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Fri. December 02, 2022
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National Cryptocurrencies: A step away
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There is no doubt that cryptocurrencies are going to be part of the global financial system in the next few years. Cryptocurrencies have gained wide acceptance among users all over the world, and their infrastructure and underlying technical system (Blockchain Technology) have come to be supported by many big financial and economic institutions worldwide. In addition, business men are increasingly investing in cryptocurrency wallets. As a result, it is no longer important to talk about the future of cryptocurrencies; what is important now is discussing the future of national currencies.

In other words, can conventional national currencies be developed into cryptocurrencies? Can they be exchanged through Blockchain-supported wallets, instead of such traditional channels as banks, so that they should no longer have any real physical existence?

If so, what will happen to banks and money transfer companies? Other important questions in this respect are: how can we overcome cryptocurrency instability and identify users so as to avoid cryptocurrency misuse? Besides, what is going to happen to the existing cryptocurrencies (more than 3000 in number and about $ trillion in value)([1])? In fact, there are various problems and challenges pertaining to this issue, and the present analysis is an attempt to address them.

Structural Changes: How do developers and investors contribute to improving cryptocurrency environment?

No one, not even the most downbeat, can nowadays be skeptical about the future of cryptocurrencies. The global financial community is already done with such a debate; it has come to accept the reality dictated and shaped by  cryptocurrencies. However, there are still certain cautions and fears associated with such currencies and discussed by experts, including the financial volatility of their market value, and the possibility of using them in tax evasion and illegal trade, as well as the difficulty of protecting wallets and block chains from hacking and cyber-attacks.

Despite these hazards, cryptocurrencies have gained the trust of many users, businessmen, and online payment companies. This has resulted in a growing tendency to invest in these currencies, manifest in developing and improving their infrastructure as well as in investing directly through buying these currencies. Following are some examples which support the technical infrastructure of cryptocurrencies:

  • Cryptocurrencies have gained the support of reputed financial companies that provide online payment services, such as PayPal. PayPal CEO Dan Schulman announced that the company will allow its active users (more than 346 Million users worldwide) to use their PayPal accounts in buying and selling cryptocurrencies. This represents a quantum leap in the infrastructure of these currencies ([2]).
  • Alfred Kelly, Visa CEO, also announced that the networks of Visa will be modified so as to facilitate the trading of cryptocurrencies. Mastercard, Visa's main competitor, announced that it is about to build a virtual network to help banks test and evaluate the process of trading national digital currencies([3]).
  • Besides, cryptocurrencies have gained users' trust for many reasons, one of which is their wide range of uses. For instance, there are cryptocurrencies that can bring the user financial profit quickly, such as Bitcoin. There are also stable, dollar- backed cryptocurrencies (stablecoins) that can be used in safe trade, such as Tether, which have- therefore -become an acceptable means of buying and selling. Acceptability is one of the most important requirements as far as currencies are concerned.

The aforementioned has to do with the infrastructure of the cryptocurrency system, which allows a lot of users all over the world to buy and sell cryptocurrencies the way they do with traditional currencies. As for the future of investing in cryptocurrencies, it is noteworthy that:

  • The biggest optimist is the CEO of Morgan Stanley for investment, who predicts that Bitcoin may replace the US dollar as a reserve currency in the next few years([4]).
  • In addition, the American billionaire Paul Tudor Jones stated that Bitcoin is "the fastest horse" in the race of global profit-making.
  • According to a survey by Fidelity investments, 36% of the institutional investors in the USA and Europe own crypto assets. Besides, Coinbase for cryptocurrency exchange declared that there was a "noticeable increase" in demand for crypto from institutional investors in the first half of 2020 ([5]).
  • Last but not least, there is Elon Musk, the American businessman and the richest man in the world, who confused global markets by supporting cryptocurrencies. Musk who added Bitcoin on his Twitter profile, and announced that his Tesla invested $1.5 billion in Bitcoin. He also tweeted in support of Dogecoin. Consequently, there was a huge rise in the value of these cryptocurrencies.

 

The support given by the aforementioned companies to cryptocurrencies in general (whether by improving their infrastructure or by directly investing in them and thus granting them "legitimacy" and "credibility" in addition to "acceptability") may contribute to effecting some structural changes to the cryptocurrencies so that they should become more rational and compatible with the legal and financial systems.

This, in turn, can lead some governments to consider legalizing and promoting the use of these currencies, or it is more than likely to result in the emergence of a huge crypto black market that would be hard to control and sure to do national economies a lot of harm.

Existing Threats: Can Crypto-related Problems Be Overcome?

In spite of this enthusiastic support, cryptocurrencies are still facing certain structural challenges. They can be either a good, safe method of exchange between people, or a sure way to facilitate tax evasion and illegal business, but they cannot be both.

One of the most important problems as far as cryptocurrencies are concerned is that they can facilitate identity concealment, which can create serious threats, such as allowing users to conduct illicit trade, support terrorist organization, evade taxes, and find a safe haven from legal restrictions and financial transactions. These threats are strongly associated with cryptocurrencies because of the   fact that they can help people conceal their true identities while doing transactions.

