Digital currencies have seen a significant rise in popularity in recent years, with Bitcoin, Ethereum, Litecoin and Qoin finding themselves growing in user population and price. To understand exactly what makes digital currencies and a cashless society such a tempting concept to investors, it's important to understand exactly where the concept of digital currency came from. This is a history of digital currencies, and what they may mean for the culture of payments and Fintech in the years to come.
Origins and DigiCash
The early years of digital money came from David Chaum, who released a research paper in 1983 introducing the idea of digital money. In the years following the release of his research paper, Chaum launched the first digital cash company, entitled DigiCash. Launched in Amsterdam to commercialise his ideas, the company operated for nine years before eventually filing for bankruptcy in 1998.
DigiCash was shortly followed by e-gold, the first-ever widely used internet money. Introduced in 1996, millions of people were reported to use the technology for all kinds of payments. These payments were peer-to-peer and went through without the involvement of any third parties in transactions. e-gold was eventually shut down by the US government in 2008 for not being a licenced money transmitter, which was a historic case as it set the precedent that a ‘money transmitter’ did not have to transmit a recognised currency, but rather anything that held value. Although this system was shut down, it proved not only that digital currencies could exist, but that they were a popular idea.
Bitcoin and The Normalisation of Digital Currencies
Following the fall of e-gold, Bitcoin was quick to take its place in 2009 and launched what we now recognise as a modern digital currency. Bitcoin was intended to be a currency that could be used to buy and sell everyday goods, but with a twist that differentiated it from e-gold. Unlike e-gold and all other currencies, Bitcoin wasn't held on any one central server, nor was it's value tied to any tangible assets that were held in reserve by a central organisation. Many nations use gold reserves or other currencies as the basis for their currency's value, but Bitcoin's value is entirely determined by the supply and demand of those that are trading the currency.
However, this change; designed to make the currency accessible, has caused issues of its own. In recent years investors have used the nature of the currency to speculate on its value, effectively causing the value of Bitcoin to surge to over AU$20,000 per coin. This raised questions over just how feasible Bitcoin was as a practical currency. The majority of digital currencies have a relatively stable value so people can be aware of just how much they are spending when utilising the currency in real life transactions. The constant variation of Bitcoin without an anchor to tether its value - has meant that many people are less willing to spend with it, given the fact that price fluctuations can occur so dramatically. Buying a book with Bitcoin could cost users five different prices in the space of a week!
When Q coins launched in China in 2005, similar speculation caused trouble leading to not only a destabilisation of the value of Q coins, but also of the national currency, the Chinese Yuan.
Since Bitcoin, many digital currencies have been launched pegged to a commodity for stability, with currencies like Tether, Paxos and Qoin aiming for increased stability.
The future of Fintech
The world of financial technology - aka Fintech - has seen digital payments and transactions as viable concepts - thanks in part to the rise of digital currencies. The shifting reliance on transactions in the digital domain for digital currencies has meant that banks have been driving mobile banking, leading to remote and digital payments becoming part of our everyday life.
Additionally, the use of blockchain technology, an open ledger protected by layers of cryptography, designed to record transactions between individuals and securely establish the currency; has been normalised. Blockchain has seen expanded use beyond simply the world of digital currencies, with industries such as video game development, health care and supply chains all-embracing blockchain as a way of securely tracking data.
Ultimately, the history of digital currencies has shown that it is growing - and at quite the speedy rate. As digital currencies grow in popularity, their use as a mainstream tool for everyday transactions will also continue to grow. Whilst the history of digital currencies is relatively short, it seems they will increasingly become part of our lives for days to come.