From barter to fiat to crypto
Humans have traded with each other since the dawn of civilisation – and money was developed to overcome the severe limitations of bartering one good for another. Gold-backed currency was largely abandoned 50 years ago in favour of fiat currency – money issued by central banks that is entirely reliant on a government's financial health and credibility for its value. A more recent innovation, especially since the introduction of Bitcoin in 2009, is cryptocurrency, which is entirely digital and completely independent from central banks and policy makers.
A cryptocurrency is binary data designed to work as a medium of exchange. Individual coin ownership records are stored in a ledger, a computerised database using strong cryptography to secure transaction records, control the creation of additional coins, and verify the transfer of coin ownership. Unlike central banks, cryptocurrencies typically use decentralised control, employing a distributed ledger technology such as a blockchain, which serves as a public financial transaction database. Verification algorithms for proof-of-work cryptos such as bitcoin require a lot of processing power, and the reward schemes of cryptocurrencies offer incentives to "miners" who provide the processing power and enable the creation of new blocks to execute transactions.
A boom of speculation more than functionality
Cryptocurrency prices have generally soared in recent years, albeit with massive volatility – a rollercoaster ride between surging demand, regulatory crackdowns, and concerns about fraud and theft risks. We see little evidence so far that crypto demand has been driven by a compelling use case for payments, but rather by speculative investments and benefits of privacy (e.g. for payments related to illicit activity). Retail investor interest has been fuelled by sharply rising prices and endorsements by high-profile influencers. Institutional interest has also started to emerge, not least owing to the hunt for yield in the current ultra-low interest rate environment.
Corporates should adopt a 'pro-active wait and see'
We do not expect customers or suppliers to put major pressure on corporates to start adopting crypto payments anytime soon. The technology could have very useful applications, but a universal use case that proves its superior payment speed, cost, security or reliability is not a driver yet. There are potential ESG issues associated with crypto, including energy use for crypto mining and reputational risks related to its use in criminal contexts such as ransomware cyber attacks. We also doubt that policy makers will simply let fiat currencies be replaced by crypto. A BIS survey shows 86% of central banks are actively researching central bank digital currencies, and 14% have already launched pilot projects. We encourage corporates to familiarise themselves with cryptocurrencies, to shorten lead times and make informed decisions about building capabilities if and when a viable business case for crypto materialises.
View from experts
We interview Norway's deputy central bank governor Ida Wolden Bache about the regulation of cryptocurrencies and the use of digital central bank currencies as a potential alternative. We also get the opinion of Nordea's Head of Emerging Technologies Ville Sointu on the use case and pros and cons for crypto.
Nordea On Your Mind is the flagship publication of Nordea Investment Banking’s Thematics team, which produces research for large corporate and institutional clients. The research does not contain investment advice and typically covers topics of a strategic and long-term nature, which can affect corporate financial performance.
Top decision makers at Nordea’s large clients across the Nordic region receive Nordea On Your Mind around eight times per year. The publication’s themes vary widely, and many are selected from suggestions by clients. Examples of covered topics include artificial intelligence, wage inflation, M&A, e-commerce, income inequality, ESG, cybersecurity and corporate leverage.
Listen to the related podcast episode
Cryptocurrencies have seen their prices soar in the past 18 months and now have a total market cap above USD 2tn.
Johan Trocmé and Viktor Sonebäck explore what cryptos are, what they are used for, what has driven the bonanza and whether there is a use case for them as a means of payment.
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Top decision makers at Nordea’s large clients across the Nordic region receive Nordea On Your Mind around eight times per year.
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