What are the biggest problems that cryptocurrencies can solve?
01 February 2019 | Fri
In recent years, the term “cryptocurrency” has been gaining traction. Cryptocurrencies push the frontiers of technology, serving as a digital alternative to conventional modes of payment. It allows users to do what traditional fiat was previously unable to, encouraging many investors to look towards cryptocurrencies as a safe haven for their money. Unlike fiat, the decentralised nature of the cryptocurrencies enables them to solve some of the biggest problems associated with fiat. Conventionally, individuals exchange currencies through merchants such as banks. The decentralisation of cryptocurrencies means that individuals can now exchange currencies on a direct peer-to-peer basis rather than going through a central body. Consequently, all records of this transaction will not be stored in a central location but instead will be distributed among nodes in a network which is permanent and cannot be tampered by any party. This unique property confers many advantages and solutions to some of the current pressing problems which will be explored in detail.
Market manipulation—finite supply of cryptocurrency
Traditionally, banknotes were regarded as a promissory note that was pegged by the value of precious metals such as gold. By the gold standard, the quantity of money supply is independent of the policies formulated by politicians and government. Pegging paper money to the value of gold prevents governments from increasing arbitrarily increasing money supply. However, in the 20th century, central banks halted the pegging of currencies to gold which then gave rise to the saying that U.S dollars are backed by “full faith and credit”. By placing full faith in the government, we may not always be making the best decision since the government has the ability to influence our currencies. An evident manner by which the state can influence the value of fiat is through the printing of excessive amounts of money. Imagine you own a watch worth $100 today. Tomorrow, this $100 drops in value and can only buy you an egg. The issue with fiat currency today is that its supply is unlimited. Governments can print more money to compensate for the shortfall they have when tax credits are insufficient. When governments have access to the wealth supply of economies, they have the autonomy to manipulate the rise and fall of the country’s currency.
In contrast, cryptocurrencies have an in-built scarcity since its production is a tedious process, one that requires solving of complicated mathematical problems based on cryptography. Hypothetically, given its finite supply, its value will be more stable as compared to fiat. This is especially useful in developing countries rife with political corruption and vulnerable to manipulation by unscrupulous governments. Take Venezuela for example, which is experiencing grave danger from its currencies. The Bolivar is estimated to experience a 1000,000% inflation by the end of 2018, because of the government’s excessive and unlimited money printing. As a result, the Bolivar has become so devalued that shopkeepers have turned to weigh bank notes instead of counting them. To cope with the ongoing crisis, citizens are turning to cryptocurrencies as an alternative store of value, allowing them to cover their day to day living expenses. Venezuela’s abundance of cheap electricity allows easy mining for Bitcoin, which is a currency rising in value as compared to their Bolivars.
Hedging against long-term inflation
Another problem cryptocurrency can potentially help to cope with is long-term inflation. Long-term inflation may seem negligible, but if you analyse it carefully, you would realise the adverse effects it has on your long term savings. Today, if you were to place $10,000 in your bank account for 20 years, with a general inflation rate of 2% a year, this amount would roughly equal to $6700. Generally speaking, governments attempt to combat this problem by employing monetary policies to curb inflation. Yet, these are still largely unsuccessful in keeping long term inflation at bay. On the other hand, cryptocurrencies help to combat inflation by removing government’s control of the supply of money. For example, given that bitcoin is limited in its supply at 21 million units, its value is not subjected to deliberate decay since its production is beyond the command of the state. The rate of usage of new bitcoins is determined by algorithms, as such, its inflation rate is defined and ultimately limited, justifying its usage as a more stable form of currency. It’s finite money supply hedges against long-term inflation and money manipulation, ensuring that the purchasing power of people alike does not dwindle under the hands of the state.
Serves as a check and balance preventing corruption
Cryptocurrencies have a large potential to reduce corruption due to its transparent and tractable nature. Using an open public ledger, streams of money from banks to government agencies can be closely monitored to provide accountability for every unit of money transacted. If cryptocurrencies are adopted, government agencies and public officials can be held accountable for their use of funds since these funds are transferred on a peer-to-peer basis. If the government decides to channel funds into the construction of a building, citizens are able to clearly monitor how each dollar is being spent and ensure that it is only spent by those authorized do so, within a permitted amount of time. This way, mismanagement of funds is prevented since there is high accountability involved. In some developing nations where misappropriation of funds by corrupt officials is prevalent, corrupt officials are deterred from diverting these funds for their personal interests.
