Can Cryptocurrency Change the World for The Better?

A common quote used by many is that ‘money is the root of all evil’. The best place where that saying manifest itself is the financial system, where a mix of an opaque monetary system and a historic trend of economic destruction across the globe has compromised the trust of our traditional financial system. The advent of Bitcoin in 2008 saw a radical shift into the perception of money, and how this revolutionary invention could be the panacea for changing the world for the better.

In order for us to understand the characteristics of cryptocurrencies as a possible solution, it is vital for us to take a deep dive into the fundamental issues of our financial system.

Problems of Our Financial System

The traditional monetary system is plagued by a wide variety of inherent issues that has not been fully addressed. Let us take a look at some major issues surrounding our financial system.

1. Corruption

Government corruption can manifest in a variety of forms, namely bribery, diversion of public funds and conflict of interests. A universal trait of corruption is the absence of any measures of accountability and transparency; that is why it is easy to get away with it in the first place. Just how widespread is corruption globally?

A global index measuring the degree of corruption in every country – called the Corruption Perceptions Index (CPI) – found that more than two-thirds of countries are corrupt. Using a scale between 0 to 100, where 0 is highly corrupt and 100 equates to corruption-free, a total of 123 countries (out of 180 countries) had a score below 50 in 2018. This reflects the failure of most countries in tackling corruption, thereby leading to a host of destructive consequences for a country’s economy and well-being.

Corruption Perceptions Index 2018

Source: Transparency.Org

 

This staggering statistic underlies an inherent characteristic of a centralized hierarchy of appointed individuals with huge amounts of power and resources. This of course shouldn’t be a generalization of all governments and politicians, but as the statistics have pointed out, there is a great deal of incentives for governments to engage in various forms of corruption given their unaccounted authority.

Corruption significantly reduces the trust and credibility of a government to function effectively for the best interest of society. When corruption seems into the higher echelons of society, monetary policies would be skewed and ineptly enforced to fix the economic inefficiencies and issues that originates from corruption in the first place. When inaccurate policies are implemented, it would have a devastating effect on the financial system and economy of a country. An example is the economic policy of printing m ore money by the government, officially called ‘quantitative easing’, which will be further explained in the next section.

2. Printing Money

Since the dawn of the traditional financial system, central banking has been a vital foundation for a fully-functioning economy. This entails a central bank (sanctioned by a country’s government) having the full autonomy in managing the state’s monetary and financial policies. As can be imagined, this autonomy yields a great deal of power with little to no accountability to the public. What is scary is that our modern financial system runs on the assumption solely on a currency’s price and its underlying supply and demand, without any reference to intrinsic value. This means that the money we hold in our wallet or in our bank is not substantiated by any real value, but rather its value is determined by the degree of trust in the government that issues the currency.

Prior to the 1970s, fiat money was backed up by actual gold bullion. This means that a currency’s value is tied to the underlying gold reserves; in order to create an additional supply of money (or paper money) in the financial system, an equivalent value of gold must be kept in reserve to support the value of the newly-created money. However, the abandonment of the gold standard in 1971 broke the relationship between fiat money – particularly United States Dollar (USD) – and gold. Since then, there is ironically an inverse relationship between the value of gold and the USD.

Source: US Federal Reserve

 

With that, fiat money had no intrinsic value. In order to sustain government spending, central banks had to resort to printing more money to stimulate the economy. The problem is, printing more money endlessly results in the devaluation of the domestic currency, since economic law states that an increase in the supply of something results in the lowering of its price, and therefore, value. This results in an economic phenomenon called inflation, which is discussed next.

In the absence of the gold standard, there is no way to protect savings from confiscation through inflation. There is no safe store of value.
— Alan Greenspan, Chairman of the US Federal Reserve, 1987–2006

In the absence of the gold standard, there is no way to protect savings from confiscation through inflation. There is no safe store of value.

3. Inflation and Hyperinflation

Inflation is defined as the increase in the general prices of things and a reduction in the purchasing power of each unit of currency. The best way to envision inflation is that a $100 bill today can be used to purchase a lesser amount of goods and services as compared to 50 years ago. The general long-term devaluation of fiat money is a natural by-product of our financial system.

“The U.S. government has a technology, called a printing press (or today, its electronic equivalent), that allows it to produce as many U.S. dollars as it wishes at no cost.”

