Forms of digital money have been on the rise in the past few years. Today, a broad assortment of transactions can be undertaken without using cash and conventional types of money. Cryptocurrency is the latest entrant. Since the emergence of Bitcoin in 2009, several other cryptocurrencies have been introduced, such as Ether, Litecoin, and Monero. Cryptocurrencies are digital assets intended to function as mediums of exchange. They are based on cryptography and blockchain technology. Though cryptocurrency could be the future of money, the inherent risks cannot be understated. Understanding the world of cryptocurrency is especially important given its connection to capital and money markets. For capital and money markets to function properly, mediums of exchange must be stable and reliable. This paper discusses the future of cryptocurrency. The paper specifically focuses on the implications of cryptocurrency on capital and money markets as well as the risks and concerns presented by the rise of cryptocurrencies. Special attention is also paid to the bitcoin scandal and its implications.
Though cryptocurrencies have gained popularity in the last five years or so, their history dates back to the 1980s, when cryptographer David Chaum developed a complex algorithm to secure electronic fund transfers (Stark). Chaumâ€™s algorithm laid the foundation for digital currency transfers, whether it is electronic cash transfers or virtual currencies such as Bitcoin. Nonetheless, Chaumâ€™s efforts to popularise cryptocurrency were impeded by government restrictions, causing his cryptocurrency start-up to shut down in the 1990s. In 2009, however, what would become the first modern cryptocurrency â€“ Bitcoin â€“ was launched by an individual or group individuals pseudonymised as Satoshi Nakamoto. While Chaumâ€™s idea did not involve decentralisation, Bitcoinâ€™s idea was inherently characterised by the absence of centralised control, in addition to anonymity and blockchain technology. Since the emergence of bitcoin, some optimists have described cryptocurrencies as technologies that could revamp industries across the board (Hackett; Zhuravlyova). In future, they could be used everywhere â€“ from banks and retail stores to pension plans and capital markets.
Cryptocurrencies are increasingly redefining capital and money markets. According to Stark, cryptocurrencies could be the new norm in the near future as far as medium of exchange is concerned. Cryptocurrencies have a number of unique characteristics that make them popular. First, dissimilar to conventional currencies, cryptocurrencies are decentralised. This means that they are not regulated by a designated authority such as a central bank: they are purely driven by market forces. Additionally, cryptocurrencies are difficult to counterfeit as they are based on cryptographic techniques. This is an especially important attribute given the rise of counterfeit currency. The anonymity of cryptocurrencies makes them even more attractive. Anonymity means that each transaction is strongly encrypted, making user identification extremely difficult. These characteristics make cryptocurrencies safer than conventional currencies. Indeed, though most financial advisors are likely to discourage clients from investing in cryptocurrencies, the currencies could offer an attractive return on investment. For example, the value of one bitcoin today exceeds $4,000, an overwhelmingly exponential increase from $0.0001 in 2009.
For financial institutions, cryptocurrency could result in significant savings as a result of reduced paper work. The technology could eliminate the laborious, paper-intensive processes banks rely on to complete transactions (Zhuravlyova). It could make bookkeeping faster and less costly, making transactions less repetitive, safer, more streamlined, and more reliable. As a matter of fact, large banks such as HSBC are exploring the potential of cryptocurrencies. If financial institutions fully embrace the technology, capital and money markets could take a whole new direction to the benefit of both banks and their clients.
Cryptocurrencies could also revolutionise capital and money markets by addressing challenges associated with the increasingly digital economy. Across the globe, there are more than two billion people without access to the formal financial system (Stark). Cryptocurrencies can overcome this challenge by facilitating person-to-person exchanges. Cryptocurrencies could also be used as platforms for crowdfunding. With cryptocurrencies, virtually everyone can be an investor online (Hackett). This is a particularly important advantage for entrepreneurs hunting for funding. In fact, some start-ups have obtained funding through this new channel. Essentially, the growth of cryptocurrencies is driven by not only economics, but also social impact. As a result, cryptocurrencies could be the future of money.
In countries like Switzerland, the use of bitcoin is already a norm (Zhuravlyova). There are even bitcoin ATMs installed throughout the country, enabling users to exchange conventional currency for bitcoins. This has made Swiss towns like Zug to be termed as â€œCrypto Valley.â€ The popularity of bitcoin in Switzerland has provided an ideal breeding ground for the advancement of cryptocurrencies. With its highly decentralised political system and finance-friendly environment, Switzerland could soon become the world hub for cryptocurrency. Perhaps there is a lot other countries can learn from Switzerland as far as cryptocurrencies are concerned.