Transparent ledger of donations to prevent fraudulent activities
More often than not, companies tend to donate to charities to alleviate their tax burden. Rather than paying taxes, it makes sense to donate directly to charities and receive tax exemptions. Unfortunately, some charities eventually misuse these funds, whereby high-ranking executives end up taking a large cut and only a miserable amount of the original donation is allocated to the cause. With the transparent property of cryptocurrencies, there seems to be a solution. If charities were run fully on blockchain it will then be straightforward for donors to track where exactly their money is going to and how is it spent. This also serves as a deterrence for some companies who exploit the system, by donating to bogus charities to avoid taxes from capital gains. The adoption of cryptocurrency will then allow the finances of the charity to be audited by the public, preventing this misuse of funds.
Transfer of money—reduction in transaction costs
Millions of dollars are being remitted to developing countries every year. According to the World Bank, it is projected that global remittances topped $596 billion in 2017, of which $450 billion was sent to developing nations. Traditional bank transfers and remittance services have a charge imposed for every transaction, which makes transferring payments an expensive process. If you were to send money to your family member in China via an intermediary, it will take an average of 7.14% cut of the money you send, which significantly increases the cost of your transactions. This transaction cost is increased if you were to send a higher amount. In contrast, cryptocurrency exchanges only charge a small, one-time transaction fee for each payment made. If you were to transfer $1000 worth, only a small transaction fee of is imposed each time, which is much smaller in comparison to the cut that banks would take. As such, cryptocurrencies allow users to avoid high costs associated with these banks and remittance services.
Transfer of money—bypassing the power of detriment
In the event of an economic sanction, governments have the ability to declare the clamping down of money by shutting down banks to prevent any flows of cash. During a sanction, cryptocurrencies serve as a form of external aid, helping the poor gain access to food and necessities. Cryptocurrencies allow people to send money anonymously, rendering aid to people in such countries. In Venezuela, people living abroad are donating cryptocurrencies to non-profit organizations to distribute aid within the country. The converse is also made possible, if a company dwells within a country where sanctions have been imposed and raw materials are necessary for day to day operations, all that needs to be done is for the owner to send cryptocurrencies to an overseas supplier. The decentralised nature of cryptocurrencies prevents any form of tracking and identification by the government, allowing funds to flow to people in need.
Power is distributed more fairly amongst people
Money is power. And power puts institutions in a strong position to influence the government. In the 2008 financial crisis, large corporations being “too big to fail” is a prime example of the peril of power being concentrated in the hands of a few powerful corporations. Money was concentrated in the hands of several large corporations which proved their ability to cause shockwaves in the US economy and the world. The influence of these large banks was so powerful that the Fed took a backseat in regulations, thereby allowing excesses in the financial sector which led to the eventual financial crisis in 2008. Notwithstanding the tragedy, given the deep entrenchment of banks in our global economy, most of us still use fiat currency as a means of exchanging value today. Fortunately, cryptocurrencies offer us an alternative, hinging on its unique characteristic of decentralisation.
Decentralisation of financial entities means redistributing this power, away from a central authority, back to individuals, allowing everyone to have a fair share of power. Decentralisation also means freedom?—?people no longer have to be under the mercy of some powerful authorities who can alter rules as they deem fit and freeze accounts in their possession. A pertinent case of authorities having the ultimate power to freeze accounts is Wikileaks, a whistle-blowing platform established to analyse and publish censored and restricted official data pertaining to war and corruption. In 2010, the US government forced major credit card companies, Visa, Mastercard, and Paypal to freeze all accounts associated with Wikileaks on the account that they might have been involved in illegal activities. With the existence of cryptocurrencies, centralised financial entities are no longer required to function as gatekeepers.
On the surface, it is apparent that cryptocurrencies bring us a step closer to a cashless society. Yet, analysis on a deeper level demonstrates how its benefits stretch beyond going cashless, solving some of the root causes of the pressing problems in the world today. In no time, cryptocurrencies enable us to be part of a system that is fully connected, whereby boundaries and prerogatives become irrelevant. We can be connected by one similar currency that enacts change?—?bringing freedom, transcending geopolitical boundaries.
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