The Evolution of Cryptocurrency: Adoption, Impact, Regulation
What is our future with and without cryptocurrency?
Cryptocurrency adoption by the world’s financial industries has risen dramatically, but still remains vague in terms of overall impact. In this article, Applicature will help you understand which economic influences could arise, and how this will affect the total financial picture.
At the international level, cryptocurrency acceptance is not being discussed for now, due to the fact that very few countries currently recognize Bitcoin and other digital money as a payment tool. Let’s overview the legal ramifications of Bitcoin all over the world.
Cryptocurrency Legitimacy
The answer to the question of cryptomarket legitimacy is controversial and ambiguous. No law predicted the appearance of cryptocurrency, and none has issued regulations directly affecting it. Before, we were successfully using money controlled by the government (fiat), and we were happy with it. For now, digital investment, mining, and transmission is not explicitly covered under the law, which means that the government doesn’t protect your rights as a purchaser or seller. However, as no law covers blockchain technology, we also cannot consider it illegal. It only comes to legitimacy when we talk about exchanging cryptocurrency for fiat or using it as a payment tool.
Cryptocurrency-Friendly Countries
A lot of the countries haven’t claimed anything related to digital money, unlike others, who have accepted it as a payment tool.
Japan
Japan is one of the most forward-thinking countries in terms of technology. Japan has more than accepted cryptocurrency as a payment tool, and it has issued regulations. People may exchange their Bitcoin into fiat at special ATMs. Here, you can see the location of the ATMs, the coins available for exchange, and the rate. Seems pretty progressive.
The U.S.
It is unambiguous that under federal law, no cryptocurrency is considered legal tender, unlike certain exchanges that are legal and regulated by state legislatures.
Each state’s statements can be viewed at the website of Financial Services and Commerce of the USA.
Germany
In 2013, the German government stated that cryptocurrencies may be used in tax payments and trading. In terms of purchases, citizens can pay in Bitcoin if the payment includes a value-added tax.
To view more countries that have legalized cryptocurrencies, please visit the Applicature blog.
Cryptocurrency Influence
The appearance of a currency that isn’t controlled by any government and doesn’t belong to anyone, even its creator, couldn’t help but influence the global economy. In this article, we are going to set the record straight on what, exactly, the influence of cryptocurrency has been on the economy of specific countries and their fields of influence.
Banks
In 2008, the world faced the worst financial crisis since the Great Depression in 1930s. At the initial stage, this was caused by the supreme mortgage market crisis in the United States, fueled by underwriting issues. People were able to obtain enormous amounts of money on properties, and it became a point of abuse. While the underwriting requirements were being undermined, banks gave money to the insolvent.
All banks work according to the inflation targeting principle, which keeps the inflation level at 2% in order to maintain a stable economy. Banks are able to regulate this by means of discounted rates, reserves, etc.
In terms of cryptocurrency, banks cannot manage its rates due to its volatility as well as their inability to control cryptocurrency emission. Consequently, cryptocurrency cannot replace fiat completely, due to the need to adjust to its unique characteristics.
For example, Bitcoin is not likely to be an heir to the position of fiat, as its emission is limited, unlike its price. On the other hand, there is Ethereum, with an unlimited amount of coins to be mined. This is more suitable for consideration as national currency.
However, cryptocurrency cannot currently be accepted as legal tender or national currency due to its volatility. Banks need it as a digital payment system, though, to delegate the risks that caused the crisis of 2008.
In 2015, the Bank for International Settlements (BIS) stated that cryptocurrency can disable the control of banks over the economy.
Nowadays, banks are closely monitoring the development of Bitcoin. The rise of cryptocurrency exceeded all expectations, and despite its volatility, banks are aware of it. The official reason for the concerns is that cryptocurrency may be a tool for money laundering.
However, the numerous lawsuits against banks involving cases of financial fraud are not counted. Consequently, we may state that banks are feeling the threat from the side of cryptocurrency.
However, there are several countries whose central banks have implemented cryptocurrency exchange systems. In Japan,as mentioned above, they have even installed CATMs (Cryptocurrency Automatic Teller Machines). These allow happy cryptocurrency owners to exchange their funds to fiat.
Some banks have even made attempts to issue their own digital money. The first to do so were the central banks of Canada and Ecuador.
Governments
Both fiat and cryptocurrency have their advantages and disadvantages. Dollars, euros, and/or any other national currency can support economic development, unlike cryptocurrencies, barring its acceptance as legal tender.
The only way a government can have its treasury replenished by cryptocurrency is to integrate taxation for any service or form of goods paid for with crypto.
Bitcoin, as the world’s first cryptocurrency, definitely has a minimum of benefits to offer governments. There are several disadvantages of cryptocurrency acceptance for governments, such as loss of money-flow control and fertile conditions for the turnover of illegal goods.
Among others, the issue of technical illiteracy remains: very few people know how to manage digital wallets, exchange systems, and transactions algorithms. Moreover, anyone can create money, but who will accept it? Governments take responsibility for the national currency and protect the rights of people, which cannot be performed with cryptocurrency. The community has to decide whether to use cryptocurrency or not, at their own peril.
The Influence of Cryptocurrency on the Global Economy
Decentralized money makes financial transactions easier and faster in terms of international money transfers. Thus, it’s essential to consider the impact of crypto on the U.S. dollar, an internationally accepted currency.
