What does the future hold for the credit card? Last week we outlined one scenario, this week we will examine another possibility, the cryptocurrency.

A cryptocurrency is nothing new. The most famous is the Bitcoin, which has been in circulation since 2009. There are others like Namecoin, Litecoin and Peercoin and hundreds of others. The coins are stored in a virtual wallet, no currency notes need to be printed or coins minted. Who has how many coins are stored on ledgers that are maintained by a community of what are known as miners. These miners are members of the general public (with above average computer knowledge) and the integrity and security of the ledger is maintained as long as there is an honest attempt to maintain the ledger. To do so, the miners are given a financial stake in the cryptocurrency so if it fails they gain nothing.

The allure of a cryptocurrency is anonymity. These currencies are less susceptible to seizure by law enforcement and this has attracted many members of the criminal element since it is very difficult to impossible to track a cryptocurrency.

Of course not everyone is getting on board with cryptocurrencies. Banks claim that they pose a risk in their ability to determine credit and that with their use a decrease in confidence in hard currency could lead to a failure of the financial system. It would be harder to gather information on economic activity and if their usage is hard to track taxation could be next to impossible (not everyone is complaining about that!). It could also challenge a central bank’s ability to set exchange rates and monetary policy. Much of the public is skeptical as well.

Despite these fears cryptocurrency ATMs are beginning to appear. In February 2014 a Bitcoin ATM was installed in Austin, Texas. As of May 2017 nearly 1,200 have been installed worldwide with a peak average of three per day. So that leads us to the big question: Is this all legal? Some nations like China outlaw any cryptocurrency. Some nations like Russia allow for them to be held but they cannot be used to purchase any goods or services within the country. Here in the US the IRS determined that cryptocurrencies will be treated as possessions rather than currency, hence subjecting them to the capital gains tax.

There are of course concerns about what an unregulated currency could do to the global economy and what value they will have to the criminal element. The anonymity that comes with them allow criminals an untraceable currency that they can extort from honest people. The Bitcoin is also the currency of choice on the Dark Web and sites like Silk Road. Tax evasion is also at the forefront of most, as a government has no way of knowing how many bitcoins someone has and if they reported it correctly. Then there is also what happens with a virtual currency if there is a computer glitch or a breach. In 2014 Mt. Gox, the world’s largest Bitcoin exchange declared bankruptcy after someone broke into it and stole all of the Bitcoins, $473 billion worth leaving some surely unhappy customers.

In order for the Bitcoin and other cryptocurrencies to become the true payment of the future the anonymity that cloaks it will need to be pulled away. Part of what gives the public confidence in paying for something with their credit card is that if it is stolen or used fraudulently they can dispute a claim or make a chargeback. That does not exist with a cryptocurrency due to the anonymity that goes with it. Also with a dollar bill we can hold it in our hard and we know we have one dollar’s worth of purchasing power with it.

With the future of the credit card eventually moving to your phone it is not out of the realm of possibility that you will store your money one day in a virtual wallet, that is you will never hold hard currency in your hard. To some degree that day is already here. Will the Bitcoin replace the dollar? Doubtful at present. Will we one day have a global currency? Probably, though you and I will not be alive to see it. But there are benefits to using one of these cryptocurrencies. Transactions are much more secure thanks to the use of keys that secure the transaction. They are also difficult to counterfeit owing to the encryption used. Processing fees are minimal since major financial institutions are kept out of the process. The technology that is used to store information on bitcoins can also be easily adapted to other applications like crowdfunding and other online ventures and again the cost of a transaction is much smaller. Along the same lines it is theoretically immune to government interference or manipulation, so if you have one of these you won’t need to sweat when the Fed changes the interest rate. Of course there are drawbacks, as was mentioned earlier one computer glitch or hack could wipe out billions of dollars. The price of these currencies is also based on supply and demand so your purchasing power with a Bitcoin today can fluctuate, wildly at times.

Will the cryptocurrency take over one day rendering credit cards and the payment infrastructure as we know it obsolete? Probably not. There are far too many questions and concerns that would need to be ironed out before the average consumer would get on board with something like this. For now there are too many risks and too few merchants that are on board with this for it to take down the almighty credit card.