BlockChain & Cryptos | |
BlockChain & Cryptos | |
3431 VIEWS | |
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Tuesday,
December 3, 2019/5:30pm/Meristem / Header Image Credit: Arts & Collections
Cryptocurrency has
generated a lot of buzz in recent times, but what exactly are they? What is
their value proposition as a medium of exchange? What risk does their adoption
pose to the current financial system and can they, someday, replace traditional
fiat money? It goes without saying that when people hold money, they expect
that it would store value for them, act as a medium of exchange and a stable
unit of account. Money, in serving its purpose has evolved from the exchange of
one commodity for another in the primitive age to the fiat system of today. The
movement from the barter system to fiat was fostered by the rapid expansion in
commerce, which demanded a more robust financial system where trusted entities
(banks) are needed to create trust in the system by intermediating transactions
between people.
Trade expansion also
brought about the need to create trust between banks and maintain a central
ledger that settles transactions between them, a function performed by the apex
bank. It is important to note that beyond this, the apex bank also acts as
bankers to the government and acts on its behalf. The essence of this is clear;
since fiat does not have intrinsic value, there is the need to have it backed
by the full faith of the government and the apex bank represents the government
in the regard. Hence, the money system is based on trust; the people trust the
banks, and the banks trust the apex bank. Cryptocurrency is a form of digital
money designed in an encrypted manner to make transactions secure, by relying
on blockchain technology which ensures that the process is decentralized,
immutable and transparent.
Cryptocurrency, for
example, Bitcoin, emanated from the opportunity to automate the "trust process" through distributed ledger technology as against trusting in banks. The
technology ensures consensus on transactions between entities while maintaining
the database of transactions across all participants. Without a doubt,
cryptocurrency offers some benefits to the payment system. Its application into
payment has the potential to drive down the cost of transferring assets through
tokenization, make transfer seamless while efficiently managing the database of
transactions. This is very applicable to cross-border payments and could reduce
the time it takes to settle international transactions from days to just a few
hours. This could accelerate the international trade and commerce process which
has become more sophisticated today.
Despite the possibilities,
the question remains; will cryptocurrency gain popular adoption? Will there be
an increased willingness to adopt it as a medium of exchange? Will regulations
support its widespread adoption? For people to be willing to accept
cryptocurrency, in the very least, it needs to match the efficiency of the
present alternatives. In this regard, scalability, the ability to efficiently
process a high volume of transactions, is a major area where crypto lags. For
example, Ethereum, the fastest cryptocurrency can only process 15 transactions
per second, compared with VISA which can process about 24,000 transactions per
second.
This technical weakness is
a deterrent to mainstream adoption because, in the payment industry, payment
processing power is important. The inability to function effectively at scale
will limit the popular adoption of crypto. Lastly, regulatory challenges might
be the biggest hurdle for crypto. Currently, there is no applicable regulatory
framework for cryptocurrency, and they are not accounted for in the supply of
money as they are beyond the purview of the central banks. Hence, the
mainstream adoption of crypto could weaken the effectiveness of monetary
policies.
Regardless, we expect the
underlying blockchain technology to be a game-changer in diverse industries,
bringing about decentralization, transparency, and accountability which are
important in building robust systems.
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