What is cryptocurrency? How digital tokens are reshaping the global economy one blockchain at a time
Cryptocurrencies have been a major topic of conversation as of late, with talks of an impending crash for Bitcoin since China’s crackdown on mining and Tesla’s suspension of purchases through Coinbase. Since the birth of Bitcoin in 2009, Crypto has transformed from a ‘short-lived trend’ over a decade ago to “digital gold”, with over 2000 cryptocurrencies in existence and huge global uptake.
Cryptocurrencies have changed everything we thought we knew about finance. What is “money?” Do we really need banks and what do assets look like? So, what impact does this disruptive technology have on the global economy?
What is cryptocurrency?
Cryptocurrency is a digital or virtual currency designed to serve as a medium of exchange. The ‘crypto’ prefix comes from the fact that cryptocurrencies use cryptography to secure and verify transactions, as well as create new currency units (coins). Cryptography makes it easy to encode something that is simple to decipher with a key and challenging to decipher without a key, which means that coins can be difficult to create but transactions can be easy to verify.
At their core, cryptocurrencies are entries in an immutable and pseudo-anonymous database, known as a ‘blockchain’, which no individual can change. The blockchain is a public record that is verified by many different nodes, which makes counterfeiting coins extremely difficult or impossible.
Much of the global appeal surrounding cryptocurrencies comes from them being outside of the control of central authorities, more resistant to M0/MB inflation, transparent and portable.
A solution to isolation from global markets?
Cryptocurrencies offer an easy-to-use, digital alternative to fiat currencies. While consumers from developed countries may view cryptocurrencies as a novelty, in countries with mismanaged and fluctuating domestic currencies, there is benefit in adopting the technology as it is a wholly utilitarian practice in which peers oversee each transaction without the oversight of the government.
For example, Venezuela’s authoritarian regime has become infamous for its skyrocketing inflation, which has led to plummeting living conditions for millions of citizens without access to external currencies. The fluctuating swings of Bitcoin and other cryptocurrencies may seem risky to American consumers, but Venezuelans may find the swings tolerable as their domestic currency has been in a sharp decline over several years with no signs of abating. In other words, many global consumers may see cryptocurrencies as a hedge against inflation, since the number of cryptocurrency coins in circulation is mathematically limited over time.
Further, 1.7 billion people worldwide do not have access to a bank account and are financially disadvantaged, which can lead to dangerous lending practices. As a large number of this population possess a cell phone, cryptocurrency may be a viable and safer option for banking. Cryptocurrency may also enable them to trade across borders and with little to no transactional costs, crypto also inspires trust and, in turn, could lead to a more integrated global economy.
Blockchain technology, which underpins the functioning of cryptocurrencies, has been cited as having the potential to boost global GDP by US$1.76 trillion over the next decade, and create value across industries, from healthcare, government, to manufacturing, finance and retail.
A beneficial or unsustainable technology?
Many countries have strict capital controls to control the flow of money or charge high taxes and cryptocurrencies are often being used to circumvent these interventions. For this reason, many countries have started cracking down on the illegal use of cryptocurrencies for tax evasion, money laundering, illicit purchases or sales abroad. However, the fact that neither individuals nor corporations can exploit the technology may also significantly reduce the possibility of coercion and fraud. Recent evidence shows that harnessing blockchain technology can be utilised by law enforcement to track down criminal activity and may improve the efficiency of tax systems.
Issues such as these have led to widespread concerns about how cryptocurrencies can further enable illegal activities from individuals to governments. The Venezuelan government, facing capital restrictions of its own, launched its own cryptocurrency in 2018, called the petro, that is allegedly backed by barrels of crude oil and support from the cartels. While official sources indicate that the country raised billions of dollars, many analysts are skeptical of these figures and the US government outlawed US citizens from purchasing the cryptocurrency.
Some experts also fear that a cryptocurrency crash could have an adverse impact on the wider global market, similar to how mortgage-backed securities sparked a wider global financial crisis. It is worth noting, however, that the total market capitalization of all cryptocurrencies is less than that of many public companies, such as Microsoft, which means that it may not have a meaningful impact on global markets.
A major caveat with the proliferation of cryptocurrencies is their possible environmental impacts. This is due to the vast amount of energy that is necessary for mining coins, which requires solving complex mathematical problems through continuously running computer hardware and is accomplished by specialized software called Application Specific Integrated Circuits. Bitcoin’s annual energy consumption is comparable to some entire countries, such as Argentina and Ukraine. Bitcoin produces 36.95 megatons of carbon dioxide annually (comparable to New Zealand) and it is estimated that in 30 years Bitcoin could alone increase global temperatures by 2 degrees Celsius.
What does cryptocurrency mean for the global economy?
Cryptocurrencies and blockchain technology also present numerous opportunities for commercial and economic development across the globe where traditional models have resulted in lacklustre progress. However, the key issues of unsustainable energy consumption, market volatility risks and tax evasion must also be addressed before the positive benefits of the technology’s expansion are to be integrated into new solutions.
The fact that individuals are able to monitor where policy funds are to be guided as opposed to authorities also presents a new avenue for people to have more agency with their money that was unheard of a decade ago. The question of whether money requires banks remains to be seen as, while individuals are able to manage their cryptocurrencies independently, banks are also expanding their use of blockchain technology and developing their own digital tokens. Despite warnings of a crash and risks of volatility from critics, cryptocurrency is not going away anytime soon and is holding its own as much as the global stock market. Cryptocurrencies are ultimately a part of the ongoing global move towards digital currency, and as NFTs and institutional players enter the market, the future looks even more digital.
Erica Bell is a recent Bachelor of International Studies (Honours) graduate from the University of Wollongong. Her areas of interest include Indo-Pacific engagement, cyber security, technology policy and innovation.