Cryptocurrency is fantastic. Cryptocurrency is essentially a currency that is digital, decentralized, and makes use of cryptography i.e., code to secure transactions. It has, as of late, become immensely popular and many people see it as the successor of modern currency. But I have my doubts about that speculation.

 

Currency can be defined as a medium of exchange for goods and services. Currencies have certain characteristics that allow it to function as the mediums through which an economy comes to life: durability, portability, divisibility, uniformity, limited supply, and acceptability. All these characteristics of currency are ensured by the central bank. The central bank of any nation or economic-turned-political union (ahem EU ahem) regulates the way currency exists within an economy. The central bank is the reason why money, in its modern form, exists. It regulates, supplies, designs, and most importantly, makes currency valuable. Currency gains value by the faith that other parties within an economy will accept it and that faith, in turn, is secured by the government and subsequently the central bank, a government body. One can see why currency became the lifeline of a modern economy.

 

The main role of the central bank of any nation or economic-turned-political union is determining its respective polity’s monetary policy. It does this by increasing and decreasing interest rates, depending on what the contemporary economic climate is. By increasing interest rates, the incentive to borrow money from banks becomes lower as its cost is higher but putting it in banks becomes more attractive as the interest rate received is greater. Due to the decrease in the flow of currency within an economy, the economy slows down, the demand for currency is lowered, and deflation occurs. The opposite holds true when interest rates are lowered. With a lowering of interest rates, there is an increase in the demand for currency as it is cheaper to borrow which reduces the incentive to save as returns from it are lower. With more people being able to spend, an economy grows, and inflation takes place. Due to inflation, there is a decrease in the value of currency, the asset with which you interact with an economy, thereby reducing your purchasing power. This is the reason why people invest. Assets are anything that have a positive economic and monetary value. Assets which don’t constantly lose value due to inflation, like currency, are increasingly gaining popularity as they maintain or gain value, thereby increasing the wealth of an individual. In the age of information, investing has become more and more popular as more and more people seek to maintain and increase their wealth. This is one of the reasons why cryptocurrency was created. Apart from being a mode of exchange through which digital transactions could take place, it was also an escape from the depreciation of inflation. It isn’t under the hegemony of a single institution but under the control of everybody i.e., it is decentralized.

 

Unlike fiat currency, which is run by a central bank, cryptocurrencies, like bitcoin, are under the ambit of a computer server. In the case of bitcoin, it is the bitcoin network. The bitcoin network is comprised of nodes and miners. Nodes and miners are computers (13,768 as of November 2021) run by normal people like you and me that keep the bitcoin network running by verifying transactions and publishing them onto the blockchain. Nodes are computers that are responsible for sending unverified transactions from the memory pool or mempool (a database with several unverified transactions) to other nodes and miners for verification. Miners then use sophisticated computations to solve difficult math puzzles by trial and error (there is a 1/5,900,000,000,000 chance of solving it) and add it to the blockchain for which they are rewarded with block rewards. These verified blocks are sent to the nodes again which further verify the block and upon verification, add it to their blockchain and send it to the other nodes. The blockchain, the database where all such transactions are stored, is accessible to everyone in the general public. All of this sounds wonderful. A currency and system of exchange controlled and verified by the people with no overarching authority reigning over it all? Absolute game changer. Some even hail it as the new currency for the new age. Except that will not happen.

 

See, the problem with cryptocurrency is the foundation of the system itself, there is not centralized authority to determine and maintain the value of the currency. Personally speaking, I love a lack of intervention and interference from the government and letting the people be. However, there are some things where the government is required, and one of those things is the economy. In a modern economy, currency acts as its lifeblood. Currency acts as the representation of one’s work. The work that goes into the manufacturing of goods and rendering of services. Even though currency lacks any sort of intrinsic value, it gains value and can represent the entire economy of a country because it is backed up by a powerful and singular entity, the government. The central bank, a government institution, creates, regulates, and guarantees the value of the currency through the full force of the government. A stable and legitimate government can do this because they can defend the economic interests of the nation at home and abroad from any aggressor, domestic or foreign, and is able to secure further economic opportunities inside and outside the country. It is this reason that currency is so widespread today and is the lifeblood of an economy. It is built on trust reinforced with an armor of steel. Cryptocurrency, however, has no regulator, no singular body to guarantee its value. Its value comes from the trust that the users within the network will believe in cryptocurrency, and trust is like a kit kat, it breaks.

​

If one looks at the line graphs of the US dollar and bitcoin, the biggest and most important units within their leagues of currency. It is clear to see that the US dollar is far more stable as it is backed by a powerful, singular, and stable government while bitcoin is subject to no regulation, leaving it wide open to manipulation which adds to its volatility. Building an economy on cryptocurrency is like building a skyscraper with a foundation of granola bars, it will crumble. No regulation means the rich, wealthy, and crooked can gobble up cryptocurrency, hold large amounts of it, hype it up, and sell it for fiat currency, a stable asset regulated by a stable body. Fiat currency is the representation of the work of the masses, the GDP of a nation or economic-turned-political union. But cryptocurrency? It’s the representation of nothing backed up by a trust that can be easily broken. Don’t get me wrong, I love cryptocurrency, but it simply is not stable enough for it to be able to function as a coherent currency in an economy. For it to be stable, it will need a central authority regulating it but doing that will destroy the basis on which it was created, thereby making it like fiat currency without any force of the government to back it up, which will destroy any and all appeal that it may have.

