Virtual Currencies, Crypto Currencies Are Here to Stay: What Are Their Benefits And Challenges?
There is a lot going on when it comes to virtual currencies or crypto currencies. The global use of digital technologiesis supposed to add over $1.36 trillion to the total global economic output in 2020, (data from 2015) according to a study by Accenture and Oxford Economics Source, so a lot will happen.
The value mentioned may be only a fraction of the total global gross world product. As the global economy moves to digital platforms, there is still a substantial space for growth and virtual currencies will play a big part on it. The challenge is how to manage a valuation between real economy and commodities such as gold and the emergence of digital crypto currencies such as Bitcoin and others.
One of the key catalysts which have contributed to the growth of the modern economy as we know it today is the evolution of money and payment systems. By having a more efficient and secured, way of transferring and receiving monies, this has helped to facilitate the exchange of assets, goods and services from one party to another.
However, over the past two decades, the global economy is undergoing a new wave of transformation fuelled by the advancements of the internet and mobile based technologies. These technological developments are beginning to change the way goods and services are being exchanged today, from traditional physical settings to online settings.
The Development of Crypto Currencies and its Challenges
Another development which is helping to fuel this transformation in our modern economy is the emergence of cryptocurrencies. Cryptocurrencies are a digital medium of exchange which is recognised as having value by the parties using them.
Cryptocurrencies are developed and named according to their own accounting unit and are issued by private developers. It should be noted that while Cryptocurrencies fall under the broad definition of digital currencies, they differ from digital money as they are not denominated in fiat currencies.
Despite the fact that cryptocurrencies are not backed by fiat currencies, this has not discouraged people from using them as a means of payments for goods and services. This is due to the fact that transacting with Cryptocurrencies has various advantages over fiat currencies in the digital economy. Cryptocurrencies are based on blockchain technologies that make use of a distributed public ledger to authenticate a transaction.
Cryptocurrencies provide a secure, and transparent transaction system, that doesn’t involve any intermediary such as a central clearing house which traditional payment systems are based on, thus the cost of transferring funds becomes significantly lower. In addition, since Cryptocurrencies allow for peer to peer transfer of payments, they have the potential to cut down the payment transfer time from days to almost real time.
Naturally, with all these advantages which Cryptocurrencies have over traditional payments system, private sector interest in Cryptocurrencies has been growing exponentially.
Although Cryptocurrencies have numerous advantages over traditional payments systems, their usage also poses several risks as they can be easily misused as a means to launder illicit monetary gains, facilitate tax evasion or to finance terrorism. Furthermore due to the fact Cryptocurrencies are not centrally managed by any central banks, the widespread use of CryptocurrenciesVCs could also pose a severe risk to the financial stability of an economy.
Bitcoin and Ether the leading global Crypto Currencies
Bitcoin, is without any doubt the main cryptocurrency. The Bitcoin is the revolution that has started all of this with its decentralised digital electronic currency, or so-called ‘crypto currency’, that uses powerful peer-to-peer networks, both of people and computers, through distributed blockchain ledgers, digital signatures and complex algorithms that generate currency without any middlemen or central authority, such as a banks, regulators and so many other organisations.
Ether is the virtual currency from Ethereum, a leading blockchain platform. Ethereum is an open-source, public, blockchain-based distributed computing platform featuring smart contract (scripting) functionality. Ethereum was launched in 2013 by Vitalik Buterin, a crypto currency researcher and programmer.
Development was funded by an online crowdsale during July–August 2014. The system went live on 30 July 2015. Ethereum provides a decentralised Turing-complete virtual machine, the Ethereum Virtual Machine (EVM), which can execute scripts using an international network of public nodes. Ethereum also provides a value token called “ether”.
Ether emerged over the last years as a leading currency starting to compete with Bitcoin in a lot of areas. Ether’s tokens can be transferred between participants and were used initially to compensate participant nodes for computations performed . This currency grew to become one of the leading global virtual currencies.
Virtual Currencies and Regulation
Crypto currencies, in essence, subjugate the roles that central banks and traditional financial institutions play in the financial ecosystem since they are issued without the backing or involvement of the government. This is the main reason why Cryptocurrencieshas over the past few years begun to attract the attention of regulators and policymakers around the world.
For policymakers and regulators, the most pressing concerns which Cryptocurrencies pose is the challenge to relate to areas regarding consumer and investor protection, financial integrity and tax evasion.
As Crypto currencies simultaneously take on many characteristics and roles of different parts of the financial ecosystems and operate across borders, the responsibilities of regulating Cryptocurrencies falls on the shoulders on different types of regulators both at the national level and international level. Therefore for any policies regarding Crypto currencies to be effective, there has to be coordination and cooperation by policymakers and regulators on the domestic level and international level.
There is no doubt that there is a need to regulate Cryptocurrencies to address the risks posed by their usage in the global economy, regulators and policymakers also at the same time have to realise the tremendous benefits that Cryptocurrencies can bring.
So while financial regulations are needed to protect the consumers and the soundness of the financial ecosystem, they must be able to produce an enabling environment to allow for new players and innovations. In other words, regulators must strike a delicate balance in managing risks while at the same time supporting a new emerging fintech industry that is trying to bring inclusive digital services to all corners of the world.
The Final Word
As mentioned early Virtual Currencies are able to reduce the cost of funds transfer and transaction times on a national level by facilitating peer to peer exchange. The blockchain technologies which Crypto currencies are based on also help to strengthen a more secure financial environment. In the longer term, the benefits offered by Crypto currencies can also help to expand financial inclusion for the millions of unbanked individuals around the world.
Apart from payment systems, the technologies behind Crypto currencies can also have wider positive impact across the entire financial ecosystem in terms of a faster and more secure transaction record keeping system. In order to realise the full potential of Crypto currencies, further technological progress must be needed. As such, the regulatory progress needed to address the risks which Cryptocurrencies poses must not reach a stage where it will become stifling to the fintech industry.
This is a series of articles, and thought leadership articles powered by Humaniq
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