How do we value a cryptocurrency like Bitcoin? Do we value it in USD or do we value USD in Bitcoin? Despite the breakthrough of cryptocurrencies, some renowned economists have stated that cryptocurrencies are redundant. They still bat for traditional money that is defined by sovereign nations.
A major reason for this, in spite of all the furor, is that conventional money is here to stay. From a historical perspective, reserve currencies like the US Dollar, have performed remarkably as the medium of value creation and exchange – the two main principles in the discipline of economics. Moreover, considering the trends, Bitcoin and contemporaries have failed to make a mark on both these primary economic principles.
However, it would be inconsequential at this point in time to dismiss cryptocurrencies as a disruptive fad. Traditional economists often make one simple yet vital mistake – ignoring the separation between currency (the economic ‘what’) and payment technology (the economic ‘how’).
The main reason for this conundrum is our inability to create clear demarcations between the two. While the traditional forms of currency are still valued by currency (monetary instruments) and gold reserves, cryptocurrencies completely eradicate the distinction.
Payment and bank transfers are making cash (the physical ‘what’) an economic anomaly, a trend that is visible in developed regions like North America, Western Europe, and Australasia. With the economic ‘how’, we use digital codes in exchange for goods and services that we invest in. And it is this payment factor that had brought newer technologies like cryptocurrencies into the fray, challenging traditional modes of financial systems.
Developing nations however how a very peculiar trend. While few have access to bank accounts and its extensions like debit/credit cards, and internet banking; mobile companies have leapfrogged the traditional banking system as payment arbitrators have made it imaginable for citizens to transfer currency-convertible mobile payments to one another. That means that people can use mobile payments as a medium of value sharing via mobile networks (mobile applications).
Of course, the opposite is true where most citizens have bank accounts and have access to a cash-less plastics instruments like credit/debit cards and internet banking. This culture has made developed nations far less exposed to disruptive technologies like cryptocurrencies.
Moreover, for these disruptive technologies to make a dent in developed economies, cryptocurrencies have to validate that their technology is compatible with existing financial structures and pass all regulatory compliances recognized by national banks.
Nevertheless, as Bitcoin and its contemporaries were unregulated, there was no need for it to become a part of these national systems. However, fast-forward 5 years and two cryptocurrency start-ups started providing peer-to-peer currency transfer system (using Bitcoin). They were Ripple – started in 2012 and Circle – started in 2013.
They provided an international payment system that relied on XRP (Ripple) as a vehicle for online payments. As Ripple relies on blockchain technology, which in fact is more efficient than Bitcoin, it provided a centralized and self-contained alternative payment system. Economists asked…’so what?”. Traditional electronic banking systems provided the same service, relying on inter-bank international processes through central (national) banks. But central banks face two difficulties here:
In case of international transfers, banks face the problems of handling ‘liquidity pools’ in various currencies other than the US dollar. The primary reason is that there is no one global/international bank. With this in mind, it is quite reasonable to see the feasibility of cryptocurrency as a viable alternative to traditional payment systems.
But there is a caveat that cryptocurrency propagators forget. The ‘exchange rate’. As the ‘value’ bit of Bitcoin and the ilk surface, the concern of the value of storage props up (gold reserves, as aforementioned). This is a big factor. So much so that Ripple and Circle have moved away from cryptocurrency and are now trying to find ways of integrating blockchain in the traditional banking systems and linking the same with national/centralized banks.
That last caveat is a big deciding factor for all stakeholders involved. And from this one single point, come a bunch of organic questions that we can’t ignore.
If every citizen has a bank account in a central bank, or their accounts are linked via private banks, and these were connected across various national/central banks – then this would create a unified system, boosting the global financial system while making it a much more stable environment. Payments would be fast, safe and efficient.
Many governments and banking institutions are fiddling with the idea, but so far conclusions cite that risks outweigh the gains. However, more research is needed before a blueprint is devised for the change.
The bottom line is that cryptocurrencies do have their positives, but a better alternative is to create a global economy by transforming existing national and international financial infrastructures. Cryptocurrencies haven’t created a new normal. The old normal - traditional banking systems - still command precedence in the global economic environment.