In spite of their immense potential in transforming capital and money markets, cryptocurrencies are yet to be formally recognised by governments as acceptable mediums of exchange. What concerns to governments have? This is a fundamental question to focus on in evaluating the future of cryptocurrencies. As explained by Stark, one of the major concerns for governments is the possible use of cryptocurrencies in black market activities such as illegal sale of firearms, drug smuggling, and money laundering. The U.S. Securities and Exchange Commission (SEC) has particularly expressed this concern. In the beginning of 2017, the commission declined an exchange-traded fund transaction by Winklevos Bitcoin Trust over black market trading concerns. The event saw Bitcoin prices drop by 35%.
In a recent tech conference organised by Fortune for cryptocurrency entrepreneurs and capital market players such as banks and venture capitalists, attendees intimated that though cryptocurrencies may be here to stay, the possibility of rip-offs cannot be underestimated (Hackett). More specifically, instances of insider trading and market manipulation could arise in the long term, eventually benefiting only a few individuals. This risk especially stems from the unregulated character of the cryptocurrency market as well as the anonymous nature of transactions. Going forward, this is an issue players in the space must confront if cryptocurrencies are to actually to remain.
Security is also an important concern. Though cryptocurrencies are based on cryptographic techniques, some of the technologies are not perfectly secure. The scandal involving Mt Gox, a former bitcoin exchange based in Japan, is an ideal example of how cryptocurrencies are vulnerable to security risks. The exchange was shut down in 2014 following the theft of about 850,000 bitcoins from its digital wallet (Moore). At the time of the theft, the digital coins were valued in excess of $400 million. Also, Mt Gox was facilitating more than 70% of the total global bitcoin transactions at the time the theft occurred. Investigations have been conducted, though it is unclear how the coins disappeared. Nevertheless, evidence provided in April 2015 indicated that the coins were stolen directly from Mt Coxâ€™s digital vault over time, starting in 2011. The theft was executed using security breaches.
Though some bitcoins were recovered, the scandal brought to light the serious risk associated with cryptocurrencies. The possibility of another scandal happening cannot be ignored. Since the scandal, Cryptocurrency companies have certainly undertaken measures to reinforce security measures. The companies may even introduce stronger measures in the future in an effort to restore or build public confidence in cryptocurrencies. Nonetheless, as put by Zhuravlyova, the science behind cryptocurrency is largely in its infancy â€“ it is not well understood. This means that there could be other security risks that cryptocurrency firms have not fathomed. This perhaps explains why most governments across the globe remain reluctant to give the green light.
Despite the scandal, bitcoin is surprisingly still in existence, gaining even more value in recent times. Today, Bitcoin is trading at over $4,000 for each unit. When the scandal happened, word was that bitcoin would soon collapse. Indeed, collapses resulting from financial scandals are not a strange phenomenon. When such scandals happen, a â€œdisastrous spiral of disbeliefâ€ is created (Moore). The public loses confidence in the venture, ultimately leading to downfall. Bitcoin has, however, defied this logic. Though many people have described it as a time-ticking bomb, the cryptocurrency venture continues to prove critics wrong. This adds weight to the prediction that cryptocurrency is here to stay.
On the whole, cryptocurrencies could be the future of money. Nonetheless, achieving this future appears a farfetched idea as the technology is yet to be formally accepted. The uncontrolled nature of the market, coupled with the anonymity of users, makes the realisation of the envisioned future especially difficult. It may take a little bit longer before governments allow the use of cryptocurrencies as official mediums of exchanges. Even so, the potential of cryptocurrencies is immense, with some countries demonstrating that the alternative currencies could actually be valuable mediums of exchange. Cryptocurrencies could revolutionise capital and money markets in a way never seen before. With the world transitioning to a digital economy, conventional currencies could in future be replaced by cryptocurrencies. Only time will tell.
Hackett, Robert. â€œ7 cryptocurrency predictions from the experts.â€ Fortune, July 25, 2017, http://fortune.com/2017/07/25/bitcoin-ethereum-cryptocurrency-predictions/. Accessed 19 August 2017.
Moore, Heidi. â€œThe Mt Gox bitcoin scandal is the best thing to happen to bitcoin in years.Â´The Guardian, February 26, 2014, https://www.theguardian.com/money/us- money-blog/2014/feb/25/bitcoin-mt-gox-scandal-reputation-crime. Accessed 19 August 2017.
Stark, Harold. â€œFrom here to where? Bitcoin and the future of cryptocurrency.â€ Forbes, April 21, 2017, https://www.forbes.com/sites/haroldstark/2017/04/21/from-here-to-where- bitcoin-and-the-future-of-cryptocurrency/#671ec7644367. Accessed 19 August 2017.
Zhuravlyova, Sonia. The future of money: Bitcoin and other cryptocurrency technologies are a way of life in this small Swiss town. Newsweek, July 7, 2017, http://www.newsweek.com/2017/07/21/zug-switzerland-crypto-valley-bitcoin-digital- currency-634524.html. Accessed 19 August 2017.
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