Today, the internet is ablaze with talk about blockchain technology and cryptocurrency. It seems for all intents and purposes to be among the biggest trends of the modern era. From social media to news broadcasts and even government legislation, it is hard to go a single day without something cryptocurrency-related being in the news. The conversation on the topic is greatly polarized with strong sentiments on all sides of the multi-faceted aisle that is the cryptocurrency argument. There are those who call it a bubble and there are others who say it has the potential to disrupt the global economy.
Blockchain technology which is the core technology behind cryptocurrency is undoubtedly described as a major disruptor of the global business process. However, it does seem like a lot more attention is being paid to cryptocurrencies than to blockchain technology. Many entrepreneurs have jumped on the bandwagon to create ICO campaigns, selling tokens to the public and raising hundreds of millions of dollars. In less than a decade since Satoshi Nakamoto introduced Bitcoin to the world, a lot seems to have happened in the cryptocurrency space. The focus of this article is to examine the impact that cryptocurrency is having on the global economy.
Challenging the Dollar Standard
For those who do not know, the global economy primarily relies on the US Dollar. This is the summary of the dominance of the United States in global economic and political affairs. The US Dollar is the reserve currency of the global economy. Every single mainstream financial actor from all over the globe function in the US market. It is for this reason that any upheavals in the US financial market always sends shockwaves around the world. Case in point, the 2008 global financial crisis which saw widespread economic hardship in countries as far away from the US as Iceland.
The global economy is interconnected in a way that is unprecedented in human history. Just imagine the Internet, but limited to financial transactions. At the core of this vast financial web is the US Dollar. The United States Treasury essentially a de facto global Central Bank. A large part of the ability of the United States to maintain its dominance in the world is down to the Dollar standard. This is a form of centralization that is being massively disrupted by cryptocurrency operations.
With the emergence of Bitcoin and all the over 1,000 cryptocoins, financial transactions are being decentralized on a massive scale. These decentralized transactions have no recourse whatsoever to the US Dollar. This changes the dynamics of international trade, foreign relations, diplomacy, and the impact of economic sanctions. There have always been attempts to “de-dollarize” the global economy and cryptocurrencies seem to be a veritable means of achieving that goal.
Countries like Russia and Venezuela have considered creating State-owned cryptocurrencies. In December of last year, the Venezuelan President announced the launch of an oil-backed cryptocurrency to help move the country out of a crippling inflation brought on by US-led economic sanctions. This provision of an escape route for nations out of stiff economic sanctions and back into the global economic theatre is a massive attack on the dollar. North Korea is another country that has tried to use cryptocurrency to get out of tough economic sanctions.
Cutting out the Middleman
The ecosystem of the mainstream financial environment, international transfer transactions require entities like clearing houses, banks, and SWIFT. SWIFT stands for Society for Worldwide Interbank Financial Telecommunication. It is an organization that provides a network for financial institutions all over the globe to transmit information to each other in a safe and secure network. Think of it like WhatsApp, but for banks and other financial institutions. No international money transfer can happen outside of the SWIFT network. There are transaction fees and it takes several days for some transactions to be processed.
In steps Bitcoin, Litecoin, Dash, and all the other transfer protocol cryptocurrencies and the suddenly the environment becomes different. The middleman is no longer required for authorizing and authenticating transactions. The transaction fees are minimal, as low as a couple of cents in some of these cryptocurrencies. Not to mention, the added allure of anonymity and privacy that is associated with cryptocurrencies. Just when you thought that was all, you then realize that transactions occur in a matter of seconds and minutes.
By cutting out the middleman in the payment processing market, cryptocurrencies are causing a huge disruption to the global payment system. One of the reasons for the centralized payment processing protocol is to prevent funding for money laundering, terrorist activities, and illicit trade in drugs and ammunition. With cryptocurrencies, it becomes that much harder to trace transactions and ascertain the identities of the participants. Central banks and other financial institutions seem to have no control over its operations. In September of 2017, Christine Lagarde, head of the International Monetary Fund (IMF) warned that cryptocurrencies have the potential to disrupt the Central Banking system and to revolutionize the concept of money.
Simplifying the Crowdfunding Process
Just as you can’t talk about the impact of blockchain technology without mentioning cryptocurrencies, no serious accounting of the impact of cryptocurrencies would be complete without making mention of Initial Coin Offerings (ICOs). In 2017, ICOs have become the leading crowdfunding method for technology-based start-ups. No longer do developers and entrepreneurs want to spend time trying to convince venture capitalists, banks, and angel investors to put up equity in their start-ups. These days, once a seemingly tangible idea is conceptualized, it is tokenized and sold to the public directly.
This has led to the proliferation of multiple technology-based start-ups that most probably would never have seen the light of day. Instead of being stuck in the proverbial “development hell” for decades, these projects are now in active development and bug-testing phases with millions of dollars in investment funding already secured.
Such has been the massive spike in ICOs that it has become one of the core focus of government agencies around the world. China banned ICOs in late 2017 and the SEC issued a ruling some ICOs were in fact securities. Many countries have placed tighter restrictions on ICO. If it wasn’t disrupting the market, it wouldn’t cause this much of an uproar.
Bitcoin, Ethereum, Ripples, Litecoin and many other cryptocurrencies continue to experience massive growth in price, market capitalization, and mainstream adoption. The cryptocurrencies are providing features and functions that are changing (maybe even improving) the way we do things. It is no longer a question of whether cryptocurrencies are disrupting the global economy, but by how much and what does the future hold. Time will tell how far this revolution will go.