Cryptocurrencies are have been touted by their supporter as the inevitable wave of the future – the next step in the evolution of money. Despite the avid support, they have been largely disregarded by regulators as a fad that could never replace conventional currencies. Are they right? Or, are they just scared of losing control over money? Whether you love them or hate them, it would seem that cryptocurrencies are here to stay.
Cryptocurrencies are much different than simply a way of making digital payments using traditional currencies. Owning bitcoin is not like putting money into a PayPal wallet, or buying something through another “e-money” provider, like Alipay in China.
Until the late 20th century, currencies were backed by some physical commodity, such as gold or silver. Most countries today don’t back their currencies with gold, but simply legislate that their currency is legal tender and give it value. Therefore, these currencies get their value from the relationship between supply and demand. If more people buy into the currency than sell out of it, the value goes up. These are known as fiat currencies.
Cryptocurrencies are not backed by a specific commodity either, nor are they backed by a specific government. According to bitconnect,
Because of the inherent transparency they offer, cryptocurrencies have been suppressed by regulatory bodies. There have been dozens of failed attempts to create a currency that could operate outside of the regulation of any governing body. The attempts by DigiCash, First Virtual, and e-gold were all virtual currencies that were quickly suppressed by regulators.
The first successful cryptocurrency to break through this wall was Bitcoin. The main reason for the success of Bitcoin, was that it was the first currency that was not trust based. Users did not have to trust that a government or company would not simply flood the market with extra currency to devalue it. The supply is based on a present algorithm, trades are done peer-to-peer without the need of a centralized authority. The wallets themselves are also encrypted, so that they can not be counterfeited. Because of this, regulators are not able to find a central authority to remove the currency or stop the trading.
Because cryptocurrencies are out of the control of regulators, they are not likely to gain official support from governments. This also means that they are not likely to pose a direct threat to existing fiat currencies. Without direct support for local governments, cryptocurrencies will never become mainstream.
Another drawback of most current cryptocurrencies is that the technology that underpins the currency needs to be more scalable. Trades currently take 10 minutes or more to complete, making them useless for daily shopping or time-dependent transactions.
These technological barriers may be overcome by cryptocurrencies in the future, but they will not likely be overcome by Bitcoin. While Bitcoin may survive, it will not likely thrive as a tool daily use and may eventually be overtaken by a more agile technology that comes along.
The first cryptocurrency to find stable ground may turn out to be one that provides intrinsic value backing each unit. In the case of Ether, access to network processing on the Ethereum Virtual Machine EVM is built into each coin. While this may not warrant the high price it currently has, it is at least something that backs each trade and gives value to currency holders.
On a more global scale, cryptocurrencies could be used to generate stability in countries with small, weak economies. These countries could release a transparent cryptocurrency to back their own fiat currency, rather than backing it with another traditional currency, such as the US dollar. This would allow small governments to introduce international oversight and built credibility. The rule-based logic gives the government the ability to control their own currency, while circumventing the need for trust from other nations and banks that they won’t artificially inflate the currency.
In this way, cryptocurrencies, would be able to offer something that current fiat currencies and monetary policy could not on their own. If regulators stay focused on the fundamentals of sound domestic monetary policy, while staying open to the new possibilities that cryptocurrencies are presenting as they evolve, they may be able to take advantage of the best that both worlds have to offer.
In a global economy, international payments are becoming more and more important. Not only are the number of transactions getting larger, but the size of the transactions is decreasing. A 2 dollar purchase on Ebay from a UK vendor, a 4 dollar fee for translation work done in China, 50 cents for a song from your favorite band in Germany.
Finding an efficient way to simplify these inter-currency micropayments has not been a priority for national banks, nor the focus of government policy. Entrepreneurs are however, actively looking for ways to facilitate decentralized, inter-currency microtrasactions. Any startup that can do so effectively, will surely reap the benefits. Even if a startup doesn’t manage to find a way to bring this about organically, it may not be long before citizens of some country demand their central bank to issue a decentralized cryptocurrency as legal tender – potentially establishing a new de facto world currency.
Considering the potential of such a currency, it is no wonder that so many startups have focused on trying to solve the critical problems that exist in the current cryptocurrency systems. Those who fear a currency that is impossible to regulate, really are justified in worrying about their emergence, but it doesn’t seem like they will be going away anytime soon. Whoever finds a way to bring the strong regulation and cryptocurrency ideologies together, will certainly be the bridegroom at the marriage of the century!