Cryptocurrency is the phenomenon of today, a sort of digital currency created in cyberspace by peripheral elements of the internet with the, maybe unintended, but absolute sub-objective to dethrone fiat currency from the privilege it commands in the global economy. A brainchild of modern internet inventions and financial curiosities, cryptocurrency was created using cryptography, thus effecting a paradigm shift in controlling and transferring digital money while demanding an autonomy from traditional central authorities.
What can firmly be said about cryptocurrency/digital money is that in actuality it is not fiat money. It is simply a storage of ‘value’, a unit of account and a fancy-digital medium of exchange for a specific community (at least in its inception), be it that of flyers who earn loyalty points from airlines in them, customers of retail giants who shop using them, of gamers that use them as tokens, etc. No government has its legal tender in virtual currency, no bank deals in them and no central or state authority recognises it as a new “money order system”.
Invented on 3rd January, 2009 by Satoshi Nakamoto when Bitcoin software went public, cryptocurrency was used for what has been mentioned above but its evolution too can be seen today. No more is it confined to certain communities for certain functions but it has constellated the interests of big players with the agenda to use them as currency in real time economy with the pliability to be exchanged for government-issued fiat currencies.
Topic of cryptocurrency has garnered immediate interest of practitioners, professors, scholars and writers in the field of economics and finance but why has this been the case? Is it the scepticism towards the store value of fiat currency or its unreliability in general that has fed the juggernaut of this financial marvel is yet to be analysed, for the vantagepoint it provides does not give a clear view of the adaptations taking under its effects by public in general and financial institutions and their processes in specific.
Cryptocurrency does solve information and transfer related bottleneck issues but whether this solution provides any immediate economic value is yet to be observed. The ripples of its effect can be felt by acknowledging cottage industries which have mushroomed substantially to provide public with their high configured computer systems, apt for mining these digital currencies, but can this concept seep through mass market barriers and make its space into the pockets of general public is a verdict cannot yet be passed.
The idea of providing a digital money platform that transcends the bounds of nations, their monies and its fluctuations in comparison to each other is juicy and luring. If there are those who say that switching cost and network coordination barriers are too steep to replace an already accepted and obligated money system then the answer to this scepticism lies in the questions such as why is there a necessity at such a nascent stage to replace an already existing system and why can’t there be a parallel system?
This parallel system has been witnessed functioning when purchases have already been made through ‘Bitcoin’, a digital currency, and also the ready acceptance of various members of the supplychain to coordinate through this system of exchange; all of which resulted into a sort of digital currency explosion with the birth of at least 500 alt-coins coming after bitcoin and showcasing their robust growth and proliferation, together having a market capitalisation of more than 893 billion US dollar as on 11th January 2023 according to coingecko.com.
But the question is, who could be the one frowning at this notion of a parallel system? There is no doubt that the governments will first face the blow of anything of this sort for such schemes have the potential to disrupt and distort functions like monetary policymaking, revenue generation, budget formation,etc. while also disabling, or at least denting micro level duties like preventing fraud, illegal transactions, dubious and con financial activities, black-money, hack related issues and its likes.
It is this ‘legal but grey area’ that governments will have a problem with and India’s example can be cited here which has kept its rigid hand on the idea of independent, parallel digital currencies functioning on its land while still acknowledging the benefits this concept can provide, thus launching its very own “digital rupee”.
Internet has opened a plethora of opportunities for everyone but also of threats and hence there can be serious concerns regarding cryptocurrencies, too. For starters, it is almost impossible to validate a genuine transaction from that of a forged one even though steps have been taken to solve this problem. A statement as simple as this can still warrant trust issues and the case is different from that of the digital platforms available for fiat money transactions for there is the intermediation of the banks and that of the governments but not so for unregulated, decentralised cryptocurrencies.
It is for this reason that many of the cryptocurrencies, including Bitcoin, cannot build trust of their customers based on the monetary policies of their governments and when this is the case, the question which can be raised is that how do they then maintain their value? These cryptocurrencies are able to stabilise, secure and sustain their value only because their users are able to trust a decentralised, unregulated cyber state of play. What does this answer conclude? It yells of volatility of virtual money so long as no tech giant of this field is ready to put its reputation on the line for the sake of its established customers and users and provide for them a trusted and secure digital platform.
To problematise the matter further, there should be no hesitation in affirming, at least theoretically, that decentralisation does have its advantages. To start with, there is no one central block of power susceptible to the control of an individual or an organisation. It promotes availability of potent computer network throughout the globe, thus erasing any concern of having a ‘central point of failure’. This latter fact also increases the chances of privacy quite considerably for there is no one server or system to track all the transaction of all the users. It is this privacy which attracts the users but one must remember that there is another side of the coin; if it attracts genuine users, it will also attract cyber criminals.
