Is Cryptocurrency the Future of Money?
Cryptocurrency has become an increasingly popular form of payment, investment and asset for many people, so much so that many are considering it to be the new form of money. However, cryptocurrency has its fair share of scepticism surrounding it; money-stability being the primary concern. It lacks the physical touch that traditional money has and no government agency is accountable for its supply, leading to its price mainly driven by demand and supply. This makes certain aspects of it highly volatile which can be difficult to rely on as a trustable form of money.
That being said, we cannot presume that the entire tree is bad just because a rotten apple falls from it. In fact, cryptocurrency has been proven in certain ways to be more secure, efficient and cheaper to transact with a close to zero intermediary cost if not none at all.
Understanding Cryptocurrency
In order to understand why cryptocurrency is safer, faster and low-cost to transact, we must first recognize what cryptocurrency is and how does it work. In short, cryptocurrency is a form of digital asset created to be more secure, anonymous, and can be exchanged virtually for goods and services.
Unlike traditional forms of money, which are mostly physical and centralized — ruled and created by the central banks, strictly regulated by government authorities, cryptocurrency relies on decentralized technology. This is also known as a blockchain, which allows the exchange of goods and services without going through a central banking system. According to a research, cryptocurrency transactions are sent and received as quick as an email. It is also processed with very minimal fees, which allows its users to avoid the steep charges imposed by most banking systems. Thus, this creates a quicker and inexpensive transaction as it does not include an intermediary in the process, or any underlying fees since it is transacted directly to the intended receiver.
The Discovery that solidified Cryptocurrency
One of the primary concerns of any cryptocurrency firm is the issue of double spending. Double spending is when an individual transacts an amount of a said cryptocurrency and incidentally, is still able to use that amount more than once. This occurs mainly because the initial transaction record was not widely maintained across the entire blockchain with all of its users. Thus, this effectively creates a discrepancy between the spending history and the balance of the said cryptocurrency available.
However, cryptocurrencies today rarely face the issue of double-spending as it was solved by the first usable cryptocurrency, Bitcoin, created by Satoshi Nakamoto.
Bitcoin achieved it by implementing several authorization mechanisms for each transaction, and maintaining a single universal ledger blockchain which only allows new information to be added, but not altered or deleted. This way, the blockchain retains all time-stamped activities and transactions dating back to the very start of the cryptocurrency.
This complex process eliminates any possibility of double-spending and counterfeiting, making cryptocurrency extremely secure and hard if not impossible to manipulate. On the contrary, traditional money does not adopt a universal process of tracking ownership or identifying legitimacy. Although double spending does not occur with traditional money, it is however still more prone to manipulation and counterfeiting. Hence, cryptocurrency brings higher security, efficiency and lower costs in comparison to traditional money due to the nature of blockchain and not requiring a intermediary, making it a reliable medium of exchange for many.
Why the Concept of Cryptocurrency works?
What makes cryptocurrency widely adopted is its deflationary nature and use. Due to this, many people view cryptocurrency as a form of investment or an asset that will grow over time and increase their purchasing power. Most cryptocurrencies on the market produces a fixed amount of currency supply, this eliminates the issue of inflation which traditional money is prone to. An example is Bitcoin, which has generated or “mined” 18.9 million bitcoins in supply up to date. Once a total of 21 million bitcoins are produced, no more can ever be created and the value of Bitcoin will start to rise as more users adopt it.
On the other hand, the central government has the power to print as much money as they want and inject it into the economy, this causes the value of the currency to fall as there is more circulating supply in the economy, which leads to inflation. As a result, with most cryptocurrencies negating the issue of inflation, it creates an opportunity for it to be held as a potential store of value, contributing to factors that could replace traditional money.
In fact, in countries that constantly face hyperinflation and have a failing currency, cryptocurrencies and alternative store of value assets are often seen as more powerful than their own currency. In 2009, the Zimbabwean dollar was abandoned by its own people due to the numerous hyperinflation outbursts which were a result of the country’s political and economic turmoil. This caused the national currency to fall drastically, so much so that people would rather hold cryptocurrency than to watch their assets crumble in value.
