The brave new world of cryptocurrencies
Eighteen months ago, you could barely open the finance section of a newspaper without seeing headlines about Bitcoin. Cryptocurrencies were the talk of the town, and money poured in from all directions as prices soared. However, it all came to a shuddering halt soon after, as the price of Bitcoin slumped from nearly £15,000 to just £2,500 by the end of 2018, and many other such cryptocurrencies followed suit.
But 2019 has been a year of quiet resurgence, and last week the price of Bitcoin touched £7,500 in the wake of news that Facebook is set to launch its own version of a cryptocurrency, Libra, in 2020. As with most new initiatives launched by the Silicon Valley behemoth, the announcement of Libra has been met with equal parts enthusiasm and scepticism, but, on the face of it, enabling people to pay for a broad range of goods and services with their smartphone anywhere in the world looks a good idea.
So, will this be the watershed moment which turbocharges the world of cryptocurrencies? Let's go back a step first...
What is a cryptocurrency?
In simple terms, a cryptocurrency is a digital currency used for online transactions - rather like digital assets which are traded between one person and another. Cryptocurrency types number in the thousands today, and vary in terms of what they can be used for, their scarcity (and value), and the rules associated with them. Bitcoin was the first of these to launch back in 2009, and there are now more than 250,000 digital currency transactions taking place each day.
The underlying technology is known as blockchain, which acts as a digital ledger that logs the change in ownership of these cryptocurrencies, and stores this data in a public database. The system operates independently of central banks and retains its integrity by virtue of being monitored by a network of specialists known as miners.
Most experts agree that blockchain is both transparent and highly secure, in that it is almost impossible to retrospectively alter the contents of a blockchain. However, concerns persist over a lack of regulation, along with the fact that cryptocurrencies provide the ideal platform for criminals to launder money, given the anonymity they provide.
What makes Libra special?
Facebook's proposed digital currency is set to carve out its own niche by virtue of its sheer accessibility. Two billion people use Facebook or one of its apps every month, and each user will be able to purchase this new digital currency once launched - regardless of whether they have a bank account or not. Libras will be purchased, stored and spent through a digital wallet provided by a subsidiary platform, Calibra, which is also synced to Facebook's messaging platforms.
The currency has already been endorsed by Visa and Mastercard, along with other global giants such as Spotify and Uber, meaning there isn't much that a user wouldn't be able to pay for with Libras. Once integrated with point-of-sale systems, payments made in store will be much the same as tapping a debit or credit card too, while Libras could also be exchanged between friends or family by way of text message if conducted through Whatsapp or Messenger.
The other core benefit championed by Facebook is that of reduced volatility compared with other cryptocurrencies. Given that Libras will be backed by major international currencies such as the dollar and the euro, along with central bank asset reserves, price fluctuations are expected to be relatively small.
Calibra will double as the medium through which compliance, Anti-Money Laundering (AML) and identity checks are conducted on prospective customers. The subsidiary will also be tasked with data protection responsibilities, while Facebook has already stated that customers who fall victim to fraud will be compensated.
So what's the problem?
If it does what it says on the tin, then the good would seem to outweigh the bad. The inconvenience and enormous fees associated with international payments at present is becoming harder to justify in a digitised world, and it is thus a market ripe for disruption.
However, there are fears that this could fire the starting gun on a single global currency, and given Facebook's recent reputational damage from data breaches, and their circulation of dubious content and propaganda, the thought of the firm steering such a ship induces trepidation.
Facebook has already observed that it would follow all compliance processes currently set out, including KYC and AML, and that transaction data will be kept separate from Facebook profiles. It is also just one of 28 members of the Libra network, with a view to growing this to over 100 - and then stepping away from a leadership role next year.
Nevertheless, many find it tough to take Facebook at their word, given the various fines and charges they are currently facing across the pond (pending the outcome of investigations by federal prosecutors). Affording the company such a large degree of power within the global system has significant implications for financial stability too, given the vast sums that might flow out of the monetary system into the Libra network at a rapid pace. There are also grave concerns over their ability to vet the legitimacy of money which flows into the system. And then, of course, there is the issue of trust when it comes to data handling.
Where to from here?
One can't help but wonder if regulators have been caught off guard by this bold new venture, and there has yet to be any significant response from watchdogs around the world – bar Mark Carney, who struck a tone of cautious optimism, rather than scepticism. Arguably, this is a common theme with cryptocurrencies in general, which remain relatively unregulated compared to banks and mainstream financial services providers.
There is no doubt that blockchain is here to stay, and if this continues to manifest in the form of cryptocurrencies, then their rise to dominance becomes an inevitability. We need not fear such an eventuality, and indeed the many benefits should be celebrated. Decentralising the immense power that central banks currently wield is surely a force for good, and any technology which makes payments simpler, cheaper and faster gets a nod of approval from us.
That said, cryptocurrencies deserve fair and proportionate regulation, as does every other sector within financial services, and it would be encouraging if the powers that be respond in kind with a proactive approach. It’s easier said than done, as the very borderless nature of cryptocurrencies makes it tough for single nation states to police them. But, having done so much good work in overhauling the financial system since the crisis a decade ago, it would be lunacy for regulators and central banks to allow a single company to undermine it all - regardless of its stature.
Our website offers information about saving, investing, tax and other financial matters, but not personal advice. If you're not sure whether peer-to-peer lending is right for you, please seek independent financial advice, and if you decide to invest with Lending Works, please read our Key Lender Information PDF first.
Since opening our doors back in 2014, we’ve always prided ourselves on living and breathing two key principles at Lending Works: innovation, and putting the customer first in everything we do.
With the retail sector enduring its fair share of challenges, companies are looking at new ways to attract customers, and drive conversion. In an overcrowded, dog-eat-dog marketplace, with behemoths such as Amazon flexing their muscle, it’s easier said than done.
On 4 June 2019, the Financial Conduct Authority (FCA) released its new regulatory framework for peer-to-peer lending (P2P); a Policy Statement known as PS19/14. As you might imagine, it's a document which, following a three-month consultation, is a hefty read of no fewer than 102 pages.
In a difficult climate, customer acquisition and lead generation present stern challenges for UK retailers, and a great deal of marketing spend invariably gets directed towards getting feet through the door.
Over the last decade, there can be little dispute that the reputation of mainstream banks – and particularly the so-called ‘Big Four’ (HSBC, Barclays, Lloyds and RBS) – is at its lowest ebb.
The peer-to-peer (P2P) lending industry is now regulated by the Financial Conduct Authority (FCA). The regulatory framework has been designed to protect customers and promote effective competition.
January tends to be a comedown following the Christmas festivities, and, from a personal finance perspective, a time for many Britons to lick their wounds. In particular, for those who’ve over-extended their credit card, it may feel like the walls have started to close in.
A new year, and indeed a new decade has dawned. Reflecting on 2019, what seemed to have got lost in the noise and political hysteria was the fact that the UK economy actually held up remarkably well.
As the good times rolled in the mid-2000s, only a precious few sounded the alarm as lending became increasingly reckless. Northern Rock's infamous 'Together' 125 per cent mortgage epitomised the rush for high loan-to-value (LTV) deals at a time when it was thought that house prices would just keep going up forever.
For those with an eye on the economy, 'GDP day' is always one to mark off in the calendar each month. And it's been a hot topic for the UK in 2019, with the latest update showing zero growth for the period from August to October.
One of the perceived strengths of the auto-enrolment pension scheme is its simplicity – indeed, it is actually a greater effort for an employee to opt-out of a workplace pension than it is to be enrolled into one. No further actions are required, and the retirement fund grows as the months and years pass by.