Could cryptocurrencies be a serious alternative to the dollar?

With its wild fluctuations, which even created some "Bitcoin billionaires", the cryptocurrency craze that has swept the financial world over summer is hard to ignore.

Yet for all the hype about the Bitcoin roller-coaster, is there any chance we will one day be doing the shopping with Bitcoin, or some other crypto-dollar?

This question has the potential to affect all of us, not to mention the core institutions at the heart of our financial system. And it's not quite as far-fetched as it may sound.

At the moment Bitcoin looks to have taken off as a highly speculative asset, rather than a realistic alternative to money.

In the longer term though, the answer is more complicated than that, because there is an undeniable shift towards digital payments taking place, and types of technology closely linked to Bitcoin and other "cryptos" clearly have some real uses.

Bitcoin is a digital "peer-to-peer" currency. It is not issued by a government or central bank, and it can be moved around without involvement of banks.

It surged by more than 2000 per cent over 2017 to about $US19,000 last month, but had dipped back down to near $US11,000 at the time of writing.

Yet for all the frantic trading activity, there are compelling reasons to think that it's not about to catch on more widely.

Managing director of payments consulting firm The Initiatives Group, Lance Blockley, says Bitcoin will probably always be tainted by its association with "nefarious activities," given that it is untraceable, can be used anonymously, and it therefore attractive to criminals. For this reason, it will likely remain "on the fringe," he says.

"Why does one need to make an anonymous, untraceable payment if what you are doing is legitimate?" he says.

The huge price swings are also an obvious problem. How can you confidently make transactions when a currency's value might fall by a quarter overnight?

As well as being a "store of value," money acts as a "means of exchange".

But the transaction costs from paying in Bitcoin also skyrocketed in recent months, rising above $US30 per transaction at their peak last month, making it near useless for small transactions.

Reserve Bank governor Philip Lowe also highlighted in December that money issued by private individuals - rather than governments - had a history of "periodic panic and instability." That's why governments stand behind currencies around the world.

Electronic currencies could also more susceptible to bank "runs", he said, because it would be easier to do the electronic equivalent of taking all your money out of the bank.

But he would say that, right? The RBA issues money in this country - why would they want to lose control of that?

Well, yes, the RBA is unlikely to suddenly advocate radical changes to the financial system. But even this conservative institution does acknowledge there is serious potential for some form or electronic dollar in the future.

Lowe's speech said the RBA had looked at "digital banknotes" - electronic tokens that performed a similar function to physical cash today. Unlike Bitcoin, the RBA would still issue these, though Lowe isn't convinced there is a case for that today.

Payments expert Blockley also says it is important to separate Bitcoin from the underlying "distributed ledger" technology that supports it - also known as blockchain.

There is no doubt this technology can be very useful, by creating a record of past transactions that cannot be changed over time. It is already being tested by banks, and can provide faster and cheaper cross-border transactions.

Indeed, the RBA has also thought about a "distributed ledger" system to make various types of payments more efficient.

It is still very early days, and unclear whether going down this path would make sense, Lowe said last month. But his "working hypothesis" was that while there are many complex questions to deal with, a case for issuing Australian dollars on the blockchain could indeed develop.

So, it's fair to assume we won't be buying the groceries with Bitcoin anytime soon. But the rise of cryptocurrencies could still have a major impact on our payment system in the future.

This story Could cryptocurrencies be a serious alternative to the dollar? first appeared on The Sydney Morning Herald.