According to an article published by Deutsche Welle, the use of Bitcoin in Zimbabwe soared incredibly because it is now viewed as a safer store of value for them. With many Zimbabweans employed overseas, Bitcoin is mainly used as a way to transact money home and across borders in order to avoid the steep fees imposed by most banks. That being said, the people of Zimbabwe also recognize the value of cryptocurrency, they believe that it is more useful than its own currency, and are willing to use it as a means to retain the value of their assets.
Thus, cryptocurrency has the potential to substitute traditional money, not necessarily in countries that command a powerful and stable economy, but in countries with a falling economy where the livelihood of people are challenged and they seek a more stable form of currency or asset.
Fearing Cryptocurrency
On the contrary, one of the primary drawbacks with the decentralized nature of cryptocurrency is its accountability to its users. With the redundancy of intermediaries or a banking system, it begs the question of who will be held accountable if something goes wrong. For example, no one will be responsible for any loss of funds due to human error or potential technical issues other than the user himself.
However, in the case of traditional money, financial intermediaries protect the interest of their users and are mostly held accountable for any discrepancies that occur. For example, when a credit card is misplaced, the bank can replace it, track, reverse and block any unauthorized transactions.
Furthermore, the anonymity and privacy of cryptocurrency users also serves as a double-edged sword which enables equal resources and eliminates any form of discrimination, but also creates an opportunity for malicious users as it is nearly impossible to identify or track users. Meanwhile, financial intermediaries or a centralized banking system help regulate activities and track suspicious movements.
As a result, although the decentralized nature of cryptocurrency makes it highly secure and transparent, the lack of accountability and regulation can lead to distrust in the currency as people want more insurance on their assets. With users being susceptible to unwarranted malicious activities within the cryptocurrency space, it also creates fear as their assets are not protected by an intermediary or banking system. All things considered, with great freedom comes great responsibility, however, some of the freedom cryptocurrency embodies is still holding it back from potentially substituting money.
Can Cryptocurrency qualify as Money?
Money has three functional factors for it to be considered reliable; a medium of exchange, store of value and a unit of account.
Cryptocurrency can function as a medium of exchange since its value is universal throughout the market and it is increasingly becoming more accepted as a form of payment in return for real goods and services. Additionally, cryptocurrency is also eligible as a unit of account as it can be used to proportionately price things.
However, for cryptocurrency to function as a store of value, it varies between different circumstances and situations. For example, in countries with a weaker economy and banking infrastructure, people lose faith in their own currency and resort to cryptocurrency as an alternative store of value asset. Although it poses the risk of prices fluctuating throughout the day, it is still seen as more secure than their inevitably falling currency. On the other hand, in countries with a stronger economy and banking infrastructure, it is highly unlikely for people to fully adopt it as a stable form of money, however, it is believed that it will be used more as a utility currency in these countries.
Fairing against the Real World
Cryptocurrency has the ability to replace money under certain circumstances and in some parts of the world, not all. Even though cryptocurrency brings a lot of benefits and opportunities such as security, speed and low-cost, it is still too early as certain aspects such as its lack of accountability and price volatility prevent it from fully substituting money in stable economic countries.
Furthermore, it is highly unlikely for countries with a stable economy to fully implement a decentralized system as it would be detrimental to their banking systems. This is because it would take away a massive chunk of revenue from the banks. It may be possible in the future with a level of regulation and accountability whilst retaining most of its decentralized nature. For example, incorporating a level of centralization where assets can at least be insured, or partnerships with banks where trading and transactions of cryptocurrencies can be a new form of service.
However for now, it is only possible for challenged economies where it is highly prone to currency inflation, scarcity of bank services, and where people seek a more stable form of currency or asset.
Source:
Mazikana, A. T. (2018). The Impact of Cryptocurrencies in Zimbabwe. An Analysis of Bitcoins.
Reiff, N. (2020). How does a block chain prevent double-spending of Bitcoins?
Sullivan, A. (2017). Why bitcoin is valued in Zimbabwe?
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