If you’ve been paying any attention to the world of financial markets over the last few months, you’ll doubtless have heard of bitcoin and other cryptocurrencies. These days, they’re all the rage – and since shooting up in both value and popularity in the latter half of 2017, they’ve very quickly revealed themselves to be the marmite of the financial world.
The existential question we face today goes something like this: are Bitcoin, Ethereum, Ripple and others a new and exciting way of liberalising the financial markets? Or are they simply the latest get-rich-quick fad for off-duty investment bankers and serious tech boffins? And when considering the fact that cryptocurrencies have the potential to more easily facilitate the exchange of illegal goods and services – is there such a thing as too liberal?
There is at least an element of truth to all of these statements but the more interesting thing about cryptocurrencies is not strictly what they are now – it’s what they have the potential to be.
Cryptocurrencies and international trade
To consider the full potential of a decentralised medium for digital transactions, it’s actually more helpful to look beyond the most well-known cryptocurrency, Bitcoin, and turn to its up and coming cousin – Ripple. Whilst not the most popular digital coin, the way Ripple works makes it the best example to demonstrate how revolutionary cryptocurrencies could be for cross-border trade and business.
After Bitcoin and Ethereum, Ripple is the world’s italization. But to truly understand how it works, you need to stop thinking of it as a currency. More accurately, Ripple is a self-contained blockchain system which allows for quick, and most importantly hands-off financial transactions.
With Ripple, you can send any amount of money, in any currency, to anybody in the world, with negligible charges. The actual Ripple coin is simply the neutral medium against which these other currencies can be measured.
This system holds a lot of exciting potential for the future of financial transactions. Where fiat currency must be held in either cash or a bank, Ripple provides a medium for peer-to-peer transactions on any scale. This value has been identified by the markets, to the extent that it’s even been used by large international banks like Santander and UBS. Where Bitcoin is largely decried by banks, Ripple has been enthusiastically employed by them.
Why is this so much better than simply transferring money through the bank?
If your UK-based company wants to make sales to people or companies in France or China, your overseas customers will need to send you money for your services, perhaps through a card payment or as a bank transfer.
On the surface, it may seem like the money is taken out of their account and promptly deposited into yours. In fact, that isn’t the case at all – the reason it takes many days for an international transaction to ‘clear’ is because there are so many intermediaries and different stages in the process.
Even the £2.50 you spent on a morning coffee will likely go on a journey through acquirers, providers, authorisers – and of course, banks, before the coffee shop gets to see any of it. All of this takes time and costs money as each entity at each stage takes their fee for processing the payment.
When transferring money abroad or into different currencies, there are even more intermediaries and even more fees. Our financial institutions weren’t built for the 21st century digital age, and the cracks are beginning to show.
The value of cryptocurrencies is that they remove the obstacle that these intermediaries create. And it’s when we consider this ability to move seamlessly between countries and currencies that its potential for international trade becomes most clear. Cryptocurrencies unlock the potential for companies, right from the smallest SMEs to the largest corporations, to be able to grow or expand their business overseas without having to navigate these obstacles – and costs – associated with the traditional financial systems.
The possibilities for increasing competition and trade on a global scale are practically endless.
What’s the difference between Ripple and Bitcoin?
The already enormous number of cryptocurrencies in existence hints at just how great the potential there is as people compete to provide the most useful technical solutions for modern banking and trade. The result of all this competition is a great deal of variety in how each cryptocurrency handles payments.
Ripple, for example, has a tendency to communicate with other currencies better than Bitcoin does. This makes sense when you consider what each system originally set out to do. Bitcoin is fundamentally a currency whereas Ripple is a decentralised method of exchanging currencies, that happens to have its own currency baked into the system. Bitcoin was never really created to blend seamlessly with fiat currencies, whereas the fundamental point of Ripple is to provide a neutral medium between them.
In order to extract your Bitcoins, therefore, or get spendable fiat currency out of the system, you have to pass through an external third party. Ripple on the other hand has a currency transfer system in its infrastructure – so you can get real pounds, euros or dollars from the digital currency faster.
Can cryptocurrencies revolutionise the financial world?
With any question like this the inevitable answer is: maybe. And maybe not – but it certainly has the potential to. Right now, all cryptocurrencies have the potential to become all-encompassing, decentralised financial markets, but as of yet, they still inhabit their own individual niches.
If we wanted to move past the days of fiat currencies and banks tomorrow, the technology is there waiting for us to do so. But are we really about to start buying bread with Bitcoin? Are you ready to give up your bank account, pounds or dollars in favour of this exciting new future in decentralised digital currency? As usual with such enormous levels of systemic change, the response seems to be: you first.
How you handle financial transactions is obviously a hugely important part of building your global business. But don’t forget you need to talk to your customers too! If you’re expanding overseas and offering products to new markets, Bubbles is here with to help with our expert language translation services.
