The Future of Money:
What You Should Know about Cryptocurrency

Physical currency has been the standard form of payment for the entirety of recorded history. But that millennia-old institution may find itself relegated to the history books given the proliferation of electronic payment platforms and digital currency. Credit cards, online banking, and digital wallets like Venmo and PayPal have trumped cash as the standard methods of payment for many. Is cryptocurrency the next new wave?

Joe Grundfest

Stanford's resident cryptocurrency expert, Professor Joseph Grundfest, weighs in on this contentious topic, lending his expertise to answer some of the most common and relevant questions regarding cryptocurrency.

Who uses cryptocurrency and where can it be used?

Cryptocurrency has a somewhat poor reputation due to it being the payment system of choice for many criminals. It's true that Bitcoin and other digital currency platforms have traditionally been popular with gamblers, drug dealers, and others committing illegal deeds over the Internet. This is because cryptocurrency initially offered some degree of anonymity, making it difficult to trace illegal payments back to their source.

Focusing on the criminal roots of cryptocurrency ignores the advantages it offers legitimate businesses and law-abiding citizens, according to Grundfest.

"There are plenty of legitimate applications for cryptocurrency," he says. "Large, established corporations might use this technology to replace traditional business models or draw attention to some related efforts at innovation. Then you have entrepreneurs trying to find novel methods to fund new businesses. There are also those living in failed states or in a nation with a failed currency or hyper-inflation who could be attracted to cryptocurrency."

Cryptocurrency is especially popular with younger demographics that felt the brunt of the Great Recession in 2008 and may be wary of banks and other financial institutions. A recent study revealed that 25% of “affluent” millennials hold digital assets.

What are the advantages of cryptocurrency?

Cryptocurrency offers the promise of heightened security over traditional money since it is encrypted and virtually useless without the right access credentials. Given the immense threat that cybercriminals pose today, cryptocurrency's security benefits make it a compelling option.

The flipside to that argument is that investing in cryptocurrency can be risky if the owner loses those credentials. Unfortunately, that's not a hypothetical situation. Earlier this year, approximately $190 million in bitcoin was lost when the CEO and founder of a popular Canada-based Bitcoin exchange - and the sole owner of its cold storage access information - died suddenly.

"It all depends on how cryptocurrency is structured," says Grundfest. "You could have radical transparency or also total opaqueness, which is something that comes down to a design decision."

How does cryptocurrency hold and transfer value?

Cryptocurrency like Bitcoin has had a meteoric rise in recent years, and its value had skyrocketed in a very short amount of time. However, Grundfest cautions that there's still a lot we don't really understand about cryptocurrency's true value and worth, which can make it a risky investment. Bitcoin's value plummeted in 2018, dropping 15% in a single day.

"Because of the technical cyber exposure, you have very significant risk of theft and loss compounded by serious custody management issues that stem in part from that security reality," Grundfest states. "In addition, significant price volatility compounds practical usable value and feels, at times, almost random. Certain tax matters make that usability issue even more problematic."

How does cold storage help cryptocurrency holders?

Cryptocurrency is generally very good at safeguarding against threats like cybercriminals gaining access to and draining funds from a bank account, but there are downsides. As the Canadian Bitcoin loss illustrates, simple oversights in the design process can be devastating.

"Certain types of theft become much more difficult," Grundfest says, "but cold storage creates risks of loss that are, for lack of a better word, rather old school and, in some cases, ironic in light of the original intentions driving cryptocurrency usage."

How might cryptocurrency storage rules change, become regulated, and ultimately more mainstream?

Cryptocurrency is such a new field that there isn't much in the way of regulation or governance, which may scare away investors and individuals looking for a stable, long-term monetary platform. Regulation could provide valuable safeguards but there is currently little consensus on how to do this.

"It is unclear whether any of this might happen at all," Grundfest warns. "But if it did, custody rules would evolve. Regulators would adopt certain requirements around security details, testing, and matters of insurance."

"If a legitimate sovereign created a cryptocurrency," Grundfest adds, "that would present the opportunity to clarify certain rules. But instead, it seems more likely that a minor member of UN might adopt their own cryptocurrency, which would not help matters."

What headlines surrounding cryptocurrency are you following closely today?

Unfortunately, much of the news surrounding cryptocurrency in recent months has involved fraudulent or otherwise criminal activity. However, Grundfest holds out hope that Bitcoin and other financial platforms will find a larger audience with legitimate users.

"I'm always looking for any indication that crypto or blockchain is actually building a real-world use case," he says. "Too much effort now is devoted to theory, not practice. Most practical applications seem to need sophisticated database use and not just blockchain."

So, is cryptocurrency the future of monetary systems? It has a long way to go before it replaces the cash in your pocket or even the funds in your PayPal account. Make no mistake, however, interest in cryptocurrency is growing and more use cases and applications will arise in the coming years.

To find out more and become a budding cryptocurrency expert yourself, enroll in Stanford's online course today.

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