Cryptocurrency And The Changing World

Cryptocurrency aims to revolutionise the way we transact in a world no longer only physical, but also virtual. It has aimed to remove middlemen such as our central banks and to give much power back to the people in the money market. And as expected, our governments are fighting back. There is a lack of clarity and homogeneity in how the states treat and think about cryptocurrency. A legitimate form of virtual money? A commodity? or a financial security? All these terms and labels have different ramifications because of which the values of cryptocurrencies have fluctuated so massively. While both sides on the debate of crryptocurrency fight, the world deals with the consequences. But what are these impacts on the global financial sector and world economy? Let's have a look.

The use of cryptocurrencies does not require authorization by any middlemen which means there is no surveillance for what it is used. Transaction fees are minimal, as low as a couple cents for some cryptocurrencies adding to the allure of privacy and anonymity associated. By cutting out the middlemen, cryptocurrencies are causing disruption in the global payment system as it becomes hard to trace and ascertain the identity of the participants, it means that it is difficult to prevent money laundering, terrorist activities, illicit trade of commodities like drugs and ammunition. This is because documentation of the person in the eyes of the government is only done when the cryptocurrency is converted into legal tender. Silk Road, dark web marketplace infamous for such trade, was closed down in 2013, but more such websites have sprung up. Dark web is a part of the internet that does not show up on search engines like google or bing, and is not easily accessible, but it is a menace. It is scary to think about what would entail if the dark web can use cryptocurrencies.

Cryptocurrencies have no intrinsic value, most of them are not backed by the state nor are they based on assets like oil or gold. What this means is that there is no institution that has a vested interest in maintaining their value, which makes cryptocurrencies sort of immune to government induced fluctuations. Its value depends on the willingness of people to believe it legitimate and secure, and to use it for transactions.

This has a lot of effect on the money market. With no control on a currencies, governments lose control on the amount of money in circulation which in turn threaten their use monetary policy to keep inflation in check. This is why central banks are issuing regulations to impose control. Russia's central bank said it would criminalise the use of bitcoin as a money substitute and would block websites selling it and its rivals. Europe Central Bank has warned EU of the same risk of lost control of money supply, thinking of cryptocurrencies along the same lines as the tulip, i.e a bubble. At present there is a limited market cap of cryptocurrencies, take for example bitcoin. The supply of bitcoin is limited like gold. Which is problematic because it means that the price of bitcoin will continue to fluctuate which bolsters the view that bitcoin and the likes are a bubble, that it will burst and the hit will be ugly. Furthermore, new cryptocurrencies are being 'born' every day, which means we really do not and can not know about the supply of cryptocurrencies.

Meanwhile, Japan has recognised bitcoin as legal tender and approved several companies as operators of cryptocurrency exchanges given they register with the government. United States has taken a positive approach towards cryptocurrency, while setting up several agencies to prevent illicit crimes transactions through it. Bitcoin and other cryptocurrencies are treated like property and are taxed alike.

But cryptocurrencies can and could de-dollarize the world. The global economy is interconnected in a very complex manner, but we can say that it is the US dollar that is the lynchpin. If the financial world is the internet, the US dollar is Google Chrome which makes the United States Treasury a de facto central bank of the world. This is an oversimplified statement but also shapes the dynamics of international trade, foreign relations, diplomacy and economic sanctions. It is also one of the reasons why the US has such a huge dominance in the world. Cryptocurrencies challenge all that by decentralising transactions without any recourse back to the US dollar. Many countries are considering the adoption of state owned cryptocurrencies to move the country out of difficult economic situations brought on due to sanctions by the US. For example, Venezuela has launched its own oil backed cryptocurrency which helped them reduce inflation caused due to these sanctions. North Korea is another such country which has tried the same. This provision is a massive attack on the Dollar. These attacks are serving the countries that are under fire with sanctions. But if the dollar really takes a hit, more than the US and other advanced countries, it is the smaller and emerging economies that will suffer.

In the business world, cryptocurrencies have caused two kinds of effects. first one is of Initial Coin Offerings (ICOs) in crowdfunding process for startups. Another is the sudden boom in valuation of businesses. ICOs are a way to crowdfund new cryptocurrency in which the creators offer 'tokens' of that cryptocurrency in exchange for capital in the form of legal tender. It has provided an escape route for the rigorous rounds of funding startups go through, hence reducing costs. Although ICOs can provide fair and lawful investment, a word of caution for investors to beware of scammers and the high risk and lack of security. The second, more serious effect, is that of the boom in share market prices of companies that are associating themselves with cryptocurrencies or blockchain technology. One such example is of LongFin, a New York based fintech, which experienced a 1000% stock rise after they took over a cryptocurrency company. These market caps are not justified, as they are show volatile investor behaviour and could harm the security market once cryptocurrencies start losing confidence if deemed illegal or restrained.

As cryptocurrencies continue experience growth in price, market capitalization, and mainstream adoption, they are providing features and functions that are revolutionising the way we operate in the global economy. We may longer face the question if cryptocurrencies are disrupting the global economy, but we do need to question ourselves on how much and ask what the future holds. Only time will tell.

References:
1. https://medium.com/the-mission/how-cryptocurrency-is-disrupting-the-global-economy-89347581aa93

2. https://www.bloomberg.com/view/articles/2017-12-18/cryptocurrencies-are-starting-to-affect-the-real-economy

3. https://news.nationalgeographic.com/news/2013/10/131014-bitcoins-silk-road-virtual-currencies-internet-money/

4. https://en.wikipedia.org/wiki/Economics_of_bitcoin

Written by: Anoushka Chawla, Year II