Cryptocurrencies break into the mainstream
(Translation from Finnish)
The Internet revolutionised the distribution and transmission of information, and open source code did the same for software. Now a similar upheaval in money transactions and methods of payment is being anticipated.
San Francisco
Senja Larsen
‘We are at the threshold of a revolution brought about by cryptocurrencies. The wheels are already turning. The resistance from traditional financial institutions and states shows how seriously they are taking this threat. There are three ways to deal with this seminal transformation. Close your eyes, and you will be trampled. Fight back, and it will ride roughshod over you. The third method is to embrace the change and speed it along. This is what the ultimate winners will do,’ says Peter Cohen, who was previously responsible for strategic investments of Amazon’s cloud service.
‘The take-up rate is high among early adopters, and cryptocurrencies are moving into the mainstream as we speak,’ confirms Joel Eriksson Enquist from Creandum, a Swedish equity investor operating in Silicon Valley.
‘It is still very early days, and the risks are high,’ he points out.
There are signs of change in the air. Companies such as Dell, Expedia and PayPal have accepted bitcoin as an alternative form of payment. Apple, too, is opening up to cryptocurrency applications. The online community Reddit is planning a share issue implemented with cryptocurrency. Regulation is being developed, too. The state of California recently approved the use of cryptocurrencies.
Why is there such a buzz around cryptocurrencies? Because their costs for coordination are almost zero. The transaction costs of credit cards are 1.5–3.5 per cent, just for administration and processing. Abuses included, the cost for merchants is as much as 6–7 per cent.
However, paying with cryptocurrencies will not replace credit cards any time soon; a payment network developed over 50 years cannot be revamped in an instant.
Average costs for transferring money abroad are 8.5 per cent; in some African countries, this is as high as 30 per cent. The Philippines has become an active user of cryptocurrency due to foreign money pouring into the country. Bitcoin’s significance is evidenced by the fact that it has surpassed Western Union, established in 1851, in terms of size.
In early October, the Financial Times wrote that there is more venture capital bustling around bitcoin than was the case with the Internet in 1995; and the level of enthusiasm is similar.
‘The take-up rate among early adopters is high, and cryptocurrencies are moving into the mainstream as we speak.’
Joel Eriksson Enquist
Creandum
‘Incubators Techstars and Y Combinator are developing services around cryptotechnology,’ confirms Taneli Tikka, a serial entrepreneur visiting Silicon Valley and Head of Industrial Internet at Tieto Group.
Bitcoin’s block chain technology can be used for many kinds of value transfer and contracts in various sectors, such as the housing trade, voting, testaments, purchasing remote work, and payment transactions between machines. This is why Tikka says bitcoin’s greatest impact is not necessarily as a currency.
The most likely scenario is that a revolution will occur in the form of micro transactions. No other system has managed to make them profitable. Half the people on Earth lack a comprehensive bank connection.
Cryptotechnology enables having a verified transaction with anyone who uses a telephone or a terminal device. It is as simple as sending an e-mail. At the very least, cryptocurrencies are a movement that cannot be halted. This could only be done by closing down all of the Internet.
Bitcoin’s childhood has been full of drama. Surely more of the same is to follow. New technology has always first been utilised for shady purposes. Regulation tends to come in the wake of innovations.
Number of bitcoin users
In millions
SOURCE: COINDESK
Bitcoin in US dollars
SOURCE: BLOOMBERG
Bitcoin
Bitcoin is a cryptocurrency based on open source code. Bitcoin operates in a decentralised manner. It is not controlled by a bank, state or any other individual party. Its value is determined by demand and supply. All bitcoin transactions are public. One bitcoin can be divided into 100 million smaller units called satoshi. The value of bitcoin’s money supply is 4.1 billion euro. The rate of exchange against the euro is approximately 300 euro per bitcoin. Bitcoins are created according to a pre-determined formula. Every four years, the number of new bitcoins created is automatically halved over time until bitcoin issuance halts completely with a total of 21 million bitcoins in existence. There are a total of 6.6 million bitcoin users, and about 76,000 merchants around the world who accept bitcoins.
SOURCES: COINDESK AND WIKIPEDIA.
Cryptocurrency
Cryptocurrencies are currencies that are based on mathematical models and operate on the Internet. The best-known of these, the bitcoin, is now six years old. Other cryptocurrencies include Litecoin and Namecoin, for instance. Virtual currencies refer to many different means of payment, from credit in web-based games to frequent flyer points issued by airlines.
A ‘digital currency’ is an electronic means of payment that is often a digital version of a traditional currency.
Their popularity is growing. ‘In its early days, the Internet got better as new sites and services sprang up. Much the same way, the bitcoin is constantly developing as enterprises build applications around it,’ says Karri Saarinen (right) who develops the use of cryptocurrencies at CoinBase, the world’s largest bitcoin wallet, together with his colleague Jori Lallo.
