Why cryptocurrency is the elephant in the room
We’ve all once heard of cryptocurrency in our lives. It is always on the news alongside weirdly fluctuating graphs but isn’t broadcasted long enough for you to understand what they really mean. Some of you may associate cryptocurrency (such as the Bitcoin) with stock markets, superficial codes, or even gambling(sshh). Like this, cryptocurrency, also known as digital cash, already causes confusion amongst us all in terms of what it is really used for. Nevertheless, it isn’t only the elephant in the general public’s room, but also in the economists’ room. In fact, cryptocurrency is one of the most controversial and relentlessly debated topics today. This article will be your beginner’s guide to cryptocurrency as it unpacks the reality of it and how it may be used. I wholeheartedly hope that this article would stimulate you to ask more questions about this so called ‘taboo’ sector of our economy.
What is cryptocurrency anyway? Cryptocurrency, by its words, is a virtual currency secured by cryptography, which makes it nearly impossible to counterfeit or double-spend. Like any other currency these ‘tokens’ are bought with the currency you hold but can only be spent on its networking service. Many of these are based on a 'blockchain technology' where the 'blocks' store all the information and data of the transactions made. A standout feature of this currency is that they are usually not centrally issued and distributed but rendered theoretically ‘immune' to governmental intervention. This explains why the Bitcoin was originally found to rebel against ventral financial authorities. Knowing the very nature of cryptocurrency, you might understand now why it really is the elephant in the room. Several cases across the world show that despite the purpose for which it was created, digital cash has been used for corrupted and illegal processes, such as gambling and drug dealing.
Nonetheless, some central banks are testing their own digital currency such as in the Eastern Caribbean (Grenada, St.Kitts and Nevis) and China (on a much larger scale). Wait-why on earth would any national bank want to implement or even experiment with this? Despite the volatility of cryptocurrency, it actually proposes several advantages to our economies. Technical difficulties can be overcome; money transfer across borders would be faster and cheaper, and access to legal tender in countries where cash supplies are falling would improve. Moreover, when the government operates cryptocurrency themselves, it allows them to intervene and monitor illegal activities better. Keep your friends (actual monetary policies) close, but your enemies (cryptocurrency) closer!
At this point you may start to question whether cryptocurrencies are really harmful, actually beneficial, or both. Well, if there were only advantages as mentioned above, there would be no reason for us, until today, to call cryptocurrency ‘the elephant in the room’. Allow me to explain further through ‘Diem’, the cryptocurrency proposed by Facebook.
Contrasting to the previous controversies about the Bitcoin being used for drug dealing and gambling, Diem is now presented to be a practical method of making transactions. Operating all around the world, it wishes to track the value of low-volatility assets, contrasting to 'Tether'(the most popular stable-coin) which follows the US Dollar. It has the vision to introduce a stable global currency to all countries but Low-Income Countries (LICs) in particular, as they currently are in a vulnerable position in global transactions. As their income and economic strength is weaker than other more developed countries, they often face problems such as dumping and unfair trade. Facebook wishes to provide less developed countries a voice in the international market and empower their consumers. (wait where did the elephant go?)
In spite of such international initiatives being very ambitious and righteous, there are continuously rising doubts of the viability of these new cryptocurrencies. The whole concept and goal of these is to enable the access to a global currency to everyone, which realistically speaking, is practically impossible. First of all, most lower income countries do not have adequate infrastructure to support these digital services. Secondly, the users, not only in LICs but across the whole world, may not be familiar with such technology and would require large-scale training programmes and long timeframes to normalise in different economies. Last but not least, the risks of transforming a national currency to completely digital cash distributed by a private company is immensely high. Considering the recent concerns regarding neo-colonisation of African countries through infrastructural investment, cryptocurrencies like Diem may create an interminable financial relationship between more and less developed countries. (aha, here it is!)
Of course, there is the option of pursuing a dual pathway, which would keep the current national currency and add cryptocurrencies as an additional option. This may sound genius on theory, but in terms of economics it would amplify social inequalities and polarisation. For example, the elite or upper social class may use Diem, whilst everyone else uses the national currency. This would affect consumer prices and sovereignty, as a product which may be average priced in Diem, may be extremely expensive in national currency. It is essentially bringing in the problems amongst different global economies into a domestic market. Additionally, as these two currencies are influenced by different factors, the national economy would become extremely unstable.
Hopefully, now you are much more confident about the topic of cryptocurrency, and the next time seeing golden tokens and weirdly fluctuating graphs on the news won’t be as frustrating as before. I’d like to leave you with one final question: do you still think cryptocurrency is the elephant in the room, or is it really the cursed treasure?
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