Blockchain is the technology that has come up with a digitized and decentralized record of financial transactions involving encrypted digital currency. Completed recent transactions, known as ‘blocks’ are recorded and added to it in chronological order. This technology allows users to trace their transactions without necessarily having to keep records. Each digital device connected to the network gets a copy of the blockchain, which is downloaded automatically.
Blockchain was initially developed as the accounting method for the cryptocurrency, a virtual currency. Blockchains use distributed ledger technology (DLT). Blockchain technology is used to prove that indeed the cryptocurrency transaction took place. Blockchain technology can practically make digital documents, encode and insert them into the blockchain (Allen). The records stored in this form cannot be tampered with whatsoever. Nevertheless, details of the records can be changed by all the users of the blockchain technology, rather than just a few people at a central place.
Once a block, a current transaction, is completed it goes into the blockchain as a permanent database. A new block is generated when one is completed. A blockchain has an infinite number of blocks connected to each other linearly in chronological order. Every block has a link with a preceding one. Blockchain carries full information of all the users since the time they joined to their last transaction.
The blockchain was designed in such a manner that its transactions cannot be deleted. Data can be distributed, but cannot be copied.
Impact of Digital Currency on the Global Economy
If the world starts transacting and storing value exclusively in the cryptocurrency, that means there will be no fiat currency. Therefore, it will render workers in financial institutions such as banks are jobless.
Slow Innovation
There will be less innovation because producers will be in constant fear of deflation of prices. Innovators will face a situation of reduction of prices by slowing down output growth and innovations. Thus, it will ensure that their current stock does not lose value or become obsolete.
Consumers will postpone consumption and will hoard money. They will decide not to spend hoping that prices will lower soon so that they can make profits by purchasing cheaply (Finck). Hoarding could practically last for extended periods. Due to this, the economic process of demand and supply will be chaotic.
Reduction in Entrepreneurial Capital
Capital is a significant barrier to entry in most businesses. If a fixed supply system prohibits lending, the borrower may not be able to generate interest. Such a scenario would deny funds to entrepreneurs who want to make innovations. Such entrepreneurs will be left to get funding through equity. Thus, it could be difficult for first-timers. This system, unlike in the current system where the government and private financial institutions, can give grants or loans to budding entrepreneurs.
The cryptocurrencies are being accepted in many parts of the world as legal tender. Japan is an example of a big economy which has taken such a step. Others countries like China have banned the cryptocurrencies. Proscribing the use of the cryptocurrencies would be like shooting own foot because its use has no boundaries.
If any country bans the cryptocurrencies, they can easily be traded elsewhere. People are progressively embracing the idea of the cryptocurrency as their ultimate currency because it is free from any control.
Moreover, due to its volatile nature, the cryptocurrency is prone to hacking or cyber-attack. Such an attack could make the digital currencies inaccessible for long periods of time (Garcia-Alfaro et al.). A cyber-attack could also lead to stealing in the process of transacting. A major cyber-attack could render the cryptocurrencies inaccessible for an unknown period.
Economic factors such as GDP, inflation, and unemployment cannot directly affect operations in the cryptocurrencies due to their decentralized and borderless nature.
Because the cryptocurrency is not stable, it cannot function as a unit of accounting. That means people cannot use it to measure value when shopping. Its nature of being highly volatile would make it difficult for people to rely on it when paying bills such as rent and servicing of loans and mortgages.
It Would Replace Fiat Money
The current money made in the form of coins and notes have been the primary medium of exchange. Thanks to the digital revolution, now a digital currency has been invented. It will help in drastic transformation in the global economy. The dollar, euro, and other global monetary currencies will be rendered obsolete and be replaced by the cryptocurrency forms such as Bitcoin.
It Would Affect the Environment
The cryptocurrencies are mined using highly complicated software and hardware infrastructure like the traditional methods of mining (Hofmann et al.). The servers used for maintaining the cryptocurrency transactions would consume a great deal of energy. This would have a massive impact on the environment. Response to such an effect will attract introduction of laws for regulating energy consumption emanating from the cryptocurrency transactions.
It Would Be Used In Overseas Remittances
Some economies rely heavily on payments from the foreign workforce. Such money is used to boost economic growth in some countries. When such money gets to hit banks in the native countries, they face high charges in processing them. Also, processing is slow sometimes taking a minimum of a week before the money is accessed. However, with the cryptocurrency, all these barriers are not there. Processing is instantaneous and attracts no charges. For economies that depend heavily on its overseas workforce, remittances are what drives growth. Presently, money transfers facilitated by banks are charged extra in processing and transaction fees. With all these benefits, it is expected that overseas workers will depend heavily on the cryptocurrency for its convenience and cost-effectiveness.
