Cryptocurrency is Shaping Fundamental Change in the Financial System?
Cryptocurrency is creating a lot of buzz today. According to estimates, the cryptocurrency market size is expected to reach USD 1087.7 million by 2026, from USD 884.6 million in 2020, at a CAGR of 3.5% during 2021-2026. The finance industry has been witnessing the ripple effects of this sudden popularity gained by cryptocurrency. However, the concept of cryptocurrency has been around for a long time. The world was first introduced to the form of virtual currency by a cryptographer called David Chaum. He is credited with the development of a cryptographic system known as eCash that was introduced in 1983.
Further, Satoshi Nakamoto was the one who created today’s well-known Bitcoin cryptocurrency around 2009, just after the world witnessed the 2008 financial crisis.
What Was the Purpose Behind the Creation of Cryptocurrency?
It is believed that the objective was to develop a new payment mechanism that does not fall under the jurisdiction of any financial institution and allows anybody to deal in it globally. Satoshi Nakamoto’s decision to establish bitcoin was heavily inspired by the 2008 financial crisis and the resulting economic predicament. Nonetheless, technical advancements have expedited the development of numerous other types of cryptocurrencies.
Furthermore, the cryptocurrency mining process became more sophisticated along the way, allowing crypto miners to carry out mining operations within no time.
What is Cryptocurrency?
Cryptocurrency allows its holders to transact with it online without any intermediaries or interference from any financial institution. The currency is decentralized digital money that works on Blockchain technology, making it nearly impossible to counterfeit. The most well-known and top Cryptocurrencies are Bitcoin and Ethereum. Nevertheless, currently, there are nearly 5000 different cryptocurrencies in use. Also, unlike any other traditional currency, Cryptocurrencies cannot be redeemed for another safe-haven asset such as gold.
Why is Cryptocurrency Gaining Acceptance?
1. Allows near anonymous transactions
In a traditional system, it is almost impossible to carry out financial transactions without disclosing any of your personal information. On the other hand, with cryptocurrencies individuals can carry out transactions while remaining anonymous from the merchant.
Nevertheless, it does not allow complete anonymity, if needed financial institutions can trace such transactions back to its initiator. This feature appeals to business persons, enterprises with privacy concerns.
2. Absence of Intermediaries
As cryptocurrencies do not come under the purview of any financial regulatory authority, it eliminates the need for intermediaries as well. As a result, overall transaction costs are minimized. This feature also safeguards transaction data from any third-party interference. However, it is to be noted that while these transactions are difficult to breach, they are not completely secure.
Hence, today there are several businesses that allow their customers to transact with Cryptos. A growing number of individuals see cryptocurrency becoming a mainstream asset in the future.
Meanwhile, all such factors are significantly influencing various aspects of financial transactions around the world.
How Cryptocurrency is Shaping Fundamental Change in the Financial System
1. Accelerating financial inclusion
One of the first successful examples of financial inclusion is the wide acceptance of mobile payment systems. In many developing countries, millions of individuals have no access to the banking system or any financial institutions. Mobile banking significantly changed the paradigm and connected many such individuals to the banking system despite having no physical banking outlets in their towns/villages.
In a similar manner, blockchain technology, more specifically, cryptocurrency is believed to accelerate financial inclusion in wider strata of society. Cryptocurrencies work on Blockchain technology, through which participants can perform financial transactions in absence of any financial regulator. In other words, it is currently out of the purview of any financial regulatory authority and they cannot have any control over the amount or number of transactions. This feature appeals to many wealthy individuals as well as small investors.
2. Transparency in transactions
Traditional brick and mortar banks carry out all monetary transactions mostly manually, which leaves room for forgery and manipulation. On the other hand, all cryptocurrency transactions are completely automated and are tracked in a distributed ledger. The process is full proof and cannot be manipulated at any instance by any individual or organization. As a result, international transactions also become easier and free from manipulation, opening doors for transparency in financial transactions across borders.
3. Wealth Generation
Investment and wealth creation are considered to be out of reach for low to middle-income individuals. Also, in several countries wealth generation services are accessible to only wealthy persons. This constraint keeps a bigger chunk of the population from achieving their financial dreams in a traditional financial setup. But with cryptocurrencies, anyone can have access to stocks of the big organization through cryptocurrency stocks or tokenized stocks, which are versions of traditional stocks. Furthermore, anyone can start investing in these tokenized stocks with very little money, thus providing investment opportunities to the much wider population.
Though this might not completely eradicate financial equality in society, it will definitely stimulate global financial institutions to take steps in this direction.
Financial Institutions and Introduction of Digital Currency
On the other hand, as more individuals find this currency attractive, global central banks such as the European Central Bank (ECB), the Bank of England (BoE), and various other financial institutions are forced to rethink currency functions. But all is not well and good, financial institutions have encountered incidences of tax evasions and criminal activities that were untraceable due to the inherent nature of cryptocurrency. As a result, various global financial institutions have banned the use of these currencies. But the central banks are on track to create their own form of digital currencies.
Reports indicate that the ECB is planning to create digital Euro that is a digital form of currency distinct from the traditional form. These digital currencies will be officially regulated and backed by the central banks. As result, these digital currencies are believed to have inherently lesser price volatility. Moreover, these currencies will be put into practice after careful tests and studies.
Cryptocurrencies Backed by Corporations
In June 2019, Facebook made an announcement of its stablecoin project called “Libra”, which will allow users to make transactions. The project has been later renamed as “Diem” and its release has been temporarily halted. However, it is believed that we will encounter many more such initiatives in near future.
Future of Cryptocurrency
Here are some real-world instances of cryptocurrency adoptions that demonstrate its promising future.
The Bitcoin Mercantile Exchange (BitMEX)
A company introduced by former baking professionals, is combining traditional financial technology with the world of Blockchain. The company provides cryptocurrency derivative trading facilities similar to that of traditional trading firms.
A digital currency platform that enables both, merchants and consumers to transact in cryptocurrencies such as bitcoin and ethereum. The technology-enabled platform facilitates recurring buys and vault protection.
Acceptance of Cryptocurrency is Still Awaiting
Cryptocurrency is still in its initial stages of development and has yet found acceptance as a mainstream finance medium. It does, however, appear to alleviate several bottlenecks in the financial industry.
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