̽��ֱ�� of Cambridge - Garrick Hileman

Study highlights growing significance of cryptocurrencies

cjb250 — Thu, 04 May 2017 17:07:30 +0000

While many members of the general public may have heard of “bitcoin”, the first decentralised cryptocurrency launched in 2009, a new report from the Cambridge Centre for Alternative Finance (CCAF) paints a broader picture of “cryptocurrencies”.

̽��ֱ��report shows that cryptocurrencies – broadly defined as digital assets using cryptography to secure transactions between peers without the need for a central bank or other authority performing that role – are increasingly being used, stored, transacted and mined around the globe.

̽��ֱ��Global Cryptocurrency Benchmarking Study gathered data from more than 100 cryptocurrency companies in 38 countries, capturing an estimated 75 per cent of the cryptocurrency industry.

Prior to this research, little hard data existed on how many people around the world actively use cryptocurrencies. ̽��ֱ��conventional wisdom has been that the number of people using bitcoin and other cryptocurrencies was around 1 million people; however, based on newly collected data, including the percentage of the estimated 35 million cryptocurrency “wallets” (software applications that store cryptocurrencies) that are in active use, the CCAF research team estimates that there at least 3 million people actively using cryptocurrency today.

While bitcoin remains the dominant cryptocurrency both in terms of market capitalisation and usage, it has conceded market cap share to other cryptocurrencies – declining from 86 per cent to 72 per cent in the past two years.

̽��ֱ��study by the CCAF at Cambridge Judge Business School breaks down the cryptocurrency industry into four key sectors – exchanges, wallets, payments, and mining. Highlights of the findings are:

Exchanges

Cryptocurrency exchanges provide on-off ramps to cryptocurrency systems by offering services to users wishing to buy or sell cryptocurrency. This sector was the first to emerge in the cryptocurrency industry, and has the most operating entities and employs the most people. Currently, about 52 per cent of small exchanges hold a formal government license, compared to only 35 per cent of large exchanges.

Wallets

Wallets have evolved from simple software programs to sophisticated applications that offer a variety of technical features and services. As a result, the lines between wallets and exchanges are increasingly blurred, with 52 per cent of wallets providing an integrated currency exchange feature.

Payments

Cryptocurrency payment companies generally act as gateways between cryptocurrency users and the broader economy, bridging national currencies and cryptocurrencies. They can fit into two broad categories: firms that use cryptocurrency primarily as a “payment rail” for fast and efficient cross-border transactions, and firms that facilitate the use of cryptocurrency for both users and merchants. ̽��ֱ��study found that the size of the average business-to-business cryptocurrency payment ($1,878) dwarfs peer-to-peer and consumer-to-business cryptocurrency payments.

Mining

In the absence of a central authority, cryptocurrencies are created by a process called “mining” – usually the performance of a large number of computations to solve a cryptographic “puzzle”. ̽��ֱ��study shows how cryptocurrency mining has evolved from a hobby activity into a professional, capital-intensive industry in which bitcoin miners earned more than $2 billion in mining revenues since 2009. ̽��ֱ��cryptocurrency mining map indicates that a significant proportion of publicly known mining facilities are concentrated in certain Chinese provinces.

̽��ֱ��study found that more than 1,800 people are now working full time in the cryptocurrency industry, as more companies are engaged across various cryptocurrency sectors.

“Cryptocurrencies such as bitcoin have been seen by some as merely a passing fad or insignificant, but that view is increasingly at odds with the data we are observing,” says Dr Garrick Hileman, Visiting Research Fellow at the Cambridge Centre for Alternative Finance (CCAF) at Cambridge Judge Business School, who co-authored the study with Michel Rauchs, Research Assistant at CCAF.

“Currently, the combined market value of all cryptocurrencies is nearly $40 billion, which represents a level of value creation on the order of Silicon Valley success stories like Airbnb,” Dr Hileman says in a foreword to the study. “ ̽��ֱ��advent of cryptocurrency has also sparked many new business platforms with sizable valuations of their own, along with new forms of peer-to-peer economic activity.”

More than 3 million people (three times previous estimates) are estimated to be actively using cryptocurrencies like bitcoin, finds the first global cryptocurrency benchmarking study by the Cambridge Centre for Alternative Finance.

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Could cryptocurrency help the ‘bottom billion’?

lw355 — Mon, 17 Oct 2016 12:02:53 +0000

‘Cryptocurrency’ is a form of finance that exists only online. Unlike national currencies like the British pound, it isn’t forged as coins or printed as notes and no central authority governs it.

Most often it’s associated with an eclectic mix of individuals: gamers, hackers and the tech-savvy; anti-authority libertarians who believe in a global currency; gamblers happy to speculate on ‘digital gold’; shady dealers, money launderers, users of adult content services and the dark web; forward-thinking members of the financial sector.

But it has also been looked at as one possible solution to help a very different demographic – the world’s poorest poor, the so-called bottom billion. Many in this demographic lack bank accounts, have difficulty in proving they own their own land or business, and frequently depend on sending or receiving money across borders to poorer relatives.

In fact only one in five adults living on less than $2 per day has a bank account, and nearly 80% of poor adults, or two billion people, are excluded from the formal financial system. Meanwhile, the World Bank estimates that 75% of the $581.6 billion global remittances in 2015 were sent to developing countries.

