On the Generalization of Virtual Currencies

2017/12/01

Virtual currencies, represented by Bitcoin, continue to rise in price without their essence being fully understood, creating a situation where buying begets more buying amid the low appeal of other investment financial products. In other words, quite apart from expectations for Fintech and blockchain technology, they are currently attracting a great deal of attention as objects of investment (or rather, speculation).

The first thing to keep in mind is the future of the IT revolution centered on the internet. With the spread of smartphones and tablets in recent years, not only information searching but also information dissemination using social media is becoming common on the internet, and decentralized diversification is progressing socially.

This trend is about to change stages from the innovation of communication via the internet to a revolution of data, sometimes called the IT Revolution 2.0.

In other words, there is a growing demand for developments that make data—which individuals and companies previously accumulated and held on individual PCs and servers—more accessible, while enhancing its preservation and security. AI technology, represented by autonomous driving, and the IoT (Internet of Things) become more effective if they do not access individual local data, but are instead stored on public data networks, aggregated if necessary (for big data analysis, AI deep learning, etc.), and utilized. The coming IT revolution can be rephrased as whether a public data cloud, where "data is normally placed on the network," can be realized.

What should be noted here is blockchain technology, represented by Bitcoin, and public data networks. The internet is convenient, but on the other hand, placing important data on the network has historically been high-risk and required a very cautious response. However, due to improvements in processing speed and technological innovation, the application of encryption technology and network formation are approaching practical levels. If an individual's important information, property value, or a company's confidential information is encrypted and stored in a distributed manner (multiple copies) on the network, the encrypted data can only be accessed by the person with the key (unauthorized persons will not even know what the data is or what value it holds), and the preservation of data beyond local backups is guaranteed through decentralization.

The people who manage the public data built on the internet infrastructure need to be paid rewards and incentives sufficient to justify their efforts. This is the reason for the existence and necessity of virtual currency (in English, "crypto-currency," or more accurately, "cryptographic currency").

Regardless of country or currency, users pay virtual currency as compensation to those who manage public data clouds and networks in order to keep the network functioning. Virtual currency can be positioned as energy similar to fuel that maintains and develops the network. Furthermore, to enable people who find value in the network to purchase virtual currency, and to allow those paid in virtual currency to exchange it for legal tender in the real world, it is necessary to develop markets and environments where buying and selling at virtual currency exchanges can be conducted smoothly.

Some people refer to Bitcoin as "digital gold," but that is definitely wrong. The utility value expected of virtual currencies, including Bitcoin, lies in the future of IT technology as described above. Since technology undergoes metabolism, it will shift toward things that are cheaper, easier to use, and safer. Similarly, the value of virtual currencies should also shift. This is the same as how, since the invention of the internal combustion engine during the Industrial Revolution in the 18th century, major energy sources have transitioned from coal to oil and then to next-generation energy, with the value of the energy itself transitioning alongside them. This is where the intrinsic value of virtual currency lies. In short, virtual currency is not an inflationary asset like gold. Furthermore, once internet data infrastructure becomes a matter of course, I believe the property value of virtual currency and its liquidity as a means of payment will also become generalized.

As the world changes to one where data = property value = money, there is a possibility that it will replace the remittance infrastructure formed by traditional banking groups. This is where many people see the potential of virtual currency as a next-generation payment method. Among the next-generation technologies called Fintech ("Finance" x "Technology"), blockchain technology and virtual currency are seen as triggering a "payment revolution." The biggest reason financial institutions are paying attention and engaging in information gathering and research and development is that they feel firsthand the risk that their existing business foundations, represented by remittance networks, could collapse amid such progress in IT technology.

As it becomes natural for data to exist on the network, there is no doubt about the necessity and significance of virtual currency as a means of exchange and payment on the network, and I believe its generalization as a means of distribution and use is also natural.

*Affiliations and titles are as of the time this magazine was published.