Why peer-to-peer payments could be as big as the internet

Duncan McCann of the New Economics Foundation

Duncan McCann of the New Economics Foundation

Duncan McCann of the New Economics Foundation makes a very good parallel between the fledgling internet of the ’90s and the current state of P2P currencies such as Bitcoin, arguing that they could be about to revolutionise commerce in the same way that the internet has transformed communication.

Source: http://www.neweconomics.org/blog/entry/why-peer-to-peer-payments-could-be-as-big-as-the-internet

Back in early 90’s a new technology called the internet was starting to make waves in the media and among a small section of the public. A little over 20 years on and no-one could have imagined the huge impact the web has had on our lives.

The signs are that peer-to-peer (P2P) cryptographic payment protocols, of which Bitcoin is the most famous, could be next. There is a real possibility that this innovation could radically transform how we pay each other, helping our financial system become much more inclusive.

The payment systems behind the currencies

These systems are currently one of the most talked about topics in alternative finance, but also one of the least well understood. It is important to distinguish between the payment systems and the design of the particular currency that can operate on them. Bitcoin, by far the best known, is both a currency and a payment system. As a currency it’s simply a new medium through which to trade, operating under parameters such as the total number in circulation, the method by which they are created and the exchange rate regime. There are many other alternative currencies that set different parameters with various aims in mind. Socially useful Solarcoin and Freicoin, for example, have designed theirs to explicitly stimulate more economically and environmentally sustainable investments.

However, the part of the P2P revolution with real potential to change our everyday lives could actually be the decentralised payment systems, not the currencies themselves. Until recently almost all transactions, unless carried out with cash, required a bank or regulated operator to perform them on behalf of the customer. Financial institutions would be employed as middlemen, ensuring the buyer has the necessary funds available, insuring the seller against this, and also overseeing the security of the transaction. These new payment systems use a decentralised distributed ledger, which operates through a peer-to-peer network and cryptographic protocols, to cut out the middleman. This means the record of all transactions are not held centrally, but in a network of computers which also confirm the validity of new transactions using special encoding technology.

What impact could this have?

This can remove or significantly lower the costs associated with non-cash transactions – attractive to individuals, SME businesses and large corporations alike. Further, it has the potential to eliminate transaction fraud. Unlike today’s system, sensitive information like your account number and sort code does not need to be exchanged to move funds, making it much harder to replicate payments. In addition, because transactions are not reversible, once funds are moved into your account you can be 100% sure they are there.

In short, P2P payment systems could make all global transactions quicker, more secure and extremely low-cost.

Of course the way in which this potential is realised will largely depend on the decisions made by governments, legislators and corporate heavy weights. As fast as the P2P innovations have been developing, businesses such as Google, Facebook and Virgin have begun exploring potential ways to claim their share.

What’s next?

Just like the internet in the 90’s, the P2P system has some hurdles to clear before it’s ready for mass adoption. From a technical perspective it must reduce the delay in confirming transactions have been processed as well as resolving some design issues. From a usability perspective it must make exchanging simple and easy. In the same way that people do not need to understand TCP/IP to use the internet, it is vital people do not require a deep understanding of the new technology.

Despite the barriers, the efficiency and low cost of these systems, especially Ripple, has already convinced some banks, like Fidor in Germany, to use them as part of their internal and customer transaction infrastructure. When compared with other payment methods, such as credit cards and money transfer services, surely other businesses will be tempted to turn. Even where customers pay intermediaries to master the complicated functions, the costs are still very competitive.

Either way, further innovation is certain. Ethereum, another decentralised system under development, aims to record and transfer ownership of any sort of asset class – such as property deeds, contracts and shares – without the need of an intermediary. Such ‘smart property’ could turn the decentralised ledger into a global registry of ownership in physical assets, rather than just a record of volumes of a particular currency. Given that this would be publically available it could be an invaluable tool in fighting tax avoidance.

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