Every new innovation in technology is met with a wave of criticism in the infancy stages. In 1995, there was a serious claim that the use of the Internet would collapse soon. As we now know, this could not be further from the truth. Innovation and digitization have paved the way to a futuristic world we wouldn’t have imagined otherwise. Today, cryptocurrency, Metaverse and Web 3.0 are taking the world by storm. In the span of a few years, cryptocurrencies have grown from the new shiny thing to trillion-dollar industries with the potential to disrupt the global financial structure.
Since the creation of Bitcoin in 2009, cryptocurrencies have exploded in popularity. Although they can offer many benefits to consumers and investors, they can also be leveraged by bad actors and pose economic threats. In response, many governments are considering introducing their own digital currencies.
What is currency?
Currency is a way for people to agree upon the value of something. It allows us to incentivize people to work with us for a common cause. It coordinates human beings and creates value for our services and ideas. We transact globally each day, so we need a system to move money freely. Our current system doesn’t allow that.
What are the shortcomings of fiat currency?
- Centralized: Our currency is centralized. There are lots of middlemen like the government, banks and financial institutions that make transactions inefficient.
- Volatile: Our currency is entirely controlled by the central authorities. Governments can print money as and when needed, which devalues our hard-earned money. Take the financial crisis of 2008 for example. Many banks in the US were filing for bankruptcy and people’s hard-earned money all went to vain. The hyperinflation in Venezuela is another unfortunate case. People started losing faith in the economy.
- No Security: There is no ensuring that money in our banks that we entrusted won’t disappear should a crisis arise. Safety is a luxury not everybody can afford. With central banks and institutions, when they go down, so do we.
Why are cryptocurrencies better?
- Decentralized: Cryptocurrencies are decentralized; because they run on a distributed ledger system that is run and secured by people equally. Without the need for third-party intervention, our transactions are truly peer-to-peer with only our digital identities. Just like I can give you a note directly without the interference of the government or credit card companies, crypto allows us to do it digitally and more securely.
- Scarcity: Cryptocurrencies like Bitcoin are completely finite (there can only ever be 21 million bitcoins that can be mined). Others don’t have a maximum cap but have limits on how many can be generated in a year. So, their value depends entirely upon the demand and amount in circulation. Unlike fiat currencies that can undergo massive inflation or deflation caused by printing rates, cryptocurrencies are scarce and hence stable in value.
- No Single Point of Failure: Decentralization removes a single point of failure. There are thousands and thousands of nodes (computers on the blockchain) that each have their own copy of the entire blockchain. It is incredibly unlikely that they fail at the same time. Your money and ownership information is always safe and untamperable.
- Global Economy: 1.8 billion people in the world have cell phones but no access to financial services. Cryptocurrency allows anyone with a smartphone and internet access to participate in the global economy in a stable way. Because we have a global economy, we need a global currency. A global currency that we were all equally responsible for and invested in would transform our economy. Everyone gets equal opportunities. Their value is recognized and rewarded. People’s savings will stay secure and stable.
- Efficient: Would you really miss banks and paperwork and all that hassle if they were gone and you had full control of your transactions and savings? I am betting on a no. Cryptocurrencies are efficient, easy and fast. That’s why they work.
What challenges has this created?
Cryptocurrencies have also given rise to a new set of challenges for governments to contend with. The anonymity and portability of cryptocurrencies make them appealing to bad actors such as criminal groups, terrorist organizations, and rogue states. There are also no certain regulations for existing and emerging technologies. In addition, crypto mining can require an enormous amount of electricity, which leads to concerns about its environmental effects. Meanwhile, the rise of DeFi and crypto payments has raised questions about consumer protections, market volatility, and the ability of central banks to carry out monetary policies.