The internet, the digital payment apps on smartphones and the credit and debit cards have two things in common when it comes to providing services to their customers – ease and speed. There is no need to carry cash, sellers have compact card readers and wall pasted bar code stickers given to them by PayPal, Google Pay, etc., all of which have given immense ease in money transactions. Online shopping is increasing and impacting the very existence of brick-and-mortar concepts, thus making the usage of digital currency more alluring. What is even more attractive to its customers and threating to the banks is the removal of intermediary fees in money transactions.
Cryptocurrencies can pressurise debit and credit card networks into decreasing the price charged to the merchants who are already well pleased by the fact that bitcoin processing fees is considerably low for them. An example of this can be seen in an online retailer with the name “Overstock.com” which claimed to have received more orders, garnered wider demographics of its customers and generated overall more revenue when it allowed its customers to pay in Bitcoins. Effects of digital currency can also be seen on many other companies like “Coinbase”, a payment processing firm, which charges no fees from the merchants up to 1 million dollars per Anum and afterwards the charge is only 1 percent; a benefit every merchant would want to have.
If there is a great opportunity seen for the merchants from the above discussion, still, not much hope can be derived for the end consumers. For them does exist a ‘technical know-how’ lag and payments in bitcoins does not provide any rebate, something which is given abundantly to credit card users. To fill this void, merchants (mainly in the nations of the West) are focusing on providing a certain rebate for their customers who use bitcoins, thus minimising this effect but such efforts have yet to become common and unless there is a conducive ecology for cryptocurrency development, end users will be hard to please.
To go further down this lane, some have even suggested bitcoin exchanges to remove or decrease the fees they charge to convert actual currency into bitcoin, a scheme that can further help the cause to widely spread this digital form of money and also the general idea of cryptocurrency usage.
There is a vigorous enthusiasm into believing that the transaction cost, something of paramount importance for any digital currency, will be lowered substantially if done through block-chain technology. It is this reason that NASDAQ announced to use digital ledger inspired by block-chain technology to manage equities. It is a technology not only being worked with but is constantly improvising and this is only going to make the case stronger for digital currencies.
Back end of the supply chain will gain as long as network coordination on this platform is sorted and banks and governments will lose if regulations and restrictions are not brought in along with the efforts to make such an idea mainstream with pivotal role play of the latter; but the pulp of concern is for those who are neutral towards the idea of cryptocurrency and what is more dissuading is that they hold the chunk of potential for profits – they are the general people, the consumers, the front and final end of any supply chain and they are not exceptionally excited for there already exist digital platforms for their fiat money and they do their job quite well.
In simple terms, cryptocurrencies do not bring any new advantage or benefit to the end consumer. Block chain technology in itself can become cumbersome if, like any other digital payment, it allows millions of its users to use its own platform for payments where every minuscule transaction is recorded on a new block, thus substantially increasing the need to address information storage related issues and even if the solution is found in block chain tech updating, it will entail serious delay, making an existing digital currency too slow for general everyday retail payments. This may be the issue for those who are reaping ‘first mover advantage’ but for those virtual currencies which are willing to launch in the future, this issue can be resolved from ground up, thus attaining a ‘second mover advantage’.
This concern is believed to be overshadowed by the highlight of digital money today – that it is being treated as niche category money with big companies adapting their ecosystem in accordance to it and thus triggering an evolution of the mindset of people (and the end consumers) in favour of it.
Imagine the already existing data base of customers and clients these giants have and the effects there shall be of it if they are persuaded to use digital money. ‘Libra’ by Facebook, ‘Units’ by Walmart, ‘Grams’ by Telegram are assertive digital money projects with global ambitions at the farthest end of their spectrum while having immediate goals of improvising and increasing the efficiency of all the elements in their ecology.
Cryptocurrency dominates in denominations for it can break into decimals (eight decimals for Bitcoins) which has a potential to squeeze money out even in fragments by producing content which is purchase driven. It is not the decimal but the scale of it that will bring the profit. A gain for the end users also lies in their motive to hold these currencies for the appreciation value they can have, thus resulting in earning more fiat currency at the right time of its conversion. It must have to be the right time for there does exist in it the factor of fluctuation and where its rate stands as against the fiat currency at the time of exchange.
Global remittance market reached 689 billion US dollars in 2018 and it is this market that the cryptocurrency eyes, too. A sum up of 14 dollars is the fees charged from sender and the recipient for every 200 US dollars sent abroad; 7 percent of it is stripped off as exchange rate margins. This fees and this percentage are what cryptocurrencies can remove when global companies will offer this feature to the public, offering them a cheaper, stable, trusted, effective and efficient mode of money transfer.
