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, according to research from Imperial College London and eToro.

In the paper, William Knottenbelt from Imperial College London and Zeynep Gurguc from Imperial College Business School argue cryptocurrencies already fulfil one of the three fundamental roles of traditional fiat money: acting as a store of value.

The other two criteria are being a medium of exchange - facilitating the exchange of goods and services by eliminating the inefficiencies associated with a barter economy - and being a unit of account - ie. acting as a measure of value in the economic system.

Meeting these two criteria will require Bitcoin and other cryptocurrencies to make progress on remaining challenges such as scalability, design and regulation.

The report suggested that each evolutionary stage of money has brought about a reduction in payments friction. Given their design principles, it concludes that the widespread use of cryptocurrencies is a natural next step to reduce friction in the global economy.

Knottenbelt stated that decentralised technologies have the potential to upend the nature of financial systems and assets.

“There's a lot of scepticism over cryptocurrencies and how they could ever become a day-today payment system used by the man on the street, but in this research we show that cryptocurrencies have already made significant headway towards fulfilling the criteria for becoming a widely accepted method of payment,” he commented.

However, there are six existing challenges that cryptocurrencies will have to address in order to become a mainstream method of payment:

• Scalability: many cryptocurrencies are built on blockchains that are not designed to facilitate high volumes of transactions at present, so the mining community of individual blockchains needs to prioritise solving scalability issues to succeed.
• Usability: like any invention, user-friendly design is at the core of mass adoption, currently cryptocurrencies can be complex and require specialist understanding.
• Regulation: this is currently fragmented with different countries pursuing different regulatory routes, so without a standardised global approach to regulation, Bitcoin will struggle to gain mainstream traction.
• Volatility: all fiat currencies fluctuate in value. However, current significant volatility in cryptocurrencies hinders their ability to be considered a store of value.
• Incentives: any new financial ecosystem requires careful thinking about how its reward system will influence behaviour. If this isn't built in the right way, then the system will quickly be manipulated by some users to the detriment of others.
• Privacy: while blockchains provide a transparent single source of truth, different levels of privacy available to different users is often attractive – without this, some people will stay away from cryptocurrencies.

Iqbal V. Gandham, UK managing director of eToro, said that people have grown used to their view of money as a solid, permanently fixed idea, when in fact the opposite is true.

“The history of money is a history of evolution, of new technology replacing old to improve the transfer of value from one person to another; cryptocurrencies represent a next step on this journey,” he added.

Gurguc admitted that new payment systems or asset classes do not emerge overnight, but said it is worth noting that the concept of money has evolved from cash to digital or contactless payments.

“The wider use of cryptocurrencies and crypto-assets is the next natural step if they successfully overcome the six challenges we set out in our report,” he concluded.

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