Finns develop cryptocurrencies in Silicon Valley
‘If a method of paying with cryptocurrencies were developed in Finland with a global reach, it would be big business.’
Senja Larsen
The founders of CoinBase, the largest bitcoin wallet in the world, will be sparring with entrepreneurs at Startup Sauna in Helsinki this Friday.
Finns Karri Saarinen and Jori Lallo toil away at the company in Silicon Valley. They are the only Finns who have ever reached the famous Y Combinator. This is a little like getting to compete at the Olympic Games.
Teemu Päivinen, Tom Hämäläinen and Kasper Parviainen, students at Aalto University in Finland, are speeding up their company called Coinmotion in the Boost.vc incubator.
There is not a shred of shadiness in them, but there is an enormous amount of faith in cryptocurrencies.
Bitcoin is well suited to Finns. It is based on open source code, just like Irc, Linux and MySQL. Indeed, Finnish people were part of the development when the rest of the world was blissfully unaware of the whole phenomenon.
For example, LocalBitcoins.com, the world’s largest bitcoin exchange, is based in Finland.
When Coinmotion began its operations, there was a handful of bitcoin companies in the world. Now there are hundreds of them.
‘We established the company for practical reasons. Bitcoin services were slow and cumbersome,’ says CEO Päivinen.
With cryptocurrencies, Päivinen was attracted by their enormous potential and the fact that they are a combination of the financial and technology industries.
‘We want to change the way the world pays and saves,’ Päivinen explains.
Tom Hämäläinen, who has saved money to buy shares since upper secondary school, says he sold off all his stocks in 2010 and put his money in bitcoins.
‘Things that take three months in the ordinary world happen in a week in the bitcoin environment’, Hämäläinen says.
Karri Saarinen compares the development of cryptocurrencies with the Internet.
‘In the early days, the Internet got better as new sites and services sprang up. Much the same way, the bitcoin is constantly developing as enterprises build applications around it,' Saarinen explains.
‘If a method of paying with cryptocurrencies were developed in Finland with a global reach, it would be big business.’
Attitudes towards virtual money are divided among Finnish operators
Leena Mörttinen from the Confederation of Finnish Industries (EK) is excited, whereas Veli-Matti Mattila at the Federation of Finnish Financial Services (FFI) is sceptical.
Mirjami Saarinen
‘Virtual currencies are a fascinating phenomenon that comprise unique technology,’ says Director Leena Mörttinen from the Confederation of Finnish Industries (EK), justifying her interest in virtual currencies.
Mörttinen urges businesses to monitor the development of virtual currencies, but does not advise them to get involved in them.
‘The greatest thing about virtual currencies is their immensely clever technology. Although technology has speeded up and enhanced even traditional money transactions, they still tie up a lot of time and people. Virtual currencies, on the other hand, are enormously efficient. The subscription is the money, and there is no need for clearing.’
The most challenging aspect about virtual currencies is achieving trust. It is the most important feature for all kinds of money.
‘As soon as people lose faith, panic will spread and no one will agree to touch it any more. The credibility of a virtual currency is by no means a sure thing,’ Mörttinen points out.
One example is a theft that occurred in Japan last spring, where virtual money worth hundreds of millions of euro owned by customers of the bitcoin exchange Mt. Gox was taken from virtual bank vaults. This stripped the virtual exchange of all credibility, and Mt. Gox failed.
‘This shows the kinds of problems that can arise when a currency is wild and not controlled by any public authority,’ says Chief Economist Veli-Matti Mattila from the Federation of Finnish Financial Services (FFI).
In Mattila’s opinion, a virtual currency is mostly an investment object, not so much a form of money.
‘The value of money used every day cannot fluctuate this intensely. It is the duty of central banks to keep the value of money steady by regulating its quantity. In virtual currencies, no one guarantees the value of the money,’ Mattila points out.
He is suspicious of virtual currencies in other ways, too. He reminds us that virtual currencies have been used for a great deal of criminal activity.
‘I am amazed at how easily some people are ready to put their money into something like this. At the same time, people at the EU level are concerned about investor protection’, Mattila says.
He also mentions that, according to Tax Administration policies, proceeds from sales of virtual currency are taxable income.
‘And these taxes have to be paid by using real euros,’ Mattila states.
‘The credibility of a virtual currency is by no means a sure thing.’
Leena Mörttinen
Confederation of Finnish Industries
EK’s Mörttinen also does not believe that ‘cryptocurrencies’ constitute a threat to traditional money controlled by central banks. However, she says they could become a parallel currency in use within enterprises in particular.
‘Businesses should also look with an open mind into how else they could use this technology’, Mörttinen states.
She is afraid that virtual currencies will begin to be regulated too early and too intensely for them to be allowed to develop.
‘This is a fantastic laboratory for seeing how virtual money develops and what else comes alongside it. This should not be regulated to death,’ says Mörttinen.
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12.11.2014 13:09
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