Ever since the invention of the personal computer and the internet, technology has advanced by leaps and bounds, and along with it, disruptions to traditional ways and means of doing business. With the advent of cryptocurrencies as a viable means of peer-to-peer transfer of value, the next industry that could be shaken to its very core is the financial system itself.

Currency, or its more common name, money, is nothing more than a medium of exchange, and any material of limited and controllable quantity or character can serve this purpose – shells, beads, amber, gold, silver, and now, fiat money have all been used. Through experience and history, the ideal characteristics of money, e.g., durability, convenience, recognizability and divisibility, led to a preference of one form over another. But history, too, taught another lesson: that trust is also, if not, the most essential characteristic of any chosen medium of exchange.

While fiat money (i.e., legal tender issued and backed by governments) remains the prevailing medium of exchange, the trust reposed in such instruments has suffered recurring crises from time to time. Numerous examples recur over the ages. The US Continental Currency, Philippine Revolution pesos, German Papiermark, Japanese wartime/invasion notes, and Zimbabwean dollar are all cases in which the money used as a store of value suffered runaway inflation and/or ultimate collapse for one reason or another, requiring the redenomination and/or reissuance of a new currency, as the trust in the old currency evaporated entirely.

The most recent, and perhaps, widespread shock to the financial system, not only of a single country but worldwide, was the Global Financial Crisis of 2007-2008. It rivaled, if not exceeded, the Great Depression of the 1930s, as the extent and the speed by which the crisis spread was magnified many times over by technology. Learning from hindsight, but perhaps, with fingers crossed over the risks, governments worldwide likewise responded with extreme measures, to shore up liquidity with vast quantities of fiat money, through the process now known as Quantitative Easing.

While runaway inflation has not yet occurred, the stopgap is only due to a very delicate balance maintained between the amount of money actually circulating and the available goods. The situation, however, remains precarious. This threat to the world’s financial system spurred the development of cryptocurrencies as an alternative means not only to transact, but to store wealth and value in the eyes of a technologically-oriented generation.

Bitcoin, which was proposed through a white paper in 2009 (just after the Global Financial Crisis) by an individual or a group known merely as “Satoshi Nakamoto,” was the first cryptocurrency which uses a revolutionary technology known as a blockchain. With the blockchain, control over the supply of cryptocurrency is devolved to a computer program, which limits the issuance of the currency to a set amount; in the case of Bitcoin, it is 21 million. No government issues the cryptocurrency, as this is generated, and maintained, by decentralized computer “nodes” all over the world. Each “node” would effectively have one vote, and in no case would a transaction in the blockchain be considered confirmed unless a majority (or more than 50%) of the nodes agree to recognize the said transaction. The supply of Bitcoins is also gradually increased through a process called “mining,” by the very same computer nodes, where the miners will be paid a portion of the newly-minted Bitcoin which would effectively pay for the maintenance of the system.

Development and acceptance was slow, and initially, a Bitcoin had a value next to nothing. In one of the first known transactions, a pizza was purchased in 2010 for 10,000 Bitcoins. However, as the cryptocurrency gained recognition and use, the value ascribed to it exploded. Bitcoin reached $1,000 for the first time in 2013; it took nearly 1,300 days to double to $2,000, another 147 days to breach $5,000, 47 days to double again to reach the $10,000 mark just last week, and a mere 12 hours after that to reach $11,000 before settling down to around $10,000. In other words, the same pizza transaction a mere seven years ago would now be worth over $100 million, an astounding rate of return which made some very early adopters multi-millionaires, even billionaires.

But not all is sunny in the land of crypto. Several challenges continue to hound its use for day-to-day transactions. Due to the limitations of the network and the amount of data that it is capable of transmitting, only two to three transactions can be processed in a second; compare that to VISA, which alone can process some 1,500 transactions a second (not to mention MasterCard, PayPal and others). Since a majority of the nodes would have to “agree,” and in case of system enhancements, upgrade their software, getting the consensus to any change has been a stumbling block to development. In Bitcoin’s case, this has led to a “hard fork” in August this year, and another one in the near future. The consequence of a “hard fork” is that two sequences of the blockchain would result, causing uncertainty over which would eventually prevail, which would also lead to mixed results on the trading floor. Due to disagreements between the proponents, the latest hard fork was postponed, and so Bitcoin still faces the challenge of improving its capabilities, even as preserving the integrity of the original blockchain remains paramount.

Also, while Bitcoin (the blockchain itself) is difficult, if not nearly impossible, to hack as this would require simultaneous successful attacks on a majority of the “nodes” worldwide, the exchanges as well as individual users have proved vulnerable. This has led to stolen bitcoins, and by various estimates, around 3.8 million bitcoins, or almost 24% of the current supply, may have been lost forever. There are also thousands of competing cryptocurrencies, which would like to mimic or even attempt the same success as Bitcoin such as Ethereum, Litecoin, Monero, Ripple, and Dash to name a few.

However, these challenges could turn out to be mere birth pangs of a newfangled commercial reality. The sad fact is, fiat money has already demonstrated its shortcomings, and is long overdue to be replaced by something better. Ever since Nixon decoupled the dollar, the world’s reserve currency, from gold in the 1970s, fiat money has suffered irreversible erosion in value, due to overprinting as well as overspending of governments. This has also led inevitably to a concentration of the world’s wealth in the top 1% as businesses are relatively inflation-proof, while the vast majority including the middle class, depending merely on near-stagnant wages which cannot keep pace with inflation, continuously suffer loss of purchasing power and decreasing quality of life.

For its early adopters who are mostly from less-affluent classes, Bitcoin and other cryptocurrencies offer the ordinary person a chance to start anew, with a currency that is less subject to government or institutional control. In the current scheme of things, they do not have much to lose anyway. On the other side of the social pyramid however are the wealthy, who have more to risk in case their current wealth is denominated and stored in fiat money that could eventually turn out to be not worth much more than the paper they are printed on.

Much like the Internet which has fundamentally changed our very way of life in merely two decades, the blockchain is poised to do the same to the world’s financial system. A number of those which may have viewed it as a threat already called for bans on Bitcoin or its exchanges. However, these have so far failed as Bitcoin and similar cryptocurrencies have been designed to ignore such bans. On the other hand, neither could any currency gain universal use and acceptance without the participation of the wealthy and the powerful.

Bitcoin may have been ignored in its infancy when it was actually insignificant as compared to the estimated $200 trillion in financial wealth and assets worldwide. Now, the tide appears to be turning as the cryptocurrency market, particularly Bitcoin, has skyrocketed from practically nothing to more than $300 billion in just a few years, and is now gaining the attention of main street investors. Instead of bans, there are now proposals for regulation. Even Bitcoin has been recognized by major exchanges such as CME and NASDAQ, where futures may be traded in the near future.

The question now is, what is the stand of regulators, investors and consumers on Bitcoin as the global market currency of the future? Are Filipinos prepared to participate and adapt to this revolutionary idea or will we be overtaken by events as they happen? We will know when we look ahead 30, 20, or even just 10 years into the future, to see how well we have responded to the seemingly inexorable rise of the world’s first real digital currency.

The views or opinions expressed in this article are solely those of the author and do not necessarily represent those of Isla Lipana & Co. The content is for general information purposes only, and should not be used as a substitute for specific advice.

Jaffy Y. Azarraga is a Director at the Tax Services Department of Isla Lipana & Co., the Philippine member firm of the PwC network.

+63 (2) 845-2728

jaffy.y.azarraga@ph.pwc.com