Recent times have seen the world in the grip of bitcoin mania. As retail investors joined the gold rush en masse its value soared. This is rightly prompting banks to consider how the rise of this name brand crypto currency, and its numerous derivatives, will impact upon them.
Before understanding this, it’s important to define crypto currencies and blockchain, the back-end technology that makes the trade of this new digital money possible.
Like any other currency before them, crypto currencies are a unit of exchange. However, these digital currencies are decentralised and enable instant payments between any parties, anywhere in the world, without the need for central banks or any other central authority. They are not legal tender and require no financial intermediaries or public institutions to verify the validity of transactions, therefore cutting banks out of the equation.
Blockchain, meanwhile, is a decentralised digital ledger shared across a peer-to-peer network of millions of computers. This broad distribution means that transaction records in the ledger cannot be modified without the collusion of the entire network and affecting subsequent blocks (or records) in the chain. This makes the ledger system inherently secure as, in theory, and in practice to date, it is not possible to tamper with records. Without blockchain ledger technology, which already has non-currency applications (e.g. for encrypted, accessible record-keeping) and holds significant unrealised potential, it would not be possible to exchange bitcoin and other cryptocurrencies.
At the beginning of 2018 there were more than 1,380 different cryptocurrencies or 'cryptos', the 100 largest of which have a combined market capitalisation of around $0.5trillion, equivalent to one-fifth of the UK’s economy, with around one-third of this value in bitcoin. Since they require no banks to mediate transactions, bitcoin and other cryptocurrencies could, in theory, replace national currencies and…