Bitcoin is forecast to become an important instrument in international trade, as well as a means to protect businesses from forex risk, according to a report released by Citigroup’s Citi GPS unit on March 1.
There are inherent advantages in the Bitcoin system, according to the report:
- “Borderless Design: Bitcoin is decentralised. No government owns or controls it
and anyone globally can participate in the market, making it ideal to use as a
universal settlement currency for negotiating contracts and supporting cross-border transactions.
- In countries experiencing currency volatility, Bitcoin might allow merchants to insulate themselves from such fluctuations. Rather than having to utilise multiple currencies to move
goods or offer services, trade partners could have their own Bitcoin wallets that
can send and accept payments to other Bitcoin wallets. This could simplify
contract language and remove potential exchange rate exposures.
- Faster, Potentially Cheaper Money Movements: Cryptocurrency transactions
occur faster and more seamlessly than wholesale fiat payments. The transaction
itself posts instantaneously and the actual transfer of funds can be accomplished
in a matter of minutes and typically at much lower cost. The peer-to-peer nature
of Bitcoin makes it hard for governments to tax or attach fees to such
- Secured Payment: The merchant or individual receiving Bitcoin knows the funds
are secure because the entity sending the Bitcoin had to have had the money in
their digital wallet in order to initiate the payment request. This reduces the risk of
payments bouncing or credit transactions being cancelled.
- Traceability: The nature of the Bitcoin blockchain ledger means every
transaction is transparent and trackable. Smart contracts can be designed to
monitor these transactions. Tracking algorithms can monitor for a successful
Bitcoin payment into a designated wallet in order to initiate the next step in a
multi-step cross-border transaction or monitor the movement of goods into or out
of a specific country’s customs database in order to trigger the release of Bitcoin
payments. This could transform the logistics of international commerce.”
There are still issue to resolve, the report notes.
“The main problem is the volume of transactions the Bitcoin network can handle. Analysis from early in
2020 shows Bitcoin executed on average only 5 transactions per second which is 4,800 times slower than the Visa network that handles 24,000 transactions per second. Efforts to improve Bitcoin’s processing speed are underway. Current initiatives are centered on a new type of scaling technology called the Lightning Network. This approach creates a processing layer that sits above the actual blockchain where
transactions happen quickly and cheaply, but are only periodically reconciled on the main chain. This is analogous to commercial banks using the Fedwire system for settling large value transactions amongst themselves and internalising transactions for clients.”
All of this points to the gradual increase in value for bitcoin, as an increasing number of merchants use it for commerce, and more institutional investors take large positions in the original cryptocurrency.