Multiple Cryptocurrencies Diminish Value
The value of all the cryptocurrency in circulation, which is a $100 billion, is tiny as compared to the value of paper dollars in circulation, which is about$1.4 trillion. Economists have disregarded the view that a money supply rule that does not respond to shifts in money demand generates significant fluctuations in prices (Schwab). Such volatility would result in unemployment since people do not usually tolerate wage cuts. They argue that it will prevent the cryptocurrencies from taking over. Fluctuations resulting from the use of the cryptocurrencies would lead to instability in prices of commodities but no substantive change in the supply. Consequently, it makes the cryptocurrency impractical as money. The cryptocurrencies provide a belt and braces alternative to traditional reserve currencies such as the dollar in places with poor monetary policy and weak banks, but their role may develop no further than that.
The usefulness of the cryptocurrency derives from a set of agreements struck by participants who aren’t confined to any one state. It could facilitate greater trade and capital flows, but from a monetary policy perspective, the cryptocurrency area is not likely to be an ‘optimal’ currency area (Garcia-Alfaro et al.). It needs an authority to direct fiscal transfers to make up for the inability to adjust exchange rates within the area failure to do this would result to a monetary policy consistently too tight and too loose for different groups at different times. An adjustment by a part of users in one area will have spillovers to everyone else. As a result, there would be an amplified boom that would disturb the business cycles of the neighboring regions.
The cryptocurrencies would lose value due to high costs incurred in transacting/mining them (Garcia-Alfaro et al.). Therefore, it would likely lead to inflation and low rates adoption in many parts of the world. The costs incurred would emanate from demand for computing power, because as the cryptocurrency market demand grows, mining becomes more difficult.
Every bitcoin transaction consumes an amount of energy that is equivalent to a day’s energy consumed by nine homes in the US. As a result, miners of the cryptocurrency are acting with speed to invent high-speed computers. On average, the computing power of a bitcoin processing devices is about 200 times that of 500 supercomputers working together.
The central banks and fiscal authorities controlling the non- the cryptocurrency areas would have to work their levers harder to stabilize their economies. Principally, bitcoin and other the cryptocurrencies would have to change protocols to keep up with the change in the monetary policy. This, however, seems unlikely.
An agreement would have to be reached to ensure that the cryptocurrency miners keep in line with the state of the economy just in the same manner like central bank interest rates, which change according to the prevailing conditions. That centralized model is the opposite of what the cryptocurrencies should be. On the contrary, economists argue that replacing fiat money with the cryptocurrency would make it easier for central banks to lower their interest rates. Investors Would Have No Cash to Run To In Their Investments
Broadbent, an economist, argues that using the cryptocurrency might remove the need to have retail banks. Bank customers would withdraw their bank accounts and move to a central bank. The central bank would start investing in government securities. Private Banks would have to get fund from non-deposit debt and shares.
There might be intermediate outcomes too, where banks are not eliminated, but instead, grow and shrink as credit risk waxes and wanes and people move between the central and private banks (Finck). This outcome might contribute to the business cycle. It is what the central banks would be trying to avoid by stopping the spread of bad cryptocurrency monetary policy.
Foreigners who are outside a country with a digital central bank could decide to withdraw from their banks and choose foreign central banks. They could decide to do this through a local intermediary if any. Increased ease in transferring their wealth into a foreign asset that is safe could worsen flow of capital due to uncertainties about the reliability of the domestic banking system, which could have led to a shoot in credits.
During the financial crisis, capital flight from the most adversely affected countries was limited by the difficulty in getting and managing cash. It was also affected by the state of banks in the preferred countries. Such setbacks would not be experienced by either direct or indirect access to foreign cryptocurrency, hence, facilitating safe transfers.
Such problems would be overcome if all authorities controlling money acted in agreement. However, it is hard for central banks to agree to work on a central front.
Impact of Decentralizing the Cryptocurrency Transactions
A decentralized transaction is one that needs no third party in the handling of customer funds. Here trade is directly between the persons involved and it is entirely automated. A decentralized system could be achieved by forming a substitute voucher or assets. It could also have a multi-signature system among other solutions that are currently in the process of being developed.
