CryptoCurrency has taken the world by storm. India alone is home to more than ten crore crypto owners, that’s the highest in the world. The industry is all set to bring the 3rd generation of the internet, aka web 3.0, to life. But are we ready to adopt the digital currency and say goodbye to paper notes?
By now, most of us must have become familiar with the idea behind crypto. A decentralized form of digital currency that serves as a medium of exchange via a computer network, and is not subject to any central authority (or a third party). Social media platforms are flooded with information related to crypto, perhaps the reason why youngsters are showing keen interest in the same. However, the aspect of interest must not overpower the impact or future implications of cryptocurrency.
The global outlook
Unlike banks, cryptocurrency does not demand investment in physical assets, electricity bills, rental property, or employee wages. Plus, they are completely free from third parties, which encourages individuals to trust and experiment with new technologies. The rise of digital currencies can make international transactions more economical and contribute to eliminating the $1.7 trillion global trade finance gap.
The recent pandemic has pushed many world currencies into price instability. We are never too sure what might hit the global economy. Debt crisis, inflation, war, it is difficult to predict the future. In such instances, cryptocurrency might help curb the economic implications. Since it involves a decentralized system, residents living in nations with unstable currencies may freely trade across borders with citizens of more wealthy nations, thus providing a level of economic equality. With an increase in cross-border transactions, international economies can become more integrated. This change in the financial landscape can further promote the idea of an inclusive economy.
As of March 2022, there are more than 18,000 cryptocurrencies in the world, with Bitcoin, Ethereum, Tether and Binance Coin being the top ones. The market of crypto has proven to be highly volatile. Prices of several cryptocurrencies have dropped significantly as compared to their prices last year. No doubt many people have made a fortune by investing in crypto, anyhow this must not overpower the fact that many have lost their hard-earned money too.
A helping hand to the ordinary
In FY21, India alone witnessed 229 banking frauds every single day. People are losing trust in the current banking system which again makes cryptocurrency a more viable option. Many believe that blockchain technology is highly secured and all the transactions are untraceable as the identity remains anonymous. However, the latter is not true. Blockchain technology is pseudonymous, meaning a person has an alternative identity in the digital space. This alternative identity is not similar but rather linked to the real identity. So perhaps the idea of anonymous transactions might not be true completely. Almost all cryptocurrencies use public blockchains, that act like a digital ledger where all the transactions are recorded.
The use of cryptocurrency can provide transparency to the current monetary system. Paper currency is harder to trace and is far more commonly used in illicit activities such as money laundering. There is no written record left behind when money is passed. However, in the case of crypto, a transaction once made gets permanently recorded in the public ledger.
Blockchain and cryptocurrency technology are inherently part of the third generation of the internet. The most prominent factor of Web 3.0 is decentralization which helps in giving greater control to content creators. Last year, the creator economy was worth $104 billion. Web 3.0 allows creators to create their own platform (Unlike YouTube, Twitter and other centralized social media sites) and decide whether to monetize their content or not. Creators will have free will in content creation. Cryptocurrency will further provide them a medium to get paid for their work. Thus, helping local artists.
The environmental cost
Conceivably, one of the major drawbacks of cryptocurrency is the impact it has on the environment. Mining is the process of verifying transactions and creating new crypto coins by solving complex mathematical problems. To solve such problems, one needs high-tech computers/supercomputers but the energy consumption of such machinery is quite high. And this high consumption of energy has a significant impact on the environment. Top cryptocurrencies like Bitcoin, Ethereum and Dogecoin are leaving a large carbon footprint at a time when world leaders are pledging to achieve carbon zero in international climate meets.
However, according to a report published last year, it was found that the total energy consumption of Bitcoin is less than half of that consumed by the banking industry. Nevertheless, the fact that more than 18000 cryptocurrencies exist at the moment is something that shouldn’t be ignored.
Also, there are many other environment-friendly options like Chia, IOTA and Cardano which use significantly less amount of energy and are way more sustainable. Big cryptocurrencies like Ethereum are also launching their own enhanced version (Ethereum 2.0) which will require less energy.
The economic impact
Transition demands time. Before we dive into the impacts of crypto, it is crucial to know the impacts of the financial shift. The shift from paper currency to cryptocurrency. For developed nations, this shift might not cause much complications. But for the developing and underdeveloped, the transition might take time giving rise to many problems, as the gap of digital divide is significant.
Cryptocurrency might be pseudonyms in nature however, it is essential to understand that at the end of the day it’s just a digital currency. Cyberspace is not yet considered safe which makes the technology prone to cyber-attacks. Besides this, the dynamic nature of the crypto market can lead to heavy losses in investments, which are quite visible today.
From a business standpoint, crypto might give a positive outlook to the current start-up culture. The global pandemic resulted in a massive start-up boom, with the number of new businesses throughout the world greatly exceeding last year’s figures. Small businesses play an integral part in the development of an economy. However, SMEs have cramped margins, less bargaining power, cash flow issues, and experience delay in payments. Stablecoins like Tether and Binance USD can help foster growth and expansion by solving such problems. Unlike cryptocurrency, the value of stablecoins is pegged to a specific reserve asset. This helps in making the market of crypto less volatile by ensuring price stability. Stablecoins can help small businesses in reducing transaction/processing fees, expand their market to international doors with rapid transactions. This might significantly increase liquidity and cash buffers, allowing small businesses to survive and prosper in the face of an unfavourable economic scenario.
Crypto currency is competent enough to solve problems faced by the current monetary system, perhaps that’s the reason people see it as a boon. However, the implications can be both good and bad. It’s crucial to note that blockchain technology is not perfect either. Flaws and defects have been a part of every medium of exchange, be it paper notes, plastic money (credit & debit cards), or the coin system. But what we are sure about is that the new way has always been better than the old. The way we accept and incorporate a system determines the impact and inference of the same. The question is not whether the idea behind crypto is right or misguided. It’s about how we will accept and incorporate it into our daily lives keeping in mind the current challenges. It would be quite wrong to assume that the answer will be similar for people living in different countries, with different income levels and monetary issues.
