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Mediums of exchange in our digital age

Going digital: cryptocurrencies such as bitcoin are becoming more mainstream, but the concept can be a challenge to understand. Moneywise takes a closer look (File photograph)

Welcome to this, a new ongoing Moneywise series to be featured on the last weekend of each month, which has been developed for you readers, with an appreciation of expertise from Denis Pitcher, chief fintech adviser to the Bermuda Government and tech co-founder of resQwest.com.

Moneywise first started writing about the emergence of blockchain digital/cryptocurrency (bitcoin being the most recognisable) in 2015. It was met with mostly yawns and serious scepticism. Yes, there were those “in the know” who were getting invested on the ground floor, while exercising some utilisation, but it certainly was not approaching mainstream interest.

Fast forward six years and look at these headlines:

– Elon Musk recognises Bitcoin as a medium of exchange in offering payment acceptance when purchasing a Tesla

– Bitcoin value spikes to an all-time high last week

– Canadian financial institutions announced the first Bitcoin ETF (exchange-traded fund)

– Bitcoin is facing another halving in the near future

– Treasury secretary Janet Yellen signalled the Biden administration supports research into the viability of a digital dollar, quote (Bloomberg): “a digital version of the dollar could help address hurdles to financial inclusion in the US among low-income households, as too many Americans don’t have access to easy payments systems and banking accounts”.

– Crypto: A $1 Trillion Asset Class, January (2021) Market Outlook by blockchain.com

– In what’s anticipated to be a breakthrough moment for the industry, Coinbase filed on Thursday with the US Securities and Exchange Commission to list its shares on the Nasdaq. The company has been valued at more than $100 billion in recent private transactions, Axios reported; meaning it could be one of the biggest companies to go public since Facebook Inc, Bloomberg said on Thursday.

– And the most attention-getting headline of all, “Bermuda Rum sales in digital dollars”, The Royal Gazette, February 22.

How the perception, investment value, and ease of use has influenced financial institutions and investors alike.

However, the feeling is that the mainstream public has yet to fully recognise what the entire, growing, digital industry represents for the future of finance, fintech, law, economics, risk protection, industries of all dimensions, retirement and more. We ordinary individuals, fully involved in working, living, caring for family, then isolated and financially impacted by Covid, may want to know more, however, any information would tend to be subliminally absorbed as very interesting, but not currently relevant.

The question is whether we, as yet, have a good sense of whether such an intangible product is for real? Where is it, what it is, where did it came from, is it is something we will ever use, or could it positively impact our financial lives?

Yet, the recent memory of a financial electronic blankness episode on a busy Friday within our community is still very, very relevant. Retail, service industries of all kinds were greatly impeded – forced to transact the old-fashioned way: physical cash, barring no-cash customers – could either not consume, or had to provide some verification of a promise to pay.

These new concepts are a challenge to understand. The user must have access to the internet via a computer, a tablet or a smart phone, etc, to engage, access and effect a transaction.

Let’s face it, using an ATM machine, a debit card or good old-fashioned cash in hand - the stuff with the lovely birds, flora and fauna on them - may still seem to be the easiest method of exchange.

Change is inevitable. The digital age is here and is not going away, as long as there are transmission routes, satellites, and other intermediation avenues to source and fulfil transactions, this new financial interchange is here to stay.

So, let’s go back to the beginning. All things digital is just the newest, new thing in the global medium of exchange.

We know our current mediums as variously: cash in hand, intangible securities, precious metals on bodies and in vaults, real property immoveable, edibles on the hoof, or harvestable on the ground, in the ground (oil, gas, coal, diamonds), and in the sea.

How did the virtual concept of digitally significant transactions start?

Blockchain methodology is derived by building on the cryptography of the past – the science of coding and decoding messages so as to keep these messages secure. Coding (see encryption) takes place using a key that ideally is known only by the sender and intended recipient of the message.

According to Cryptography, by Kathleen Richards, modern cryptography concerns itself with the following four objectives:

1. Confidentiality: the information cannot be understood by anyone for whom it was unintended

2. Integrity: the information cannot be altered in storage or transit between sender and intended receiver without the alteration being detected

3. Non-repudiation: the creator/sender of the information cannot deny at a later stage his or her intentions in the creation or transmission of the information

4. Authentication: the sender and receiver can confirm each other's identity and the origin/destination of the information

A blockchain is a decentralised ledger of all transactions across a peer-to-peer network. Using this technology, participants can confirm transactions without a need for a central clearing authority. Potential applications can include fund transfers, settling trades, voting, and many other issues.

Blockchain is the technology that enables the existence of cryptocurrency (among other things).

Bitcoin is the best-known cryptocurrency, the one for which blockchain technology was invented. A digital medium of exchange that uses encryption techniques to control the creation of monetary units and to verify the transfer of funds”

A link to a simplified explanation of bitcoin and the blockchain process, titled “Explain Bitcoin Like I’m Five”, can be found below in the useful resources list below.

Now readers, you know this is not meant to say that you are all five-year-olds, far from it, but thinking about the transfer of a physical apple and a digital apple is an easier tack to tangibility.

That’s all for today, stay digitally tuned next month for continuing dialogue.

Useful resources:

  • Making sense of bitcoin, cryptocurrency and blockchain, PWC, United States https://tinyurl.com/ybnr79at
  • Understanding cryptography’s role in blockchains, Josh Lake, 2019 https://www.comparitech.com/crypto/cryptography-blockchain/
  • Explain Bitcoin Like I’m Five https://medium.com/free-code-camp/explain-bitcoin-like-im-five-73b4257ac833

Martha Harris Myron, CPA JSM, a native Bermudian, is the author of Bermuda Islander Financial Planning Primers https://www.royalgazette.com/bermuda-islander/, consultant to the Olderhood Group Bermuda, and financial columnist to The Royal Gazette, Bermuda. All Proceeds from these articles are donated to the Salvation Army, Bermuda. Contact: martha@pondstraddler.com

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Published February 27, 2021 at 8:01 am (Updated February 27, 2021 at 7:58 am)

Mediums of exchange in our digital age

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