Digital currencies such as bitcoin have captured a significant section of the market and are continuing to do so. Yet, people have somewhat mixed perception about them – while some believe that they have the potential to replace fiat currencies, others think they are not going to last.

In a latest report, Peter Dixon, Global Equities Economist at Commerzbank, says that the claims by bitcoin enthusiasts that the digital currency will eventually replace conventional currency is somewhat “far-fetched”, adding that bitcoin has yet to convince investors that it can replicate many of the functions of money.

“The extent to which bitcoin will displace other currencies is open to question. Although it has become more widely accepted as a medium of exchange, its use as a store of value depends very heavily on its stability”, he said.

However, as is being widely believed, Dixon said that blockchain technology, upon which bitcoin is based, represents a “genuine revolution in the management of decentralised processing systems which has the potential to transform data management.”

“It is this non-centralised nature of the ledger (the blockchain) which is the true innovation resulting from digital currencies”, he added.

Dixon further says that the defining feature of the blockchain technology is the manner in which it achieves consensus regarding proposed changes to the ledger. While in conventional monetary systems, we have to trust the banking system to act in the best interests of participants and ensure that the ledger is maintained, the blockchain offers a way around these constraints.

“From a systems perspective, the blockchain is a genuine revolution”, he said.

Blockchain technology has the potential of eliminating many of the risks associated with the conventional ledger system, such as credit risk, liquidity risk and operational risk.

“Due to the fact that in a decentralised system transactions are conducted directly between individuals, there are no intermediaries to introduce credit and liquidity risk which are thus virtually eliminated. And since the technology is distributed across many users, operational risks are correspondingly reduced”, Dixon explained.

However, the technology fails to eliminate fraud – as agents do not have to disclose their identity when transacting in a decentralised system, there is less risk of identity theft, he added. In addition, there is a greater risk of direct loss if agents lose the private key which allows them to access their digital wallet. There is also bigger risk of systemic fraud if hackers succeed to gain access to a large proportion of the systems linked to the bitcoin network.

Dixon concluded saying, “In the years to come, even if bitcoin is relegated to a footnote in monetary history, blockchain technology is likely to still be with us, even if some of the claims currently made for it prove to be exaggerated.”