There are now around 9,000 cryptocurrencies, Bitcoin and Ether are by far the best known. But how do they work at all and are they real competition for our existing means of payment? Will there still be cash in the future and will the financial sector still need banks? Diplomatisches Magazin spoke about these questions with Dr Cyrus de la Rubia, Chief Economist at Hamburg Commercial Bank.
DM: Dr de la Rubia, perhaps we first need to clarify what exactly a Bitcoin is.
Dr Cyrus de la Rubia: The new and revolutionary thing about Bitcoin is that it ultimately shows that digital assets can be sent over the internet basically like emails, and in a forgeryproof way. If you have a digital value, a photo for example, you send it, then of course you can send it to many others and the recipient can also send it on. Then it has no uniqueness. But with Bitcoin, this uniqueness was created and people have actually been tinkering with it for decades. And then, in 2008, out of nowhere, a person by the name of Satoshi Nakamoto put a paper on the internet and explained how this Bitcoin blockchain works and then simply started it at the beginning of 2009. And this idea that digital assets can be transferred over the internet in a tamper-proof way was applied to many other cryptocurrencies and blockchains. Bitcoin simply still has a very prominent position, also because this blockchain has been working smoothly since 2009 and has not yet been brought down. But many other applications, based on the Ethereum Blockchain, will still gain a great deal of importance, and will probably even become more important than the Bitcoin blockchain.
DM: Why is the Ethereum Blockchain more promising?
Dr Cyrus de la Rubia: Bitcoin really focuses on the fact that only Bitcoin can be transferred from A to B as a currency unit. The Ethereum Blockchain, by contrast, can not only transfer value in the form of currency, but also map entire business models, which then in turn function in a decentralised manner. So I can install a crypto exchange on the Ethereum Blockchain, which can then be used decentrally by people. I can create an asset manager on the Ethereum Blockchain and then I can invest my money there without really needing a central administrator, this is done with the help of socalled smart contracts. A smart contract is a software that is installed on the blockchain and can be used by all kinds of people and is still very, very secure.
DM: Are there then no fees at all for transactions?
Dr Cyrus de la Rubia: Fees will be charged, but much less than in centralised systems.
DM: To whom do these fees go?
Dr Cyrus de la Rubia: The fees go to the members who ultimately operate the blockchain. But the blockchain can be operated by everyone, evaluating all the transfers that happen there and checking them, so to speak, and ensuring that these transactions are right and consistent. And for that the operators get a small fee in the form of Ether, the native currency of this network.
DM: Of course, only techies can do that?
Dr Cyrus de la Rubia: Of course, techies are particularly good at this, they can work it out for themselves, so to speak. There are also specialised companies but it’s not like some authority or some legislator can now tell me, “No, you’re not allowed to do that!”, rather I can actually simply participate in it. And that is of course something new, also internationally, also across borders. This is not limited to Germany, but is truly global. USA, China, Kazakhstan, Argentina, everywhere.
DM: If cryptocurrencies become established, would they do away with banks?
Dr Cyrus de la Rubia: That is the big question, whether cryptocurrencies can actually become established. The great value of money is that it is a stable unit with which I can calculate somewhat reliably. If I have €100 today, I can also get roughly the equivalent value of goods for €100 tomorrow. With Bitcoin or Ether, the value of these currencies fluctuates very strongly, which is why it will certainly be difficult for them to establish themselves as a general means of payment. However, Banks are not only in the payment business, but instead are engaged in the assessment of credit worthiness and arrange finance deals etc. and many of these tasks will continue to exist.
DM: A Bitcoin is currently worth around 24,000 euros. But can we buy anything at all with Ether or Bitcoin? Services or goods?
Dr Cyrus de la Rubia: Bitcoin and Ether are not accepted by everyone, so of course I can’t pay for my hairdressing service with Ether, but I can pay for certain stock exchange services. We are dealing here with the beginnings of the infrastructure, which will ultimately also enter the real world.
DM: One big disadvantage is the gigantic electricity consumption!
Dr Cyrus de la Rubia: Yes, it is 0.6% of global electricity consumption that is needed just for the continued existence of the Bitcoin blockchain. Ether, is very energy intensive as well, but the validation process is about to be changed for the Ethereum blockchain. That’s a very complex process they’ve spent years preparing, that saves 99.9% of the energy. And to that extent, the Ether blockchain will then really be “environmentally friendly”.
DM: What about the risks, for example from hackers, terrorist financing, black money?
Dr Cyrus de la Rubia: The prejudice against blockchain technology is that it is only used for black money. This has to do, among other things, with the fact that about ten years ago Bitcoin had established itself relatively strongly as a means of payment on marketplaces in the Darknet. In 2013, for example, the illegal marketplace Silk Road was discovered, and there it was traded not in mobile phones and cars, but in drugs and contract killers. In fact, there is a clear indication that Bitcoin is used less for illegal transactions, as it is not completely anonymous.
DM: Not completely anonymous, you have to explain this.
Dr Cyrus de la Rubia: Sure. My Bitcoin address is not marked with my name, so if there is a certain hash, a certain sequence of numbers, then no one knows that Cyrus de la Rubia is behind it. But you can actually track every single transaction and every single flow of money down to the last detail. There is appropriate software. Of course, it is not only private individuals who have acquired this, but also the regulatory authorities and the USA, for example. They have a blacklist at a corresponding regulatory authority, where certain Bitcoin addresses are stored that they know come from illegal sources. And as soon as a payment from this address goes somewhere, they immediately sound the alarm.
DM: What are the advantages of cryptocurrencies?
Dr Cyrus de la Rubia: So in countries where the institutions are very weak and where they have not yet managed to provide really stable money, this is a fallback option. Or in countries where the payment systems don’t work, where people don’t have access to a bank account, where money evaporates due to hyperinflation, for example – this new technology offers a very streamlined approach to providing people with financial services. Because all you need is a smartphone and an internet connection.
Interview Marie Wildermann