Besides, there is the financial volatility characterizing the crypto market. It is true that cryptocurrency exchange can yield lots of money in a few weeks, but it is equally true that you are prone to losing this money in a shorter time. Therefore, hoarding huge amounts of cryptocurrencies is a risky business, especially if they are not dollar-backed, such as Bitcoin. Even such a dollar-backed cryptocurrency as Tether is not perfectly safe from such volatility and unexpected changes, because its relationship with the dollar may come to an end one day.

However, the major and most serious problem is the likelihood of 51% attack, in which some pools (i.e. groups of miners) may manage to own more than 51% of the total hashing power, which means that they can exert influence over the value of the cryptocurrency.

The problem is that 65% of the mining farms, where the mining processes are carried out via thousands of huge computers, are in China([6]) because of the low cost of electricity there. If a certain pool or large corporation managed to own more than the half of the mining power of a cryptocurrency, it would be able to influence and control the currency's value and power. 

The question that needs to be asked here is: how can we overcome the threats and problems associated with cryptocurrencies, which make governments and official financial institutions hesitant to legalize and support this kind of currency, without negatively affecting the advantages of buying and using cryptocurrencies?

Another important question is: in case structural changes are made to them so that they should conform to existing laws, systems and regulations, will cryptocurrencies retain their market value, or will they collapse? In addition, will countries allow non-state actors to manage local and global currencies in the first place? Or will governments amend the rules and regulations governing their financial systems so as to have exclusive control over cryptocurrencies? The coming few lines could help answering these questions.

Going crypto: the next step in the developmental pyramid of financial system:

"Going crypto", so to speak, is but another step up the developmental pyramid of financial transactions. Just as the barter system gave way to the use of currency (first coins then banknotes), and just as paying in cash has developed into paying with card, conventional monetary systems are witnessing a new developmental step, which is the use of blockchains and cryptocurrencies. Banks and other entities were needed for traditional money management. Similarly, new types of financial institutions are required for managing cryptocurrencies.

Needless to say, cryptocurrencies are growing in popularity worldwide for many reasons. For one thing, they offer users a very important advantage-namely, the ability to make immediate transfers and payments without paying any additional fees. Besides, traditional money transfers usually take several days, whereas cryptocurrency transfer does not need more than a few minutes to reach the other party via the blockchain. Therefore, compared to depending on banks for transferring money, using cryptocurrencies is both cost-saving and time-saving.

 Another significant reason for the growing popularity of cryptocurrencies is that users are increasingly losing faith in the existing mechanisms and institutions of the current monetary system. Much is being said about an imminent global financial crisis, and users continue to discover serious defects in the procedures of the dollar-dominated world economy. As a result, there is a growing tendency among stakeholders to invest in cryptocurrencies, which, though risky, seems safe by comparison with conducting business traditionally, given all the potential threats endangering the current monetary system.  Accordingly, Bitcoin hit $ 60k in a Covid-paralyzed world, where economic crisis and stagnation loom large.

It is obvious that big, tangible changes are taking place, which necessitates that countries act quickly and do what it takes to adapt to these changes, just as they did in the past, when faced with the need to adapt to such technological developments as credit and debit cards, smart governance, social networks (and their enormous influence on people), to name but a few of the sophisticated technological developments which countries could not choose but adapt to, by rationalizing and legalizing them.

Since the global monetary system is changing, countries must get their priorities right by starting to respond to the changes, so that they can retain their natural right to issue national currency, protect markets from financial bubbles and economic crises, and preserve national security by preventing criminal and terrorist organizations from exploiting any loopholes in the financial system to finance vandalism and terrorist attacks.

Readiness: Can a National Cryptocurrency be Issued?

Given all the aforementioned circumstances, it seems reasonable to think of issuing 'national versions' of cryptocurrencies, so that there will be 'crypto dollars' and 'crypto euros', for instance, in addition to the traditional dollar and euro. That would serve as a preliminary step; gradually, the national cryptocurrencies are supposed to take the traditional currencies' place, and, eventually, the monetary system would be exclusively based on Blockchain-backed cryptocurrencies, provided that these currencies conform to standards and criteria that achieve the countries' aims and ensure their security.

In other words, the state alone should be entrusted with the task of issuing cryptocurrencies. The state should also determine cryptocurrencies' value the same way it does with traditional currencies, i.e. depending on gold reserve or reserve currency (whether crypto or not). This means that currency will be exclusively used and exchanged in its crypto form, instead of through credit and debit cards or as cash.

In order to overcome the problem of identity concealment and the danger of misuse, signing up for cryptocurrency wallets should be via national IDs. Besides, a government entity, such as the state's central bank, should be entrusted with the task of reviewing and auditing the transactions, to make sure that they are legal and that the cryptocurrencies are not used for financing illegal activities or evading taxes.