The system is in contrast with the contemporary model where users deposit their funds which are exchanged with a token that can be traded freely. In case a user needs to withdraw his cash, the symbols are converted into the cryptocurrency and sent to the user (Finck).A decentralized system removes the worries over the trust. In these system users personally handles funds without necessarily thinking of a third party, there is completely no worry over security and honesty of exchange.
A decentralized system is excellent in providing privacy. Personal information about users is not revealed to any other person. It is a guarded secret. The only exception is when a bank transfer is involved whereby the identity of one user is shared with the user who is selling or buying from them.
Decentralized exchanges are not hosted at a centralized point but distributed to every computing device or the node; this guarantees no server downtime. Due to lack of rules concerning the use of the cryptocurrencies in international trade, it would be imperative if countries and their financial institutions gave their views on this issue so that the use of this new currency and its mode of payment can be embraced and used by people at all levels. The creator of Bitcoin argues that a financial system whose trust is based on agents is weak. Such a system exposes people to many risks. The cryptocurrency was created for the noble goal of keeping off mediators from the process of executing financial transactions. Furthermore, he introduced a different way of doing that through the Internet to bring monetary freedom because it negates the need for financial institutions, and it is safe and fast.
Lack of Regulation Would Lead To Increased Transactions
Due to lack of control, cryptocurrency would lead to increased transactions. Individuals and corporates would love this idea because it would make them offer services competitively due to the reason that rates in the cryptocurrency transactions are meager as compared to those of the banking system (Finck). Value is subjective and is in every individual's mind." Therefore it is essential to note that variations in the value of the cryptocurrencies vary according to how the markets accept it. It means that it can either shoot or plummet with the same rapidity.
Contextually, in situations where there are legal uncertainties and lack of supervision, there exists a high risk. From a financial perspective, the cryptocurrency is a high-risk deal. It could easily collapse. The cryptocurrencies pose big challenges to regulatory authorities, both local and international, emanating from its mode of operation. It would be hard for people to efficiently deal with a self-regulated system that independently determines its value as well as being a means of transaction.
The functions that the cryptocurrency system is trying to take over are today carried out by the independent public or private entities. The cryptocurrency technology has made people have a very different perspective of their financial institutions. Regulation and laws are some of the ways that could be used to protect commercial and economic operations. They are the view of the fact that it would be almost impossible to do away with the cryptocurrency system considering that there are massive investments regarding personnel, time and infrastructure (Allen). There is also need for the international community to think of how they can create a forum that can bring people together to accept the use of the new currency under fair and acceptable regulations.
The cryptocurrency has an advantage over other modes of payment. Users can track their transactions because each has its serial number. These serial numbers make it easy to know whether the person who is paying has enough assets that would be needed to make a transaction complete. In case there is the default, it would be easy to know where the cryptocurrencies were taken. This information would be obtained from the blockchain.
The cryptocurrencies could also be adopted for use in international trade. They could be used to the transactions to be made to settle obligations between involved parties. It would make it easy for the involved parties to demand their assets.
If companies adopted the standards of the cryptocurrency, they would head to achieve excellence in their operations. Their operations would also be quality, and that would boost their trust by their markets and the society at large. Companies that would do away with any form of regulation would be significantly embraced in the market. Due to self-regulation, the cryptocurrency has achieved a significant impact in the market (Allen). In many countries, regulatory authorities such as central banks are yet to make decisions on the new currency. Participants or user of the cryptocurrency has themselves come up with guidelines for their operations, therefore setting own standards.
Users of the cryptocurrency are found all over the world, calling for the need to analyze their trends. International institutions must decisively come up with ways of determining the best transactional procedures and other standards that should be used. The rules are fundamental as they are the ones to make the cryptocurrency to be widely accepted. Presently, the cryptocurrencies have not yet gained a good reputation for individuals and corporate irrespective of their significant advantages.
Works Cited
Allen, Darcy W. E. "Discovering And Developing The Blockchain Crypto-Economy". SSRN Electronic Journal, 2017. Elsevier BV, doi:10.2139/ssrn.2815255.
Finck, Michhle. "Blockchain Regulation". SSRN Electronic Journal, 2017. Elsevier BV, doi:10.2139/ssrn.3014641.
Garcia-Alfaro, Joaquin et al. Data Privacy Management, Cryptocurrencies And Blockchain Technology. 2017.
Hofmann, Erik et al. Supply Chain Finance And Blockchain Technology. Springer, 2018.
Schwab, Klaus. The Fourth Industrial Revolution. Portfolio Penguin, 2017.
