The ‘Crypto Valley’

Exactly 4 months ago, bitcoin developer Mike Hearn, wrote a post on Medium that rocked the community of people who believe in the future of the digital currency and its technology. Bitcoin, he wrote, has failed. “It has failed because the community has failed.. Worse still, the network is on the brink of technical collapse.” The post led to screaming headlines about the end of bitcoin.

And yet, the industry plugs along. At the beginning of 2011, 1 bitcoin was 1 USD, in November of 2013, bitcoin reached its peak at 1242 USD and is currently valued approx 450 USD. And last month, the Wall Street Journal profiled a top ETF (exchange-traded fund) attorney who is advocating for a bitcoin ETF.

But even with the fact that bitcoin is still the undisputed marktleader in terms of capitalization (see https://coinmarketcap.com/), it’s hard to predict, if the bitcoin-experiment will ultimately succeed or fail.

However, the introduction of bitcoin sparked a revolution in finance and economics with the emerge of crypto-currencies and blockchain. This will change the way we use money and valuables in the future. Some say this is like the internet 25 years ago.

In order not to bore you with too many technical details, I keep it simple: Crypto-currencies allow you to buy stuff or send money without having a third party – a credit card company, a bank or Western Union – involved. These so called ‘peer-to-peer’ transactions are therefore faster, cheaper and offer a substantial higher degree of privacy.

The technology behind digital currencies is blockchain. Bitcoin might fail but the blockchain is here to stay. Blockchain is a global database running on millions of devices and open to anyone, where not just information but anything of value – money, titles, music, art, scientific discoveries, intellectual property – can be moved and stored securely and privately. With the blockchain, anyone with a cellphone can make a digital cash transaction.

http://www.youtube.com/watch?v=jbu6I-8mNUo&sns=em

For retail-banks, this has basically the same effect, the invention and broad use of email had for your local post-office. They fear to lose the fees from the juicy payment-business and become more and more useless, if they don’t come up with a competitive solution.

For central banks the problem is that they cannot produce units of crypto-currency like they can print traditional paper money. So the directions from the European Central Bank are mainly focused on warning investors about the unstable nature of cryptos and the high volatility that is involved in their prices.

However, the Bank of England has just revealed a plan to launch its own Bitcoin-like crypto-currency called RSCoin. It will also function on Blockchain. This comes a few months after China’s National Bank announced plans to launch a virtual currency.

However, the impact crypto-currencies might have will probably not be decided in London or Beijing, but in the ‘Crypto Valley’, I recently visited to learn more about.

If you are not working in finance or in commodity-trading or as a corporate tax adviser, then you probably never heard about the city of Zug. Although the cosy town in central Switzerland with just 30’000 inhabitants is on its way to become a global leader in crypto-currencies.

In recent years, young entrepreneurs and programmers have set out to make Zug a leader in innovative technologies supporting the social and economic process of digitalization. With well-educated knowledge workers, stability, excellent infrastructure, low taxes and a tradition for privacy, Zug has become a highly respected destination for ‘Financial Technology’, commonly shortened to FinTech. Over 15 industry-relevant companies including Xapo, (one of the very first to move into the region after relocating from Silicon Valley), Monetas, Ethereum,

Blockchain Source and ShapeShift are operating in the ‘Crypto Valley’.

Now, as the first city worldwide and in a pilot-project, the town of Zug accepts bitcoin payments’ equivalent to 200 CHF (800 RON) for municipal services. The program will last until the end of 2016. An analysis will follow and the city council will decide if bitcoin and other crypto/currencies are acceptable as payments for municipal services without any restrictions.

Paper money was invented by the Chinese 1’200 years ago out of necessity. Carrying large bags of metal coins over long distances wasn’t practical. And Chinese businessmen weren’t about to cut their profitable trade routes short just because their horses couldn’t carry that much weight.

Crypto-currencies are not necessary in the same way. But then, who needed smartphones (more about in tomorrow’s post), when people lived without it for centuries?

Whenever I have to decide whether I should accept or reject a new technology, I think of my former boss in the 90s. When he was asked, if our department would like an email-account, he almost kicked the data-guy out of the office and yelled: “We don’t need that sh.., we have a fax-machine!!”

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In a pilot project in the swiss town of Zug, people can now pay fees for municipal services with bitcoin.