 

Instead of cryptocurrency becoming replacing fiat currency, I think two other scenarios are more likely and much more practical.

1. Central banks mint their own digital coins.

2. Cryptocurrency or a slightly tweaked version of cryptocurrency becomes the mode through which international trade is conducted.

 

Let me explain the first prediction. As we progress further into the future, it should be abundantly clear that we are going to be more and more digital. This means that the economy will also become more and more digital, which will therefore demand a more digital mode of exchange i.e., a digital currency. This demand can be met by the central bank of a nation which can mint a digital and regulated currency that meets the demands of our digitizing economies. It may seem as though we already have such a digital currency in the form of debit and credit cards, but it must be remembered that the transactions carried out using these devices involve real money in real banks which need to be transferred from one account to another. This can take a day or even more. This is an obvious problem and can be mitigated by the introduction of digital currencies which will result in much faster transaction fees. This is not a wild idea sprung up from the depths of nonsense. This is an idea that has been floated before with China and Sweden working on digitizing their currencies and the US Federal Reserve releasing a report on the matter, albeit it didn’t take any side in the debate. Nonetheless, it will combine the benefits of both cryptocurrency and fiat currency. Moreover, other features of cryptocurrency like having a public ledger which shows the validity of transactions that take place using such a currency can also be introduced (this can spur debates about financial privacy, which I am sympathetic to, but that is a discussion for another time), alongside the world-class encryption of cryptocurrency. If such a proposal is acted upon, I think that instead of introducing a plethora of digital currencies that exist as a separate entity from physical currencies, which can increase inflation, the introduction of digital currencies should, at first, mirror physical currencies. What I mean to say is that the newly introduced digital currency should just be the digital representation of the physical currency in circulation right now, which can allow people to convert their physical currency to digital currency and engage in a digitized economy more efficiently without having to risk inflation.

 

The second prediction, I will admit, might be a bit difficult to implement. My prediction is that cryptocurrency, with a few tweaks, could become the medium through which international trade is conducted. With the existence of multiple currencies all over the world, a country would need to, theoretically, convert their national currency into the market value of another nation’s currency with whom they want to trade. This, of course, is not the case as in many scenarios, the US dollar has come to be the de facto international currency. But even then, problems exist. The US dollar is controlled by the Federal Reserve, an American government institution. This is good reason for nations that aren’t very amiable towards the USA to reject the usage of the US dollar or, at the very least, use it with caution. This can be mitigated by a global cryptocurrency. This cryptocurrency can mitigate the aforementioned problems and advance international trade by making it cheaper, quicker, more accessible, and more efficient. Since it is decentralized i.e., not under the control of any single institution or body, it will garner more trust among the international community. However, this decentralization has its problems. As previously mentioned, when there is decentralization, the rich, powerful, and wealthy tend to take advantage of the lack of regulation by buying large amounts of a commodity, hyping it up, driving its value up artificially thus creating a bubble, and bursting that bubble whenever they feel it is convenient. This is an obvious problem that one cannot ignore. Therefore, two things can be done. National governments engaging in international trade should only conduct international trade in currency and refuse to accept any other currency apart from this digital cryptocurrency, thus restricting national fiat currencies to national trade. This will result in big and powerful nations being less incentivized to create a bubble around the cryptocurrency in question and selling it off for some other asset. This is, in my opinion, very unlikely as most nations won’t just stop using the US dollar, the currency of the most powerful nation on Earth which can wield tremendous hard and soft power, which it has used many times in the past to secure its economic interests. This rejection of the US dollar will result in the value of the US dollar going down and Uncle Sam won’t be very fond of that. The alternative is for nations to delegate regulatory powers to a new, crypto-centric body that regulates the usage of cryptocurrency and ensures the lack of fraud within the that cryptocurrency or these powers could be given to an existing body of a similar nature. Either way, this will violate the ethos of cryptocurrency, which is decentralization, which is also why I called this a slightly tweaked version of cryptocurrency. It will be decentralized in the sense that every user can validate the transactions of that cryptocurrency, view it whenever they please, will not be subject to the monetary and economic interests of a single entity, and will not be minted by a single, national entity that answers to a single nation but by an international entity that answers to the international community as a whole and is controlled by nobody and everybody. This, I think, will be more capable of implementation but it still faces some problems. Again, the US dollar will be dethroned and when push comes to shove, the USA can really shove. That entity, like all real-world political entities, will be subject to some level of corruption and its ethos of collective control will be violated in a clandestine or open manner. This is why I think that the implementation of my second prediction will be a bit more difficult as it comes across more pressing and challenging problems than the first.

 

Regardless, these are only predictions. Even though I expect them to come true, especially the first one, who knows what the future holds?