A new report by Deloitte University Press says bitcoin has great potential to disrupt payments and other industries, but that the media may be “distracting” governments and businesses from the technology’s advantages.

The report, titled ‘Bitcoin: Fact. Fiction. Future.’ and authored by Tiffany Wan and Max Hoblitzell, points out that the media tends to focus on bitcoin’s volatility, government crackdowns and exchange meltdowns instead of “its potential long-term significance as a disruptive new money technology”.

In addition, Deloitte UP sees potential for bitcoin in fields that are often overlooked even by proponents of the digital currency:

“Bitcoin is more than just a new way to make purchases. It is a protocol for exchanging value over the Internet without an intermediary. Much has been written about the payment applications of bitcoin, including remittances, micropayments, and donations. However, bitcoin could soon disrupt other systems that rely on intermediaries, including transfer of property, execution of contracts, and identity management.”

Bitcoin evolution and new use cases

The report argues that new use cases will emerge as bitcoin continues to evolve, opening up a new range of opportunities, along with new challenges for governments and businesses.

Bitcoin, it says, has the potential to change the way governments regulate the market and enforce the law, while companies could continue to innovate and eventually change the way we conduct business and think about work.

“The sooner the public and private sectors understand the potential of this new technology, the better prepared they will be to mitigate its challenges and realise the benefits of bitcoin and other similar virtual currencies,” the authors concluded.

In the report, Deloitte UP explains how bitcoin, via cryptography, is used to create an open but securely authenticated system, and why it has to deal with less overhead than the traditional payments system.

However, in addition to this general optimism, a number of fairly serious challenges facing bitcoin are also mentioned.

Speculation and regulation

Deloitte UP lists volatility, regulatory uncertainty, exchange security, transaction volume and ease of use as its biggest bitcoin caveats.

Speculators rank high on the list, adding to the volatility and creating the impression of a get-rich-quick scheme. Thus, they introduce more reluctance on the part of everyday investors.

The regulatory environment still leaves much to be desired. Like speculation, regulatory moves have a big impact on the price, creating even more volatility.

“As governments begin to issue consistent guidance on bitcoin, businesses may become more willing to accept it as a form of payment,” the report says.

Security and ease of use are both seen as stumbling blocks for the emerging technology, and the authors clearly state that the system needs to be vastly improved to make bitcoin truly practical for the average consumer.

The conclusion is simple: mainstream users are unlikely to use bitcoin until wallet services develop more user-friendly and secure storage techniques. Cold (offline) storage does little to encourage users and, furthermore, goes against the basic principle behind digital currencies.

Another factor weighing down bitcoin is the relatively low transaction volume of about 60,000 transactions per day, which pales in comparison to Visa’s 150 million daily transactions. The bitcoin network would have to evolve and grow to accommodate mainstream transaction volumes, raising questions about bandwidth, storage and power efficiency.

More than money

However, unlike Visa and other credit card companies, the bitcoin block chain can be used for a range of different purposes.

Deloitte UP examines bitcoin as a payments system and as a way of transferring value across the globe at much lower fees than traditional systems. Bitcoin could thus disrupt the remittance market, valued at $514bn in 2012, according to the report.

This excerpt neatly sums up bitcoin’s benefits in payments:

“Today, if someone buys a donut with a credit card, the merchant pays an interchange fee to the credit card issuer. This interchange fee is usually a small flat amount (10-20 cents) plus a percentage of 1-3 percent. For a low-margin good like a donut, a 10- to 20-cent flat fee can approach 100 percent of the cost of goods. This interchange fee is often passed on to the customer. Using bitcoin, the transaction fee could be lowered to as little as 1 percent. This could ultimately evolve into a new payment system for credit card companies and banks.”

New use cases

In addition to remittances and payments, the authors say the bitcoin protocol could be used to simplify complex asset transfers, ranging from cars to securities. Using a frictionless system to transfer assets, backed by a public ledger, could eliminate the need for brokers, lawyers, notaries and similar services.

Bitcoin could also be used for identity management and execution of various contracts. Using the bitcoin protocol to manage identities would practically eliminate the possibility of forging identification documents and it would help put confidence artists out of work. A network operated by the government, a contractor or any other entity could verify anyone’s identity simply by scanning a bitcoin key.

“This system, based on cryptography instead of paper documents, would simultaneously increase mobility and security. If bitcoin can be used for travel documents, it could also be used for other forms of identity management like social security numbers, tax identification numbers, or even driver’s licenses,” says the report.

Another offshoot of the idea is the use of block chain technology to create and execute contracts. Traditional contracts could be replaced by digital contracts, essentially lines of code that self-execute when a triggering event occurs.

This could pave the way to new financial instruments, reduce legal fees, introduce more transparency into the financial industry and eliminate some of the paperwork that in practically every industry.

Vitalik Buterin’s Ethereum is mentioned as a new venture that combines registry and escrow functionality to execute the conditions of a contract automatically.

As for the future of bitcoin, Deloitte UP does not offer a clear conclusion. It outlines four possible scenarios, but indicates there are simply too many factors at play to pick any one of them.

About the publisher

Deloitte University Press – an imprint of Deloitte Development LLC – publishes original articles, reports and periodicals that aim to provide insights for businesses, the public sector and NGOs.

It draws upon research and experience from throughout the Deloitte professional services organisation, and from co-authors in academia and business.

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