Cryptocurrency: Future of Money (PART - 2)

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Cryptocurrency is not without its demerits. Even if it promises to decentralize the monetary power, capitalism’s innate monopolizing tendencies could lead some players to accumulate enough computing power to seize control of the network and revert a trustworthy, decentralized system back to one of self-served and centralized. Cryptocurrencies could flame out entirely. A currency to work effectively needs a widely accepted medium of exchange. According to Gavin Andresen, the heir apparent of Satoshi Nakamoto, “bitcoin really is still an experiment.” The major hurdle in the way of widespread acceptance of cryptocurrency is that it is not regulated by any Governmental authority rather it runs on the premise of decentralized control, which has given its acceptance to anti KYC - “Know Your Customer” - elements of the society such as criminals, tax evaders, money launderers. Since it does not ask any details of its users. On the other hand KYC is the foundation stone of anti money laundering.

But it’s hard to ignore the idea of DeFi as the trends point inevitably to an age of Cryptocurrency, if not immediately, then a few years or so in the future. The Internet has spawned a new era of sharing economy - a decentralized one. The examples of such entities are Airbnb, Kickstarter, Uber etcetera. The estimated current market valuation of cryptocurrency is US$2.0 trillion that cannot be ignored. Central Banks around the world have started thinking about issuing their own cryptocurrency known as CBDC - Central Bank Digital Currency. Several countries are also on the cusp of acknowledging cryptocurrency as a medium of exchange e.g. El-Salvador has started accepting cryptocurrency as a medium of exchange. China has already issued its own cryptocurrency named Digital Renminbi or e-CNY. It is in testing phase from April 2021.  

There remain many issues to be solved before DeFi becomes the default financial system. Money has three broad characteristics: it’s a unit of account, a medium of exchange and a store of value. For any cryptocurrency to achieve all three is going to need broad based support of consumers and businesses. It may fail to earn that support even if the product is technically solid. Another important question is what would happen to banks as credit providers when such an age arrives. What would happen to all the businesses that rely on bank credit for its expansion or working capital needs? Governments would not so easily give up control over fiat money because it gives them unfettered power to print money. With paper money they can raise debt to finance their domestic as well as international agendas, purchase arms, launch wars and then demand tax payments in that same currency to repay debts. 

Mastercoin’s David Johnston’s famous quote which is known as Johnston’s law describes the future of cryptocurrency: “Everything that can be decentralized will be decentralized”. When faced with disruptive challenges from new technologies and new ways of organising society, businesses and institutions then the established players have three choices. First, just to ignore the new idea and carry on as usual. Second, to fight it through political lobbying or by smear campaigns to destroy the nascent threat augmenting its demerits and hiding its potential. Third, try to adapt it or to incorporate or to work with the new technology. Cryptocurrency is at the moment in between the second and third phase. Many are highlighting its flaws such as  the Mt. Gox exchange fiasco or its acceptance in the notorious dark web silk road or its anti KYC stance. On the other hand El-Salvador has become the first country to accept bitcoin as legal tender. Other countries are also thinking about adopting this technology and issue CBDC. China is already in the testing phase. According to the CBDC tracker many countries are in the pilot phase and many are researching this concept. So the days of fiat currency or paper currency are numbered. Get ready for digital currency.