To understand the key factor that motivates the emergence of cryptocurrency, it is useful to analyze the history of Bitcoin, the first and main decentralized virtual coin. Bitcoin was launched at the end of the 2008 financial crisis, which is considered by many experts to be the greatest crisis since the Great Depression. The text comment embedded in the genesis block of this cryptocurrency says: “The Times 03/Jan/2009 Chancellor on brink of second bailout for banks”. It is a reference to a headline that appeared on the respective date in the British newspaper “The Times” and is suggestive of the limitations of fractional reserve banking.
The latter designates the traditional banking model according to which banks operate by taking deposits and lending money while being required to hold in reserve only a fraction of the deposit liabilities. The minimum reserve requirement varies from country to country and could be, for instance, 10% or even less. A 10% reserve, could mean that a bank that has 1 million dollars worth of deposits could theoretically make loans of 10 million dollars – this happens electronically and new money is created in the process (out of thin air). Obviously, the bank earns much more in interest from loans worth 10 million USD as opposed to just 1 million.
One of the greatest liabilities of fractional reserve banking is that, when a significant number of money lenders come for their deposits (for instance, as a result of panic), the bank simply can’t return their money. The central banks usually step in and bailout these banks using money that is essentially collected from taxes or transformed into debt that needs to be paid by all citizens. Below we explore the paradigm change brought by cryptocurrency in the world of finance.
6 Changes Expected to Be Brought by Cryptocurrency
- Cryptocurrency could change the world by creating a parallel decentralized financial system independent from the state-regulated banking system and devoid of the key flaws of fractional reserve banking, which has led to so many crises throughout history. Nowadays, banks control financial fluxes and can impose their rules and commissions for various operations. The client is often left with few options, hence, cryptocurrency can provide an alternative. However, there are also downsides to such a scenario – the low degree of user transparency and non-existent supervision of transactions with cryptocurrency as opposed to banks could result in widespread adoption by criminals.
- Cryptocurrency could also be a solution to the problem of inflation, especially when driven by irresponsible monetary emissions – whenever the state decides it needs money, it just asks the central bank to print some. By contrast, a cryptocurrency typically has a total supply limited by design, which means it is not amenable to inflation (after being completely mined).
- A virtual currency could enable true privacy for any financial transaction. For instance, in countries with authoritarian regimes, cryptocurrency could be used to make a truly safe purchase of a VPN subscription which could help one attain online anonymity. College students who seek academic help would also benefit from this aspect. Many students already make use of services like Edubirdie writes your essay fast but they might want additional measures to ensure their privacy, for instance, when making payments. It is very easy to imagine that, in the not-so-distant future, academic assistance platforms start accepting payments in cryptocurrency.
- Since cryptocurrency has no nationality, it could be used all around the world without any exchange fees being incurred, which could make it perfect for traveling or even for international money transfers with minimal or even no commissions.
- A virtual currency could work in combination with the far more comprehensive smart contracts to yield a variety of integrated solutions. Smart contracts are computer protocols that are meant to enable, verify, or enforce the performance or negotiation of a contract without the need for a third party (such as a lawyer), helping to save on costs, time, and effort, but also to avoid conflict. Data pertaining to the contract would be recorded in the blockchain – this would ensure decentralization, speed, and safety in exchanging shares, money, property, services, etc.
- The blockchain technology behind Bitcoin and other virtual coins inspire multiple security improvements in a variety of areas: user authentication (including by potentially replacing user passwords), protection of sensitive digital data, enhancing the security of Internet of Things devices, ensuring secure communication within organizations or between any chatting parties, etc.
Given all those mentioned above, there is little doubt that the blockchain technology and cryptocurrency will change the world as we know it. These can not only bring more safety to financial transactions and various other aspects of our online presence, but they can also create parallel, decentralized systems that would get rid of third parties, whether these are represented by banks, lawyers, etc. This automation is able to simplify a great number of financial or legal operations, saving time, money, and effort. Nevertheless, it is vital to ensure that we make good use of the benefits these tools offer, while also addressing their vulnerabilities and the potential dangers associated with them.
Many people around the world have already embraced virtual currency, while some have even become millionaires by trading it. If you are also planning to buy some but don’t know where to start, check out this article for some basic considerations. Currently, most of the fans see cryptocurrency as an investment opportunity rather than a currency for daily payments (the infrastructure is underdeveloped yet). Even so, there is an overwhelming consensus among them that virtual currency represents the future of finances.
Connie has experience in writing content on a great variety of topics, including finance, SEO, as well as on many emerging Internet tools and technologies. She also has good insight into on-demand research websites and student assistance platforms – their diversity, types of services offered, internal organization, etc. Apart from that, Connie likes to share writing tips and hacks with younger audiences.