Digital payments are a powerful innovation that has already started to shake up the payments industry, and the signs point towards a world in which software-enabled digital currency, without the centralised control of traditional banks, also begin to gain traction. The shape of this future has yet to be formed, and I believe that if banks move fast they will still have an important part to play.
Making secure transactions quicker and cheaper
Mobile payment systems such as Barclays Pingit, Apple Pay, Samsung Pay, and Google Wallet are changing the way we pay for goods and services and the way we think about payments. Payment by mobile is gaining momentum, and Barclays has even enabled people to make payments on Twitter, using just a Twitter handle. As these examples of internet-enabled payment systems become more mainstream, the prosect of a mainstream digital currency seems set to continue.
Digital currency, a process of exchange powered by the internet and delivering instant global transactions, has been on the agenda for 25 years. The first instance of an e-currency was founded in 1990 by David Chaum (explained to me by Richard Brown, aka @Gendal), which was called DigiCash. Unfortunately DigiCash declared bankruptcy in 1998 and subsequently sold its assets to eCash Technologies, another digital currency company, which in turn was later acquired by InfoSpace. In 1996 we saw yet another attempt, known as E-Gold, which was promptly shut down by the US Government for facilitating illegal money laundering.
The drive for faster, cheaper transactions that bypass traditional banking institutions hasn’t faltered, however. We are witnessing the success of bitcoin as it is accepted by more retailers and used to make payments for everyday items. Policies and procedures offering regulatory guarantees for consumer protection are still lacking, however, as are anti money-laundering measures, and these will be needed for e-currencies to stand a chance of becoming widely adopted.
These shortcomings only relate to digital payments through applications, or “virtual wallets”, though. The underlying protocol that runs and secures the bitcoin network is another matter, and it’s important to note that while there have been widespread reports of digital currency wallets being hijacked in cyber-attacks, the central system has yet to be violated (despite, we can only assume, numerous attempts by the keenest of criminal masterminds).
It’s all in the ledger
The blockchain ledger used to enable the transfer of bitcoin payments is crucial to making digital currencies a realistic proposition for the masses. The central nervous system of bitcoin, the blockchain ledger is the key to secure verification of e-currency transactions.
It works like this. Bitcoin address and ownership information for every transaction that has ever taken place is listed on the blockchain ledger. The blockchain records both the creation of new bitcoins (25 per block at present), and the transfer of bitcoins between users.
These individual blocks link together in chronological order to create the chain of events (blockchain) and to verify ownership at the point of need. The information is located on multiple computers, or bitcoin “full nodes”, rather than a single central source. All full nodes have a copy of the full blockchain history. Each time a bitcoin user makes a transaction, a copy is forwarded to all bitcoin nodes, which verify it and temporarily store it, pending inclusion in a block by a bitcoin miner. At this point the transactions included in that block are considered verified, processed and finalised. Each block builds upon the last one, so some people recommend waiting until several more blocks have been built before considering it safely processed.
What’s truly unique about the blockchain ledger is that by holding bitcoin address and ownership information over multiple computers, rather than on a central server, and by forcing miners to solve a difficult computational puzzle, bitcoin transactions have a level of security never experienced before. An attacker would need to control over half of the entire processing power of the network to succeed.
The core of the bitcoin system appears to deliver a robust and safe solution to the consumer, but the same cannot be said of the consumer wallets, more work is required. Too many people still lose their bitcoins because their computer is hacked.
A step change to build trust
The market for digital currencies will retain much exposure over the coming years, and its success or failure could hinge on how the digital currency system is packaged, and in turn how it is perceived by the customer. The underlying infrastructure of our future banking system may be unrecognisable to the systems of today, making use of learnings from the e-currency world to deliver more dexterity behind the scenes, without sacrificing security.
The vital “packaging” – how the behind-the-scenes technology is translated to the actual products and services exposed to the customer – will determine how easy to use, how secure, and how reliable the concept is when it becomes reality. This is where retail banks could play a crucial role. Their focus should be on crafting solutions that will take the benefits of crypto-currency and entwine these with the practicalities of easy to use banking processes, to deliver a benefit-led package to consumers. This could create the step change to mass adoption of virtual currency.