— Ben Bernanke, Former Chairman of the US Federal Reserve

There have been countless examples of devastation caused by inflation and hyperinflation throughout the modern age. Perhaps the most well-known example was back in 1920 in Germany, where the government printed a staggering amount of money that led to the country incurring a sovereign debt from 5 billion to 156 billion Deutschmarks in less than a decade! Putting things in perspective, the inflation rate was at mind-boggling 20.9% every day, leaving devastation to the livelihood of people and businesses. Another recent example is the current situation in Venezuela, where a carton of eggs is currently worth 250,000 Bolivars, which is far from its price of 6,740 Bolivars in 2017.

These examples go to show the cataclysmic effect of excessive inflation and to a larger extent, a profound and fundamental weakness of our financial system. History has shown that fiat currency is a horrible store of value, given their long-term depreciation.

All money is a matter of belief.
— Adam Smith

All money is a matter of belief.

All above problems are a direct result of the absence of transparency and accountability. It is no surprise that the creation of cryptocurrencies were seen as a solution in solving the issues of fiat money.

Catalyst For Change: 3 Defining Characteristics of Cryptocurrency

The creation of Bitcoin in 2018 kickstarted a technological revolution that can change the world for the better. The underlying technology of Bitcoin, called blockchain, is essentially a public database of records that are immutable, transparent and permissionless. Let’s take a deeper dive into the characteristics of cryptocurrencies.

1. Decentralization
The defining trait of cryptocurrency is the decentralization of its network. This means that no single person or entity that controls the network. Rather than relying on a central authority to mange and secure transactions, the blockchain achieves a robust degree of security by utilizing ground-breaking consensus mechanisms across a global network of nodes that validates and record transactions that are incorruptible, secure and accurate.

This distributed architecture makes the system much fairer and secure. No bank, regulators or central bank can control or interfere with the system. Government intervention in our financial system has been a problem throughout the history of money, causing numerous devaluation of fiat currency since the dawn of time. Through a decentralized network, money is free from the control of the government.

Additionally, cryptocurrencies have a finite supply that cannot be ‘printed at will’. The rules of the software protocol ensures that the supply of the coins – generated through a process of mining – is kept in check and transparent. This negates the harmful effects of inflation, which is a mortal enemy of fiat enemy. That is why Bitcoin is often termed as ‘digital gold’.

2. Transparency
The blockchain underpinning cryptocurrencies allow anyone to verify and observe every single transaction with all the necessary data. This openness is central to the philosophy of cryptocurrency. The monetary system design of Bitcoin is public and open-sourced. Every transaction recorded in the blockchain since the first transaction ever executed can be accessed, viewed and analysed by virtually anyone, even if it is not yours. You can access the exact time, the value transferred, the wallet address of the sender and recipient, and the fees paid for executing the transactions. The distribution schedule of Bitcoin is also public information that can be accessed by anyone.

This level of transparency allows for accountability since it helps the general masses understand what’s currently going on or what had happened. On the other hand, it is impossible for us to access historical information in the fiat currency system, nor do we know how much money is being printed by governments today. This stark comparison underpins the trustlessness nature of cryptocurrency.

It should also be pointed out that a wide variety of application and use cases besides money can be managed by a blockchain to enforce transparency and accountability in a system.

3. Immutability
Due to the open nature of blockchains, all transactions are recorded in a public ledger that everyone has access to. This means once a transaction has been validated and stored on the blockchain, it cannot be changed or altered in any way. The integrity of the system is constantly monitored and secured by a global reach of participants (called miners) that validates the transactions at any given point of time. Given the decentralized nature of blockchains, it is close to impossible for any singe person to compromise the network.

Conclusion
The advent of cryptocurrency and blockchain technology has the potential to disrupt traditional systems for the better, by infusing vital traits of transparency, accountability and stability. A quick rundown on history has constantly reminded us on the harmful effects of corruption, unaccountability and opacity in our financial system. That is why fundamental issues needs to be addressed and processes needs to be improved. It is clear that cryptocurrencies are the next step of the evolution of money, given their groundbreaking technology to solve the pertinent issues that traditional systems faces. It is only a matter of time before the innovation within this technology starts to permeate every facet of our social life.

 

The above content is for informational purposes only and should not be construed as any type of advice. All trading involves risk of capital loss. Digital Assets trading also involves additional special risks not generally shared with official currencies, goods or commodities. For more information on the risks please refer to our Risk Disclaimer

* The information above is not investment advice.

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