Cryptocurrencies like Bitcoin offer a viable evolutionary ‘next step’ for money and have the potential to become a mainstream form of payment within the next decade. This is the central finding of new academic research from Imperial and eToro.
In a research report published today – Cryptocurrencies: Overcoming Barriers to Trust and Adoption – Professor William Knottenbelt from Imperial College London and Dr Zeynep Gurguc from Imperial College Business School argue cryptocurrencies are already equipped to fulfil one of the three fundamental roles of traditional fiat money: acting as a store of value. The three criteria are as follows:
- Store of value: allowing individuals to make intemporal choices on when to spend their purchasing power.
- Medium of exchange: facilitating the exchange of goods and services by eliminating the inefficiencies associated with a barter economy.
- Unit of account: acting as a measure of value in the economic system.
Meeting the last two criteria will require Bitcoin and other cryptocurrencies to make progress on remaining challenges such as scalability, design and regulation.
The research argues that money has evolved significantly over time. The earliest forms were based on systems of barter and objects of value such as cowrie shells. Over time, these early ideas were replaced by coins, notes and payment cards. The rise of contactless and mobile payments is the most recent step.
In each case, new forms emerged which rendered older ones obsolete, such as coin minting and electronic banking. However, despite the changes, money’s three core functions have remained constant throughout.
Provided they can demonstrate progress as a medium of exchange and unit of account, as well as a store of value, cryptocurrencies represent a viable technological update to the way we spend money.
The research also notes that each evolutionary stage of money has brought about a reduction in payments friction. Given their design principles, the paper concludes that the widespread use of cryptocurrencies is a natural next step to reduce friction in the global economy.