There has been so much FUD (fear, uncertainty, doubt ) and fake information floating around regarding cryptocurrencies that it makes sense to look at this from a data and verified information perspective. So, a short summary of the advantages and disadvantages of cryptocurrency and the viewpoint of Governments and Central Banks around the world.
What is a Cryptocurrency
Well, there are several definitions that are floating around, however here’s the one that I think describes them best:
A cryptocurrency is a digital currency in which transactions are verified and records maintained by a decentralized system using cryptography, rather than by a centralized authority. Its usually based on blockchain technology which enables the decentralized authority and ownership and in-built security for the transactions. Most cryptocurrencies today are privately held, although there are discussions around the world central banks to start their own digital currencies, also known as CBDC (Central Bank Digital Currency)
Advantages of Challenges associated with Cryptocurrencies
Here’s what makes a cryptocurrency very attractive:
– It’s a direct 1 to 1 transaction between 2 bodies and very similar to a cash transaction as opposed to a third-party requirement for a digital payment transaction. Due to the distributed ownership and accountability model offered by the underlying blockchain technology, it is possible to do such a direct transaction
– Cryptocurrencies are convertible to any of the world other currencies online through an exchange at any point in time
– All these transactions are very secure, leveraging the inherent security of blockchain transactions
– It is fully transparent and yet offers anonymity behind cryptic wallet ids
– Some of the cryptocurrency like bitcoin have set limits to the number of bitcoins that can ever be minted, making the currency immune to inflationary trends
Some of the Challenges are:
– While decentralization is a positive it also implies that there is a lack of an institution that can regulate and protect the cost of the money.
– This is turn results in volatility
– While there seems to be a positive relationship between increased investments in Cryptocurrencies and the state of the world economy, it is unclear as to what other parameters may influence this relationship
– It is also not clear to the ways and number of uses that can emerge for cryptocurrencies (e.g NFTs have become more popular recently as a form for trading art .
– All these aspects create a challenge for regulators and the formation of a regulatory framework for the same
The viewpoints of Governments and Central Banks around the world:
Most Governments and central banks are taking a very cautious approach towards cryptocurrency. One of the concerns is extreme volatility and there are also concerns around Issues with tax evasion.
European Central Bank: As per an Analysis released by Central Bank in Europe “ From an economic perspective, the virtual currencies currently known about do not fully meet all three functions of money defined in economic literature: i) medium of exchange (money is used as an intermediary in trade to avoid the inconveniences of a barter system); ii) store of value (money can be saved and retrieved in the future); and iii) unit of account (money acts as a standard numerical unit for the measurement of value and costs of goods, services, assets and liabilities).”
(From the Virtual currency schemes –a further analysis – February 2015, European Central Bank )
United States Federal Reserve: Earlier in November m the U.S. Federal Reserve Chairman Jerome Powell confirmed that the US has no plans to ban cryptocurrencies. He did reiterate the need to resolve technical issues that remain and the fact that governance and risk management will be crucial before cryptocurrencies become part of mainstream society.
People’s Bank of China: The People’s Bank of China (PBOC) said cryptocurrencies must not circulate in markets as traditional currencies and that overseas exchanges are barred from providing services to mainland investors via the internet. The PBOC also barred financial institutions, payment companies and internet firms from facilitating cryptocurrency trading.
Bank of Japan: The bank is currently testing a ‘digital yen,’ the digital version of its fiat currency, but remains shaky on the topic of cryptocurrencies. Bank of Japan governor Haruhiko Kuroda has concerns around the volatility associated with the currency and the speculative nature of the trading of cryptocurrencies.
Bank of England: Former Bank of England Governor Mark Carney called cryptocurrencies part of a “revolution” in finance, making the central bank one of the few governmental proponents of the technology. This however does not mean that there is unilateral support for the existing cryptocurrencies, but a more definite forward movement towards a Central Bank Digital Currency (CDBC)
Reserve Bank of India: The Finance Ministry has received a proposal from Reserve Bank of India (RBI) in October, 2021 for an amendment to the Reserve Bank of India Act, 1934 to enhance the scope of the definition of ‘bank note’ to include currency in digital form. This is however more likely in preparation of a CDBC than the support to private currencies.
Conclusion
As of first December 2021, The Total Market Cap of all the Digital Currencies stands at $2,635,105,410,768. (2.6 trillion dollars). This is close to India’s GDP of 3.05 trillion in 2021. Can this wealth of private individuals be erased without any repercussions? I don’t think so, and hence I believe that even as CBDCs come up there will be a place for the private currencies with some regulations and governance in place.