Bitcoin seemed to be on a roll. el salvador in early september declared the cryptocurrency legal tender, allowing its use for payments. there is talk that bitcoin will become a medium of exchange in afghanistan, allowing financial transactions in a society where conventional money issuance has collapsed. Cryptocurrency is even entering mainstream finance with this week’s introduction of a bitcoin exchange-traded fund on the new york stock exchange, allowing us investors to speculate on bitcoin prices without actually owning it. And of course, fortunes have been minted by early bitcoin investors.
In the midst of all this hoopla, financial regulators in Washington have begun to express growing concern about bitcoin and other cryptocurrencies. then last month china lowered the hammer and banned all cryptocurrencies.
Reading: Why bitcoin is the future
As bitcoin continues to elicit enthusiastic and fearful responses, does cryptocurrency have a future? the answer is complicated bitcoin is unlikely to topple the dollar or other major central bank currencies, but its technology will change the way we make payments, bank and other financial transactions. these changes will bring many benefits, although there are also significant disadvantages. Governments will have to play a key role in achieving this balance.
Bitcoin’s main appeal was that it would allow users to conduct financial transactions using only their digital identities and complete those transactions without using fiat currency issued by a national central bank or relying on a trusted intermediary such as a credit or commercial bank. card provider the technology that enables this feat, called blockchain, is truly innovative. All bitcoin digital account balances and transaction information are recorded in public digital ledgers, visible to anyone with an internet connection, that are maintained on multiple computers around the world. Surprisingly, it is this extreme transparency that makes the blockchain secure and tamper-proof.
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for all its technological dazzle, however, bitcoin suffers from fundamental weaknesses that stand in its way of becoming a viable medium of exchange for financial transactions.
Bitcoin transactions are slow and expensive, and its network cannot process large volumes of transactions. A bigger problem for an aspiring medium of exchange is unstable value. the wild fluctuations in bitcoin prices, from month to month and even day to day, make it unreliable for day-to-day transactions.
In its early days, bitcoin acquired a nasty reputation for facilitating illicit trade. It has recently been used by hackers who demanded ransomware payments in bitcoin, but the criminals have mostly moved on to other cryptocurrencies that offer stronger anonymity than bitcoin. still, governments eye all such cryptocurrencies warily for fear that they could facilitate illegal activities such as money laundering, drug trafficking, and terrorist financing.
That’s not all. Because there is no centralized authority managing bitcoin, transactions cannot be reversed and errors cannot be rectified. bitcoin balances that are stored in digital wallets can be lost forever if users forget or misplace their passwords. Furthermore, the process by which transactions are validated on the bitcoin blockchain requires enormous computing power and energy, with dire environmental consequences.
Interestingly, although it largely failed in its original purpose of facilitating transactions, bitcoin has become a financial asset. many investors seem to believe that it is a safe investment due to its scarcity. Unlike fiat currencies like the dollar that central banks can print at will, the computer algorithm that manages bitcoin limits its total issuance to 21 million bitcoins (about 18.5 million have been created so far). Basing the value of an asset, which has no intrinsic use, on scarcity alone seems like a dubious proposition. but that hasn’t stopped investors from pouring money in, creating a massive speculative bubble. the total market value of all cryptocurrencies is now $2 trillion.
For all of bitcoin’s flaws, the blockchain technology itself is maturing. some newer cryptocurrencies, called stablecoins, have better potential to serve as a medium of exchange. they have a stable value because they are backed by fiat currency deposits. With this modification, the technology has the potential to make low-cost digital payments widely accessible. Many low-income households, even in the US. uu. they lack access to digital payments because they do not have a credit card or bank account. international payments, beset by even more impediments, could also be made cheaper, faster and easier to track. These changes will be of great help to consumers, businesses, as well as exporters and importers.
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Blockchain-based finance, bypassing conventional financial institutions, is seen by proponents as a way to democratize finance, allowing for broader and easier access to a wide range of financial products and services. for example, variants of the original technology make it easy to connect savers and borrowers directly, bypassing banks. The prospect of easy access to digital payments and basic banking products for savings and credit could be beneficial not only in developing countries, but even in a rich country like the US. official financial system.
but technology cannot solve all problems and even creates new ones. Financial regulators face particular challenges in updating rules to cover cryptocurrencies and related financial products that often fall through regulatory cracks. Investor protection is a serious concern, as naïve retail investors could end up taking more risk than they realize when dazzled by the promise of a fast track to riches from new technology.
Facebook plans to issue its own stablecoin, raising questions about privacy and how these corporations will exploit user data and, perhaps one day, their power to issue their own coins that directly compete with fiat money. Here, too, the government has a role to play in establishing guardrails for the use of consumer data and preventing the use of such unregulated cryptocurrencies for illicit trading.
Finally, there is the unsettling prospect that rather than new technologies leading to a more equal society, inequalities in digital access and financial literacy could end up worsening socioeconomic disparities. the proliferation of digital finance could disenfranchise households that lack reliable digital connectivity. moreover, the risks inherent in crypto assets could end up falling heavily into the lap of uneducated investors who find themselves swept up in the tail end of speculative frenzies.
The future promised by the technological revolution that spawned bitcoin is bright. While harnessing the transformative potential of blockchain technology to benefit their citizens, governments will still need to play an active role in managing technological, financial, and social risks.
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