Can Cryptos Replace Redundant Cashless Systems?
There are currently 200 cryptocurrencies in existence, the values of which vary from a few cents per coin to astronomical asking prices like $58, 000 (at the time of writing) in the case of Bitcoin. The rise of cryptocurrencies has meant that governments along with traditional banks have had to reassess the monetary system. ‘Business as usual’ and ‘if it ain’t broke, don’t fix it’ are likely terms that explain their stance. However, there’s no denying the fact that the world is changing and in the last decade of the 21st century, a lot more than ever before. The Internet and all it’s subsequent offshoots have resulted in a new climate of living, social behaviour and monetary exchanges.
As a consumer culture we’re already living in an era in which traditional cash is seeing less and less use. Banking giants like Visa and MasterCard allow us to make purchases in-store or online without any physical cash exchanges. Are Cryptocurrencies then simply the next step in the evolution of cash? Let us not forget that it wasn’t that long ago that gold and silver were used to transact, and then along came paper money, pegged to gold up until 1971 when then US president Richard Nixon chose to abandon the gold standard. Captains of industry such as Tesla’s Elon Musk, Twitter’s Jack Dorsey, and Facebook’s Mark Zuckerberg have all thrown their lot in with cryptocurrencies – Zuckerberg has even tried to introduce a regulated crypto – Libre, also known as a stablecoin, but has since faced major hostility from US regulators. What is abundantly clear, is that cryptos are here, and they’re here to stay.
The appeal of blockchain technology
To further elaborate on cryptocurrencies, it’s important that one understand the technology that makes it possible. To illustrate, let us look at leader of the pack – Bitcoin. Bitcoin is a digital currency that is “mined” by its users, who are incentivised to do so. According to its founder or founders, Bitcoin is “a purely peer-to-peer version of electronic cash [that allows] online payments to be sent directly from one party to another without going through a financial institution.” The technology that makes this and all other virtual currencies possible is known as blockchain technology. In a nutshell, when a Bitcoin is sent from one user to another, the transaction is recorded on an inflexible public block. As more transactions happen, more blocks are generated, thus creating a blockchain – a public record of all such transactions. Such blocks are generated roughly every 10 minutes and the user responsible for the block receives remuneration in the form of a newly issued Bitcoin. The remuneration is determined by proof of work: a combination of computing power, large random numbers and estimations to what such numbers might be; in a word, ‘mining’. The extent to which cryptocurrencies have changed the game of money is in some ways comparable to examples of how Forex has changed trading. This type of trading lets its users speculate on the value of a Bitcoin or cryptocurrency and thus provides profitable possibilities without the slog of mining or buying.
Cryptos: advantages v. disadvantages
Once again, for the purposes of illustration, let us look to Bitcoin, which according to its proponents, has two key advantages over traditional currencies. Firstly, there is no infinite amount of Bitcoins and this in turn means that devaluation is not possible. Typically banks print more money or make more of it available, thus leading to inflation and a weaker currency. Secondly, advocates of Bitcoin claim that all transactions are immovable. Theoretically a bank can remove money from a user’s account and then claim no knowledge of such funds. In the case of a crypto like Bitcoin, the record of its existence and movement is recorded in a database that cannot be edited by any type of central authority, thus deeming it ‘trustless’ – users know expropriation is impossible.
Bitcoin’s anonymity means that it is used to procure illegal drugs, facilitate money laundering and accept extortion payments. In addition to this, it’s use can prove to be prohibitively expensive with regards to transfer fees. In 2020 alone, users incurred transfer costs from anything between 28 cents to over $13. Thus, many who have opted to use Bitcoin have had to open third party wallets – an act that can present Joe Public with a fair amount of challenges and/or stumbling blocks, mainly in the form of administrative processes. Not all third party wallets (crypto exchanges) are created equal, with some having made off with users money in the past.
What does the future hold?
Outside of the fact that cryptos are here to stay, their future in terms of universal use and acceptance remains uncertain. In order to overcome these challenges, cryptos need to become legitimate in the eyes of governments and regulators, which in turn will require price stability in order to be appealing to both merchants and consumers. This can all be spurred on through the forging of allegiances with existing/well-established stakeholders like Visa and MasterCard, Google Pay and Amazon etc. (cards, apps and retailers). Thus, the likelihood of cryptos replacing the current cashless system in its entirety is very unlikely. Instead, in the future cryptos will likely become part of the existing monetary system and all that that entails.