But how can cryptocurrencies help? Since its launch in 2009, bitcoin, the most well known of digital currencies, has had a chequered history. Issues with market volatility, security and regulation, together with its association with online black markets like the now defunct Silk Road, have created suspicion among citizens and policymakers alike.

And yet, a recent headline in Wired stated: “Thought bitcoin was dead? 2016 is the year it goes big”; the reason, they explained, is it can “provide a much cheaper and simpler way of moving money from place to place, particularly when you’re a consumer or business moving it across international borders or a retailer accepting payments from online buyers.”

Dr Garrick Hileman, who researches the impact of cryptocurrency on world finance at the Cambridge Centre for Alternative Finance, adds: “And it’s not just transfer fees. Conventional financial systems can suffer from slow transfer times, inconvenient hours for completion of transfers, limited access to transfers, and the failure of approximately 2% of all international transfers to be successfully completed. These all negatively impact remittances.”

He and colleagues have been looking at which markets and countries are the most likely to adopt cryptocurrencies based on 40 different factors, ranging from degree of technology penetration to cross-border transactions fees to history of financial crises and inflation. ̽��ֱ��results indicate that Sub-Saharan Africa, Latin America and former-Soviet Union countries have the greatest potential for adopting cryptocurrency.

“Cryptocurrency is an immature technology and is not without flaws. However, as with any new technology, it’s the applications that have ignited interest – it’s raised important questions about how cross-border payments can be improved and, wider still, whether the very special type of ledger system that underpins cryptocurrency can be used for any number of other areas.”

At the heart of bitcoin is the ‘blockchain’, a database that records all transactions chronologically through a unique series of numbers arranged in ‘blocks’, which are then ‘chained’ to the next block cryptographically, so as to be both secure and accurate. This linking of information makes them like a financial ledger, but unlike centralised banking systems, the blockchain is a database that can be stored and shared worldwide by anyone with a computing device and internet connection – hence its description as a distributed ledger technology (DLT).

Part of the promise of cryptocurrency lies in the absence of a gatekeeper in its set-up, as Hileman explains: “Transactions occur person to person, or machine to machine, without the need for third party institutions – and that means lower or no transaction fees.”

“For the seven years bitcoin has been operating, there hasn’t been a single minute of downtime, unlike traditional IT networks employed by banks and other institutions. This resiliency has people’s attention,” says Hileman. “And currency is not the only thing that DLT can be used for. It can be used to exchange anything that has value – stocks, houses, airline miles, notarisations, votes.”

This year, the Government Office of Science published a report in which Chief Scientific Advisor Professor Sir Mark Walport described distributed ledgers as “powerful, disruptive innovations that could transform the delivery of public and private services” and “provide new ways of assuring ownership and provenance for goods and intellectual property.”

One of the recommendations was for the UK research community to ensure that distributed ledgers are scalable and secure. ̽��ֱ��report added that the Alan Turing Institute – a joint venture by the universities of Cambridge, Edinburgh, Oxford, ̽��ֱ�� College London, Warwick and the Engineering and Physical Sciences Research Council – would help to support these endeavours.

“We probably have yet to see the full extent of future uses of distributed ledgers,” adds Hileman. “However, our research has shown that cross-border transactions are viewed as one of the most promising applications of distributed ledger tech, due to the high transaction fees, technical interoperability issues, complex and conflicting regulatory frameworks, and legacy equipment and processes associated with existing systems.”

To realise this potential, he says, there are problems that need to be solved for customers in developing countries: “people know they are being stung by transaction fees but are still reluctant to switch for a wide range of reasons.”

“It could even be that banks themselves adopt the technology, and yet still enable its distributed peer-to-peer set-up, offering it as a separate service to their traditional monetary services. In other words, customers may never know their transactions are happening on a blockchain,” he adds.

Bitcoin has had a volatile exchange rate and Hileman concedes that it’s too early to know whether regulatory measures will help shield customers from this and other risks, or reduce money laundering and financial crimes committed with bitcoin. In the meantime, the Centre’s work on benchmarking cryptocurrency and blockchain activity will provide useful data for policymakers and other stakeholders keeping an eye on the technology.

“More than $430 billion was sent in remittances to developing countries in 2015, mostly to India, but also China, Mexico and Nigeria,” says Hileman. “ ̽��ֱ��costs of these transactions – which can average as high as 12% in Sub-Saharan Africa – hit the poor the hardest. Technological advances like cryptocurrency and distributed ledgers may offer a solution.

“It would be surprising to me if in 30 years from now we aren’t looking back and saying yes this was a watershed moment for financial inclusion, and that cryptocurrency and distributed ledgers played a significant role in opening up access to the financial system in developing economies.”

Many of the world’s poorest poor don’t have access to a bank account and yet depend on being able to transfer money across borders. Could digital currency help, ask researchers at the Cambridge Centre for Alternative Finance.

More than $430 billion was sent in remittances to developing countries in 2015, mostly to India, but also China, Mexico and Nigeria. ̽��ֱ��costs of these transactions hit the poor the hardest

Garrick Hileman

FamZoo Staff

From cash to digital

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