What are cryptocurrencies — money or something different?
Today I’m going to speak about Bitcoin as the most famous and original cryptocurrency. The novelty of it is simple and complex at the same time — at its heart Bitcoin has characteristics of a payment system and a unit of account. Before Bitcoin, ‘unit of account’ and ‘payment system’ existed separately, as money was issued by one entity and operated by other entities. By uniting these features, Bitcoin presents a whole new ideology, which has to be understood with regards to the history of the financial system.
Background
Everything happens for a reason and the appearance of Bitcoin’s White Paper in October 2008 right after the crisis hit the world’s economy that September, seemed like a logical planned event. In either case, the start of the network on January 3, 2009 gave rise to new ideas that call into question the traditional finance system as we know it.
For example, the US financial system. has a pyramid-like structure. On the top is the Dollar followed by the Federal Reserve System, while lower in the pyramid are banks, corporations and on the very last level, there are users. If we look at the global financial system, there is a similar situation — the Dollar is on the top, followed by reserve currencies such as GBP, EUR, YEN, which are in turn followed by all other currencies.
The reason we mention this is that unlike the traditional system, Bitcoin has a flat structure which means that private individuals can use it without a controlling third party. For now, any counterparty that stands between you and your money, which is mostly held on your accounts, can block your operations or your funds. So the Bitcoin, being not only the unit of account but the payment system, eliminates side impact on what you have, enabling fast independent operations.
The form of money today
When thinking about what money is we can give many answers — it’s the unit of account, governmental obligation, token for purchase, tool for exchange or anything else. Indeed today, money is usually represented in an electronic form. Taking into account the fractional reserve system, the electronic money in your bank account is not available in cash in full, so your funds are just the information on how much the bank “holds” for you. In this sense, Bitcoin operates honestly from the beginning — all your money is just the information, that indicates how much “resources” you can use for transactions within the system.
The power of new unit of account & payment system
Let’s take a look at China. Today marks the start of the Chinese New Year so the Chinese people will have a long period of vacation, which will be easy to see in the volumes of trades and transactions. The thing is that the Chinese economy is very closed and centralized, but the whole world trades with China, so everyone who makes money there wants to take the capital out of it fast and without third parties. From the point of view of government, when something uncontrolled and powerful appears, this obviously is not favorable for them.
Notably, the Managing Director of the IMF, Christine Lagarde has mentioned that she sees the creation of national cryptocurrencies as the next step in the development of the financial system and highlighted 15 countries that are working in this direction. After examining all of them, we can conclude that the Swedish Central Bank is going to be the leader in this direction. Sweden already has a very small percentage of cash usage and very innovative approaches in banking. However, even national cryptocurrencies do not give citizens entire freedom. By making a Central Bank that controls the distribution of a national cryptocurrency, and users interacting without third parties, the system might put us in the position of strict digital servitude. To have an alternative — we must create innovative ideas and continually propose improved systems.
To keep with the pace of global financial system development we initiated the UAX project, which is the launch of Ukrainian national cryptocurrency. The UAX will be the alternative to traditional payment methods, that can be used in e-commerce, escrow and loans. The new token will have similarities with the Swiss coin WIR, released in 1934, which makes it possible to carry out mutual settlements while also being the tool for mutual lending and securing obligations of participants in the system. Aside from giving more flexibility to the market, implementation of the digital assets based on DLT-technology will strengthen Ukraine’s position among the leaders in blockchain adoption, supporting the global trend of reaching consensus between the traditional financial system and new payment methods.
