Cryptocurrency is taking the business world by storm, paving the way for digital currencies as the payment method of the future. Decentralized from banks, cryptocurrencies use encryption to regulate funds and verify transfers.The allure of cryptocurrency lies in their anonymity and security, allowing users to store money safely without providing any personal details (McGoogan & Field, 2017). Although, the lack of governmental authorisation means that banks are highly unlikely to join the “Cryptocurrency Renaissance” (Etsebeth, 2017) by endorsing it as an official currency.
Aside from Bitcoin which launched in 2009, multiple cryptocurrencies have emerged, including Ethereum, Ripple and Litecoin (Scott-Briggs, 2016). Bitcoin is the most developed and commonly use digital currency, valued at over $45 billion as of July 2017. Introduced by Satoshi Nakamoto, Bitcoin promises lower transaction fees than traditional banks, and uses peer to peer technology to facilitate instant transactions (Investopedia, 2015).
Other popular cryptocurrencies use decentralised computer encryption to support peer to peer payments, and are all alternatives to the flagship system. Essentially, all currencies offer similar benefits, but may include original features unique to their brand. For example, Litecoin offers faster payments, and Ripple allows consumers to use other forms of money aside from cryptocurrency. Another system, Ethereum, includes terms of a transaction into a “smart contract”, better protecting users from fraud. Currently, the CoinMarketCap publically lists over 850 different cryptocurrencies, and this myriad of options allows potential investors to tailor their choices based on their individual requirements (Greene, 2017).
Investors are drawn to cryptocurrencies for their high returns and endless possibilities. However, high expected return correlates with high risk, and thus, digital currencies are notorious for being volatile, risky ventures. Of course, being a new system, many consumers struggle to understand how cryptocurrencies work (Helmore, 2017). The process of introducing a cryptocurrency into the market occurs via an initial coin offering (ICO), where the required initial investment amounts may differ. Currently, Bitcoin requires the highest initial outlay with a minimum of $4000.
The market for ICOs is indeed booming, having raised up to $1.3 billion this year (Hileman, 2017). These new ventures create hundreds of new assets (i.e. coins or tokens) that, in turn, can be used to power yet-to-be-developed peer-to-peer block chain networks. Speculators are attracted to the potential of building on decentralised block chains, and this is what drives the funding of ICOs.
In the future
Cryptocurrencies have large implications on the push towards a cashless society. As a decentralised method of peer to peer payment (Cryptocoins, 2017), the adoption of cryptocurrencies would mean that there would not be an overarching authority with a monopoly on the production of money, such as the Reserve Bank of Australia or the Royal Mint (Enterprise Innovation, 2017). In a cashless society where there would not be the need to use physical cash, people would no longer be limited to their domestic currency and would be able to choose the medium of payment in denominations other than their domestic currency. As such, they would be free to make payments across the globe with virtually no barriers or cost, further encouraging the spread of globalisation.
However, independent of governmental control and held amongst the people for the people, there would be little opportunity to regulate any transaction without compromising the integrity and technology of the software that supports cryptocurrencies. The only option – to introduce capital controls – would be difficult, costly and time consuming to enforce (Financial Times, 2017). As a result, regulating cryptocurrencies would be virtually impossible.
This could potentially undermine a country’s sovereignty in economic policy since monetary and fiscal policy is reliant on the widespread acceptance of a domestic currency where the government has a monopoly over its production and distribution (ResearchGate, 2001). In a cashless society, the relative prices of good would remain constant according to the law of one price (Investopedia, 2015) – that is, when arbitrage opportunities due to price differentials across countries eventuates in the equalisation of pricing. In such a scenario, if the people were to prefer cryptocurrencies over their domestic currency, governments would be more vulnerable to the adverse shocks of capital inflow and outflows without a single common currency adjusting accordingly as an automatic stabiliser pursuant to the country’s economy.
Another issue concerning cryptocurrency is that since it is decentralised and anonymous, money cannot be tracked. Being unfettered by government control, this leaves cryptocurrencies susceptible to being used for illicit activity on the dark web as there is less of a paper trail that could assist in solving cases (DailyFX, 2017). As such, in a cashless society, illicit activities may become more economically rewarding to pursue given the lower risk of being caught.
To sum up, the technology surrounding cryptocurrency is powerful when understood, and it does have numerous advantages. It increases the efficiency of transactions, reduces the holding cost of money (in the form of cash) and keeps relative prices constant across the globe, thereby accelerating globalisation. However, it poses a threat to the government as the single unitary authority on money within its own borders. In the face of widespread adoption of cryptocurrencies, many economies will face the threat of a loss of confidence in their respective domestic currencies, and thus, lose their autonomy in fiscal and monetary stabilisers. As such, the transition could momentarily destabilise economies. However, in the long run, it should improve economic efficiency from the lower holding and transfer costs of money whilst facilitating more global transactions.
The CAINZ Digest is published by CAINZ, a student society affiliated with the Faculty of Business at the University of Melbourne. Opinions published are not necessarily those of the publishers, printers or editors. CAINZ, our Partners and the University of Melbourne do not accept any responsibility for the accuracy of information contained in the publication.
Bachelor of Commerce student majoring in Accounting and Finance. Inclined towards topics that explore the intersection between current affairs, technology and the business world.
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