Not only ease of use for public but there does exist ease of operations for the companies too, something the governments may later derive benefits from. Digital money used by customers of these tech giants will immediately put a digital print on their blockchains, leading to faster data analysis. As the global societies of today are highly digitalised and gain their access to bank and other critical services and government facilities through their digital identities, it is this market that can be tapped by these tech giants which will enable them to offer valuable digital identity data (derived and stored due to the customer’s usage of their digital money or by using their intermediary services for interlinked digital platforms) to the governments on whose land these companies work for the sake of national security or laws pertaining to AML (anti-money laundering) and its likes. An example of WeChat can be cited here.WeChat is a Chinese social media company and in collaboration with its government has provided a digital service for its users where they can access government services without the requirement of a physical identity card.
Immediate drawback and limitation that comes to mind is the long learning curve for both the companies and the customers. Not every company can become a player in this field for there is a requirement of expertise in digital technology, blockchain and cryptography. On the other side, there is a need for ease of user interface where the customers can believe they can use this mode of payment as easily as any other existing platform. This latter is a challenge for the companies too, let alone expectations of the customers for anonymity and safety from cyber-attacks.
A risk worth mentioning for the users at this point is also the irreversibility of the transaction done through cryptocurrency (bitcoin, for example); an issue which the banks mitigate through the services they offer to their customers. If a transaction using bitcoin has taken place either through error or fraud, there is no way of reversing it for there is no protocol for Bitcoin at its end to help its users. It is a pressing issue and a lesson for future cryptocurrencies for they will have greater advantage if they enter the market after addressing this issue.
Shifting the focus towards cybercrimes, one would not be astounded to know how deep its penetration has been in the last two decades and at all levels including politics; and cryptocurrencies have only become a tool for more efficiency in these activities. It is a proven fact that virtual currencies are being used by these non-state actors for money transfers, for attaining specialised services, ransom tactics to secure data of the victim only on payment of digital currency, buying of drugs and illegal items through ‘dark web’ or ‘silk road’, etc. Even though there does not seem to be evidence enough to depict occurrence of these activities as part of standard economic commerce, still, the weight of the issue is enough to raise an eyebrow and a whole lot of concern not only of governments but also of public.
Can the scale of these crimes be raised to a level of global concern by including the issue of terrorism and the catastrophe that might be when it is assisted through cryptocurrencies? Even though corroboration for this claim and concern is lacking, the idea is sufficient to give a great deal of apprehension. It may as well be assumed that these abhorred activities will only increase if the concept of virtual currency becomes more effectual for cyber criminals and terrorists.
Sometimes, the intent can be more formidable than its subsequent result for it has the power to inspire its likes someplace else in a different setting and hence giving a different and unexpecting result. Scotcoin in Scotland and Aurora coin in Iceland are digital coins deployed in their respective countries and have been blamed to be politically motivated to dethrone their physical fiat currency and give to its citizens a more stable option; all of this without any acknowledgement of the government. Though not successful as they were intended to be, a seed has still been sown in the minds of many revolutionaries alike throughout the world irrespective of whether their intentions would be for the good or bad.
An actual, accepted, corrected, robust cryptocurrency of the future if exists on the platforms that are known today will definitely have a grand storage value for there will be no manipulation by the issuer to affect its potency, function and purpose related to commerce and trade. A great opportunity in itself, it in fact has a potential threat to the governments for it can be used as safe haven or even treated as reserve money unless there is some sort of government intervention that benefits it and its citizens. For what is known today, cryptocurrency, like bitcoin, allows its users to enter transactions independently of any established monetary or trade control. This opens the pandora box of such a freedom that limits the effects of modals used for social behaviour control by implementing fiscal controls such as proscribing money laundering or exercising ‘capital control’.
The promise of digital currency does not lie in the new mode of payment or value as much as in the hope for security and trust it has the potential of offering. A transaction through it from one internet user to another is imprinted and hence legitimate.
What can this technology offer? A safe and trusted decentralised mode of transferring digital data, digital signature, contract, digital keys, digital ownerships, digital letters, bonds, stocks, shares and what not; all of it minus any predatory intermediation of banks or brokers. The potential of cryptocurrency lies not only in the mode of payment but in the very platform it offers.
The idea of cryptocurrency cannot be done away with until the very internet is done away with. The social, political or financial issues that the idea of cryptocurrency has brought forward, if analysed with a pragmatic mindset, will show that all these issues have existed even before the inception of these virtual currencies. The digital age has offered a great potential in the form of cryptocurrency prototype and the technology it has to offer.
The drawbacks today will be learnt from and a better digital product will come to fore. There is no denying the fact that the concept of cryptocurrency is the phenomenon of this digital era, the product of the internet and now an actuality that is here to stay, be adapted to and lived with.
[The writer is a Ph.D candidate in Jamia Millia Islamia, New Delhi. Email: [email protected]]