Bitcoin, a medium of exchange that can facilitate transactions using only the digital identities of the transacting parties (referred to as pseudonyms), initially promoted the dark web, where drug and Illegal commerce such as sex trafficking was conducted. As it gained popularity, it became clear that the anonymity of its users could not be guaranteed. using a comprehensive set of transactions Bitcoin Or the purchase (and delivery) of genuine goods and services using cryptocurrency makes it possible to reveal the true identities of users. Hackers receiving ransomware payments in bitcoin have to be quite sophisticated to hide their digital trails. Furthermore, bitcoin is volatile and transactions using it are slow and expensive. The network also cannot process large transaction volumes in a timely manner.
Although it has failed in its stated purpose as a pseudonymous medium of exchange, bitcoin has turned into a financial asset to some extent. Since bitcoin lacks intrinsic value, its followers believe that its scarcity is the basis for its high price. The algorithm that controls the process of creating the cryptocurrency maintains a hard cap of 21 million bitcoins (about 18.5 million have been created so far). But scarcity may not in itself be a sustainable source of value, and at this stage, the skyrocketing prices of bitcoin and similar cryptocurrencies reflect pure speculative plays, their value entirely dependent on investor confidence.
Over the years, various cryptocurrencies have emerged that attempt to address the flaws of bitcoin. Cryptocurrencies like Monero and Zcash have sophisticated encryption algorithms that hide users’ identities more effectively but they are cumbersome to use. A new breed of cryptocurrency called stablecoins attempt to fix the problem of volatile prices, but they require specified intermediaries to validate transactions. Somewhat ironically, stablecoins derive their stable value – a major disseiratum for an effective medium of exchange – from their backing by stores of fiat currencies or government bonds. The business case for stablecoins is that they provide low-cost and easily accessible digital payments within and across national borders. Sensing an opportunity, even Facebook has proposed its own stablecoin, DIAM, which will initially be backed by reserves of hard currencies such as the US dollar and US government bonds. Given the wide reach and financial clout of corporations such as Facebook and Amazon, it is not hard to imagine their cryptocurrencies gaining widespread acceptance.
However, the prospect of such corporations someday issuing their own un-backed digital currencies is an uncertain one as it would infringe the monetary sovereignty of the national. Central bank. It is also troubling that these unregulated cryptocurrencies can be misused to promote illegal activities such as money laundering and the financing of terrorism across borders.
China’s ban on bitcoin and other cryptocurrencies highlights how some governments see them as a threat. Other governments are also working hard to regulate cryptocurrencies and related speculative financial products. They also carry financial risks, especially for gullible retail investors who may not understand the risks of investing in crypto assets.
This does not mean that cryptocurrencies have not provided any real benefits. The technology that underpins bitcoin, called blockchain, is finding use in other areas of finance. Without traditional middlemen such as lawyers and real estate brokers, it will soon be possible to conduct a wide range of transactions, even when buying a home or car. Of course, even though ownership transfers of various financial and physical assets can be done on a public digital ledger blockchain technology, governments will still need to enforce property and contractual rights.
Equally important, central banks have begun to design their own digital versions. Countries like Japan and Sweden have started testing and many other countries including India plan to do the same. Thus, cryptocurrencies are indirectly accelerating the demise of physical currency. While the future of cryptocurrencies as a financial asset is unclear, they have clearly heralded a revolution that will make low-cost digital payments widely accessible. These new technologies will help democratize finance by making a range of basic financial products and services easily and widely available to the public. This may be the true legacy of bitcoin that we should be thankful for.
Author Professor at Cornell University and author of The Future of Money: How the Digital Revolution is Transforming Currencies and Finance.