Crypto Impact on the U.S. Dollar
It’s worth mentioning that the global economy’s reserve currency is the U.S. dollar. This is the reason why any upheaval in the U.S. dollar causes concern all over the world.
The Treasury of the United States is considered a global central bank, as it houses the assets of other central banks. The reason the U.S. continues to maintain dominance is the status of the dollar. This is a great example of a centralized system that has, by the way, been drastically disrupted by cryptocurrencies.
As we all know, it’s better to take your enemy’s side when you cannot beat him. Most of the countries that follow technology development adhere to such a principle.
Neither Bitcoin nor Ether nor any other cryptocurrency has recourse to any other currency. This changes everything: international trade, diplomacy, international relations, etc. The appearance of a decentralized currency seems the perfect way to de-dollarize the world’s economy.
Crowdfunding
Explaining the influence of cryptocurrency on countries and their economies isn’t possible without mentioning blockchain technology and ICOs (initial coin offerings).
Last year, ICOs became a major means of investment in technology-based startups. The idea of crowdfunding has changed, as now, the people behind startups no longer try to convince venture investors to give money for the further development of the product. Instead, they sell the issued tokens on blockchain. So far in 2018, the total amount of money invested in ICOs is $21,356,115,254 USD.
No Need for the Middleman
The international money transfer system requires third parties, such as banks or SWIFT (Society for Worldwide Interbank Financial Telecommunication). The following images illustrate money transfers involving fiat and cryptocurrency:
As the image shows, money transfer in the context of international business consumes time and fees. Some transactions with SWIFT take several days to be processed. Working on the blockchain platform, the transaction will be fast, secure, and, if necessary, encrypted (if information about the transaction is confidential). This is how it works in theory, but taking into account the technical illiteracy of the community, this process turns to mayhem, in practice. In fact, full blockchain-based payment system implementation requires much more than the ordinary citizen can achieve.
So, with blockchain technology and cryptocurrencies implemented sensibly, intermediaries are no longer needed for verifying transactions. In addition, elimination of intermediaries causes significant disruption in the international payment system, which has the potential to result in temporal unemployment issues.
Recent Businessweek research showed that the fee for an international money transaction taken by Western Union is 9% of the sum. When converting to cash, it is 5%. Global banks require millions of dollars per year for things that blockchain can do for free.
Consequences of Cryptocurrency Adoption
Consider the image below for an overview of the changes the economy will face with cryptocurrency acceptance:
Price Inflation
If a country accepts cryptocurrency as legal tender, it must be a digital currency characterized by unlimited maximal supply and an unfixed coin emission rate correlated with real-sector economic growth. Otherwise, the economy is left to wait for real-price inflation or deflation, which represents a huge step backward. In fact, implementing any new technology can be fraught with the problems with inflation or deflation.
Coexistence of Two Currencies
The dominance of fiat is obvious, and it is not going to vanish with the appearance of cryptocurrencies. Coexistence of two currencies will cause constant price-ratio fluctuation and competition until one supplants the other, and it is unlikely to be any of the cryptocurrencies. According to Gresham’s law, “bad money” always overtakes “good,” or money with minimal real value (like paper for cash) competes with high-cost material money (gold coins or cryptocurrencies with expensive IT infrastructure behind them).
Unemployment
In the beginning, with the middleman cut out, financial and other service industries will experience huge job loss. Because of the fact that there will be no need for lawyers, bank services, suppliers etc., people will most likely lose their jobs. This, however, will be temporary. Blockchain will provide new opportunities for employment, and people will be able to retrain and become a part of our future.
High Transaction Costs
Comparing the transaction costs of cash and cryptocurrency, fiat wins by a significant measure. The lower transaction costs are, the more actively the economy develops, which itself leads to higher profits and benefits.
Until the blockchain is fully implemented, cryptocurrency transaction costs (the financial and time-related costs of using crypto instead of fiat, such as device usage, internet, and time for verification of transactions) will interfere with the development of cryptocurrency as a match for fiat.
De-monopolization
Growing transaction costs will cause de-monopolization, which, in fact, will have a beneficial impact on the welfare and efficiency of the economy. The growth of transaction costs leads to an increase in enterprise growth costs versus the price for involvement of third parties from the market. This is an opportunity for small and medium enterprises, while large ones will concentrate on capital-intensive production, where blockchain has no real tools for improvement (except managing increases in cost efficiency).
Financial Fraud Elimination
Given that all transactions are open and wallets are trackable, trade of illegal goods has fewer options for actualization. On the public blockchain, any transaction to a “dirty” wallet will immediately be considered money laundering. This can be caused by the human error as well as by fraudulent intention or action. However, it has more advantages than disadvantages, any fraudulent activity is rigorously tracked and eradicated.
Demand for New Products
Since middleman elimination causes a temporal unemployment issue, blockchain technology will require new jobs to provide support for all fields of activity.
Conclusion
Created in 2008, the year of the biggest financial crisis, cryptocurrencies offer plenty of solutions for the financial industry to avoid repeating the mistakes that led to global economic downfall.
Currently, cryptocurrency is not able to compete with fiat because of its volatility, its need for computational power, and the fact that some countries cannot provide suitable conditions for cryptocurrency adoption.
Consider the negative factors that an economy could face when adopting cryptocurrency:
- price inflation
- coexistence of fiat and digital money
- unemployment
- high transaction costs
However, favorable results will also emerge in the following factors:
- de-monopolization
- elimination of financial fraud
- demand for new products
