A few years ago bitcoin was not widely known. But when a host of other crypto projects emerged, the world was forced to take a closer look. The growth of cryptocurrency payments around the world seems to suggest a change in markets. Countries like Japan already recognize Bitcoin as a legal tender. Could the rest of the world follow? The big question, in fact, has always been this: could we see cryptocurrencies replace real money?
Even though this looks to be something very much possible, it isn’t straightforward. A good way to look at it is to understand the concerns and benefits of cryptocurrency as legal world tender.
What are some of these concerns?
Unstable Monetary policy: The set protocols that govern cryptocurrencies are what could be considered as their monetary policy. These protocols are manageable to a certain extent but with the increasing growth of transactions, verification is becoming more and more constrained.
On the other hand, fiat money, having a central regulator, forms considered monetary policies that can be regulated using interest rates and buying of bonds to stabilize inflation. Nothing is left to chance.
Cryptocurrency investment is highly speculative and poses great risk. The system does not respond to shifts in money demands and this often results in unexpected fluctuations either upwards or downwards. Such unexpected declines can have disastrous consequences on an economy.
Because participants are not confined to any particular area, there is the possibility of creating a greater trade and capital flow to favor a certain area and at the same time cause a collapse of the economy of another area. This is exactly what fiat money strives to correct by some areas creating a unified currency like the Euro or dollar.
If one set of users in the world makes a partial adjustment, the effects will spill over to everyone else. This kind of spillover effect would disturb the business cycles of all surrounding neighbors and puts a toll on the central fiscal authorities to work their levers harder to stabilize their economies.
Cryptocurrencies can be stolen electronically and since no single person owns the system, there would be no legal redress to issues. On the contrary, any deal gone sour with the fiat money can lead to a proper legal process.
Loss of Government control
Every country's currency is controlled by the individual government. This right would be denied them if cryptocurrencies were to take over and any response to unpredicted financial turmoil would have to run full course as the government's hands would be tied in making decisions to curtail furtherance of such an occurrence.
Breakdown of a known system
In the event that cryptocurrencies take over, infrastructure to adapt to the new system would have to be developed the world over. Fiat currency would then become incompatible with the new currencies and besides the obvious loss in its value, established financial institutions would inevitably collapse.
The very reason that makes cryptocurrencies stable could be the same cause of their undoing. By being decentralized and having no centralized ownership, it becomes very fragile and susceptible to external interference. What this implies is that governments can increase regulations and decide that the cryptocurrency market is a money laundering scheme thereby prohibiting all forms of involvement from its citizenry. If a string of governments collaborate and enact such laws, its collapse would be sure.
With all these concerns of a crypto takeover, are there are any real benefits to be accrued from such an eventuality?
Benefits of a crypto takeover
Every coin has two sides. Cryptocurrencies too have their fair share of benefits.
Due to their decentralized operational nature, cryptocurrencies cannot be readily manipulated as it commonly happens with the fiat currency. In effect, this means that there would be fairness in the way income is earned and huge gaps would be closed as pertains to economic classes as we presently know and abhor them.
Low operational costs
Middlemen would not be necessary as all transactions are purely electronically driven. This means that operational costs that are generally passed on to the consumer would be greatly reduced and the benefits enjoyed by the same consumer in terms of more earnings.
Unlike fiat currency, cryptocurrencies, though universal, are not bound by any country's forex rates, transaction charges, interest rates and other transaction charges or inter-country charges. This makes them ideal to operate at a universal level easily. They are recognized worldwide.
The safety with which the cryptocurrencies operate is awesome. Every user has a private key known only to self and a public key that makes up the cryptocurrency address. These are very personal and can only be lost by self or if hosted by a web-based service that is prone to fraudulence. This is quite unlike the conventional accounts we hold which though said to be personal, every detail is attached to someone else basically a financial institution or company.
There are an estimated 2.2 billion people who use mobile phones and in effect access internet. Of this huge number, only a small fraction has access to traditional fiat exchanges either by reason of infrastructure, literacy levels, poverty and a host of many other reasons. The cryptocurrency market is targeting these mobile phone users with the logic that as long as one can use their smartphone, then one can transact. Most transaction platforms have very user-friendly interfaces that require no basic technical knowledge. A third world country like Kenya has 1 out of every 3 Kenyans now owning a digital wallet. That speaks volumes on the direction the world is taking.
In hindsight, we can say that it isn't outlandish to think that cryptocurrencies can replace real money. It is however not a decision that can be arrived at any time soon as the impact this transition may have on governments and major institutions is enormous. It is, however, safe to state that though cryptocurrency may not be an end in itself, it has however sparked off a re-look into new fundamental systems that will definitely change the global economic system.
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