In addition to the central bank's role, all miners who own cryptocurrency wallets should contribute to verifying the transactions, through the mining processes they carry out in the blockchain. As a result, money can be transferred from one miner to another with small fee, or even without them having to pay any additional fees, unlike what happens when they transfer money via traditional banks. This is simply because the fees are already paid in the form of energy consumed by computers in the process of mining. In other words, miners will continue to do what they already do, and will be exempt from paying additional fees under the umbrella of the new national monetary system

     If these steps were taken, countries would be able to reap the benefits of using cryptocurrencies, such as limiting the role of mediating institutions in the process of money transfer, saving the cost and time that traditional money transfer requires, putting an end to the hazard of cash forging and smuggling, and winning the battle against the black market. Besides, these steps would enable governments to avoid and overcome the disadvantages associated with cryptocurrencies, through exercising strict control over all cryptocurrency transactions and activities.

The Challenges of Transition: Infrastructure, Economy, and Culture:

Undoubtedly, the transition process will not be easy or smooth; countries aspiring to replace conventional currency with crypto will face technical and cultural challenges, as well as security challenges, and even highly developed countries are no exception here, at least in the short run. However, developed countries would display more ability to accommodate and adapt to such changes. Developed countries have come a long way in the field of digitizing financial activities, and E-payment, digital trading, ecommerce etc. are already part of the culture of people there, whereas less developed countries are more likely to face challenges, as their monetary systems have not undergone full digitization, and not everyone in these countries has access to the internet. Therefore, underprivileged people in these countries will not be able to fully accept these radical changes in the monetary system.

In addition, in order to make sure that governments will keep a firm grip on national currency, special infrastructure is needed, which is highly sophisticated and by no means easy to build. This is simply because in this case, cryptocurrency networks all over the world should be merged, so that governments can determine exactly where money comes from and where it goes, just as conventional banks do.

  An important question to keep in mind is: what will happen to banks and financial institutions? Since there will be no "real" money to keep, transfer, invest or lend, banks will be no longer able to play their traditional role in a crypto-based monetary system. They may be reduced into mere financing institutions, where groups of businessmen can put venture capital to be borrowed by individuals in return for interest. Individual wealth, as well as payroll (e.g. salaries, raises, bonuses, etc.) will be no more than a number in a crypto wallet. This will also apply to all payments (e.g. food commodities, bills, installments, etc.).

In case cryptocurrency is legitimized, it could be fair to issue an independent, global cryptocurrency, backed not by a specific country but by an international entity established for this purpose, so that this global cryptocurrency should be the international exchange currency in the new economic scene. In other words, this global cryptocurrency is supposed to play the role currently played by the US dollar in traditional economy. A possible alternative is that certain countries may tend to issue shared digital currency with which to conduct business among themselves. Saudi Arabia and UAE have already announced that they are about to do so. 

As the most likely scenario involves depending on Bitcoin as a reserve currency, it is necessary that this cryptocurrency be rationalized and backed by an independent institution, rather than by the pseudonymous developer Satoshi Nakamato (who could eventually turn out to be a secret army project carried out by one of the countries that seek to control world economy). The existence of such an institution is supposed to protect the cryptocurrency's mining power against 51% attacks, guarantee transparency and integrity, prevent countries (say, China) from monopolizing mining farms, and see to it that Bitcoin is not used in illegal activities or processes.

Finally, if this scenario takes place, it can cause a lot of confusion in cryptocurrency markets; both small and big investors may race to invest in cryptocurrencies instead of engaging in real economic activity, the consequence being that the price of cryptocurrencies will rise irrationally, jumping much higher than their real value. This will eventually result in a huge financial bubble as everyone will lose his/her money, and economic crisis will strike. Therefore, the process of transition must take place under an international, rather than a national, umbrella, so that market stability should be maintained as much as possible.

Dr. Ehab Abdel Hamid Khalif is head of the Media and Technology Unit, Future center for advanced research and studies, Abu Dhabi, UAE. 

 


[1] - Cryptocurrencies: growing in number but falling in value, Reuters, Accessed 7 Feb 2021, on

https://graphics.reuters.com/CRYPTO-CURRENCIES-CONFLICTS/0100818S2BW/index.html#:~:text=Though there are now more,of all coins has crashed.

[2] - How PayPal's Crypto Service Will Work, Coin Market Cap, October 25, 2020, Accessed 6 Feb 2021

https://coinmarketcap.com/alexandria/article/how-paypals-crypto-service-will-work

[3] - Visa prepares for crypto future, Finextra, February 1, 2021, Accessed 8 Feb 2021

https://www.finextra.com/newsarticle/37384/visa-prepares-for-crypto-future

[4]- Will bitcoin end the dollar’s reign?, Financial Times, Accessed 8 Feb 2021

https://www.ft.com/content/ea33b688-12e0-459c-80c5-2efba58e6f1a

[5] - Who's Been Buying All the Bitcoin?, Coin Market Cap, November 2, 2020, Accessed 8 Feb 2021

https://coinmarketcap.com/alexandria/article/whos-been-buying-all-the-bitcoin#:~:text=Coinbase said it witnessed a,and Europe own crypto assets

[6]- Jordan Tuwiner, Bitcoin Mining in China, buy bitcoin worldwide, January 8, 2021, Accessed Feb 9, 2021 on

https://www.buybitcoinworldwide.com/mining/china/#:~:text=China is the undisputed world,of extremely cheap electricity prices

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