The Rise of Cryptocurrency: The Race For the Future of Money from the Ancient Times to Today
Financial systems are the vessels of the world economy and international relations. They are also the driving force of development.
Countries, companies, and citizens make financial transactions with each other every second, thus bringing socio-economic benefits. National currencies are owned by their respective countries and usually regulated in a centralized way, most often through Central Banks. When the relationship between the countries is good, the traditional financial systems (e.g., SWIFT) work well, but when it gets worse economic sanctions are unavoidable, which first and foremost create a massive gap in the pockets of the ordinary citizens and worsen the socio-economic situation. But what if the currency is digital, blockchain-based, and decentralized?
This is actually the whole idea of crypto: distributed ledger making everything decentralized. The transaction process in itself is done by individuals. They record these transactions on this digital ledger, a system of trust that is fragmented across the blockchain, a system of recording information in a way that makes it difficult or impossible to change, hack, or cheat the system. The user has a public key and a private key, and the private key unlocks your crypto. The trick is that everybody is involved, but nobody is in charge.
Brief Overview of the Money History
From coins to leather money, paper money, the gold standard, credit cards, and cryptocurrency. It was all about simple transactions between goods; however, it all changed with the introduction of the use of metal traced back to Babylon before 2000 BCE.
- Coins: The use of “metal for money can be traced back to Babylon before 2000 BCE, however, standardized and certified coinage may not have existed until the 7th century BCE”(Encyclopædia Britannica, “money”). For example, the “minting of coins in Greater Armenia dates back to the years of reign by Tigran II the Great (95–55 BC), however, the “earliest coins found in Armenia date back to the 6–5th centuries BC” from the excavations in Erebuni (Central Bank of Armenia, “Commissariat”).
- Leather Money: “About the 6th century BCE leather and animal hide began to be fashioned into currency. Early ancient Rome reportedly used this type of money. It was also found in such areas as Carthage and what is now France, and Russia is believed to have used leather money into Peter the Great’s reign (1682–1725 CE)” (Encyclopædia Britannica, “money”).
- Paper Money: “This innovation is widely thought to have occurred during the reign (997–1022 CE) of Emperor Zhenzong” in China (Encyclopædia Britannica, “money”).
- Golden Standard: “Unsurprisingly, currency comes with a number of problems, one of which concerns fiat money. This is the currency that is issued on the “fiat” (decree) of a sovereign government and, unlike gold and silver coins, has no intrinsic value. Countries can thus issue such money at will, and some did (and do), potentially making the currency worthless. This became such a problem that in 1821 the United Kingdom — then the leader in international finance — introduced the gold standard. In this monetary system, the standard unit of currency is typically kept at the value of a fixed quantity of gold,” however this system also has its drawbacks. After the Great Depression (1929–c. 1939), countries began to rethink the gold standard, and by the 1970s gold was no longer being tied to currency” (Encyclopædia Britannica, “money”).
- Credit Card: “While credit has existed for ages, the first universal credit card was not introduced until 1950.” Now, everyone has a credit card (Encyclopædia Britannica, “money”).
- Cryptocurrencies: The cryptocoin industry began with bitcoin in the wake of the 2008 financial crisis. Satoshi Nakamoto created this project. The most important part of it is that there is a limit on how many bitcoins one can mine (Financial Times, 2021). Mining is a computer-generated process aimed at creating a cryptocurrency. The total supply of Bitcoins is capped at 21 million coins, roughly 18 million are currently in circulation (Binance, 2021). Unsurprisingly, the most popular cryptocurrency is Bitcoin which is held by 65% of those who own any crypto.
According to Financial Times, crypto is a USD 2 trillion dollar industry now. However, a Bloomberg expert claims that the crypto world already hit USD 3 trillion market capital in 2021 (Bloomberg Technology, 2021).
Below is the list of public and private sector companies currently largely investing in crypto:
In an interview with Bloomberg, Changpeng Zhao Binance Founder & CEO of the world’s largest crypto exchange platform, agreed that “in the next two years, every bank will have to take a look at cryptos” (Bloomberg Markets and Finance, 2021). According to Binance CEO, “right now crypto is population-wise 5% adopted globally. So out of 8 billion people, probably 400–500 million have it. He foresees mass adoption happening in the next 5–10 years(Bloomberg Markets and Finance, 2021).
To trust the independent or government issued cryptocurrencies or not to trust is the question.
Money, whether digital or physical, especially after the cancellation of the golden standard, relies not on any physical asset like gold or silver but on trust and common knowledge. There is no widely known incident in history when money was issued not by the government but by the private sector. This is the revolution that digital currencies brought into the financial systems. However, there are also digital currencies issued by the governments (e.g., USDT, Digital Ruble). These are called Central Bank Digital Currency (CBDC).
“A Central Bank Digital Currency (CBDC) is the digital form of a country’s fiat currency that is also a claim on the central bank. Instead of printing money, the central bank issues electronic coins or accounts backed by the full faith and credit of the government” (Atlanti Council, 2022).
Your dollar, euro, or ruble isn’t worth the paper it’s written on. There’s nothing backing your dollars, euros, or yen, nothing but the promise that the note you are holding will be able to buy the same amount of goods tomorrow that it buys today. Modern money is also more of a social contrivance. “People accept money as such because they know that others will. This common knowledge makes the pieces of paper valuable because everyone thinks they are, and everyone thinks they are because in his or her experience, money has always been accepted in exchange for valuable goods, assets, or services” (Meltzer et al., 2022).
The initial idea behind cryptocurrencies is to make economic freedom a reality, primarily on an individual level. Traditionally, banks play the role of financial intermediary. Bank accepts deposits and makes loans. It derives a profit from the difference between the costs (including interest payments). However, a digital currency is on a decentralized digital leather, there is no intermediary in the transaction therefore no transaction fees, and no government has control over it.
For example, “Bitcoin is the most well-known fully decentralized cryptocurrency. Another type of cryptocurrency is stablecoin, whose value is pegged to a commodity or a fiat currency like the dollar” (Atlanti Council, 2022). “Bitcoin is not issued, endorsed, or regulated by any central bank. It is created through a computer-generated process known as mining. It is a cryptocurrency unrelated to any government. It is a peer-to-peer payment system as it does not exist in a physical form. Bitcoin offers a convenient way to conduct cross-border transactions with no exchange rate fees” (Bajpai, 2021).
According to Tim Draper, Silicon Valley venture capitalist, and investor, “Bitcoin represents trust and freedom in a world that is starting to get less of both in the fiat world. Fiats are less trusted because governments are just printing them willy-nilly to just build their own coffers” (“Draper,” 2021)
However, transition to something new takes time, and people tend to put more trust in the systems that they relied on previously, though they might not work perfectly, than the new ones that have not been around for too long. This is one of the reasons why countries are also issuing cryptocurrencies, a Central Bank Digital Currency (CBDC).
A few key findings from the countries involved in the race for the future of money.
Other than proving that the transformation of the international financial system is happening at the moment, the facts mentioned above also prove that “without new standards and international coordination, the financial system may face a significant interoperability problem in the future” (Atlanti Council, 2022).
References
Bloomberg Technology (November 9, 2021), Cryptocurrency Market Soars Past $3 Trillion Market Cap, Retrieved from https://www.youtube.com/watch?v=cTUUI7gLBeI
Financial Times (November 16, 2021), Cryptocurrencies: how regulators lost control | FT Film, Retrieved from https://www.youtube.com/watch?v=CVsYMVHW17c
Bloomberg Markets and Finance (November 19, 2021), Binance CEO on Cryptocurrencies Outlook, Retrieved from https://www.youtube.com/watch?v=DB4k5VbZrOY
Bloomberg Technology (November 25, 2021), Why Tim Draper Is Betting Big on Crypto, Retrieved from https://www.youtube.com/watch?v=M2_6RZlIDFI
Walsh, D., (December 4, 2021), Paying with Bitcoin: These are the major companies that accept crypto as payment, Retrieved from https://www.euronews.com/next/2021/12/04/paying-with-cryptocurrencies-these-are-the-major-companies-that-accept-cryptos-as-payment
Bajpai, P., (August 25, 2021), Countries Where Bitcoin Is Legal and Illegal, Retrieved from https://www.investopedia.com/articles/forex/041515/countries-where-bitcoin-legal-illegal.asp
Binance, (December 6, 2021), India publishes National Blockchain Strategy, 5-year roadmap, Retrieved from Binance app
Leo Rivers, M., (September 29, 2021), Banking Bitcoin: Swiss Regulator Approves First Crypto Investment Fund, First Digital Asset Custodian, Retrieved from https://www.forbes.com/sites/martinrivers/2021/09/29/banking-bitcoin-swiss-regulator-approves-first-crypto-investment-fund-first-digital-asset-custodian/?sh=21f3eb354010
Binance Research (2021), 2021 — Global Crypto User Index, Retrieved from https://research.binance.com/en/analysis/global-crypto-user-index-2021
Pollock, D., (January 31, 2021), Mercedes Leveraging Blockchain As Part Of Its Ambition2039 Initiative, Retrieved from https://www.forbes.com/sites/darrynpollock/2020/01/31/mercedes-leveraging-blockchain-as-part-of-its-ambition2039-initiative/
Murphy, H., (November 27, 2020), Facebook’s Libra currency to launch next year in limited format, Retrieved from https://www.ft.com/content/cfe4ca11-139a-4d4e-8a65-b3be3a0166be
Statt, N., (March 3, 2020), Facebook is shifting its Libra cryptocurrency plans after intense regulatory pressure, Retrieved from https://www.theverge.com/2020/3/3/21163658/facebook-libra-cryptocurrency-token-ditching-plans-calibra-wallet-delay
CNBC (October 25, 2019), Why Facebook’s Libra Cryptocurrency Is In Trouble, Retrieved from https://www.youtube.com/watch?v=vPu4kn5GN5M
BusinessToday.In (October 29, 2021), Why Facebook changed its name to Meta, Retrieved from https://www.businesstoday.in/technology/news/story/why-facebook-changed-its-name-to-meta-310793-2021-10-29
Банк России (February 15, 2022), Цифровой рубль: старт тестирования, retrieved from https://www.cbr.ru/press/event/?id=12685
Central Bank of Armenia. (n.d.). From the first mentions up to the creation of Transcaucasian Commissariat in 1917. Exchange archive. Retrieved May 14, 2022, from https://www.cba.am/en/sitepages/exchangearchive.aspx
Encyclopædia Britannica, inc. (n.d.). A brief (and fascinating) history of money. Encyclopædia Britannica. Retrieved May 14, 2022, from https://www.britannica.com/story/a-brief-and-fascinating-history-of-money#:~:text=Coins,issued%20the%20first%20regulated%20coins.
Meltzer, A. H. and Friedman,. Milton (2022, March 12). money. Encyclopedia Britannica. https://www.britannica.com/topic/money
Central Bank Digital Currency tracker. Atlantic Council. (2022, February 15). Retrieved May 14, 2022, from https://www.atlanticcouncil.org/cbdctracker/#:~:text=What%20is%20a%20CBDC%3F,and%20credit%20of%20the%20government.
