Cryptocurrency is a digital currency that is decentralized and is used as a unit of exchange and a place to store assets without relying on a central bank. Decentralized currency means that the currency has no connection to any local, state or federal government. Bitcoin was the first cryptocurrency and it was founded in 2009. Currently, there are around a thousand such coins and most are similar to derive from Bitcoin. The legal status of cryptocurrencies varies from country to country. Some say cryptocurrency is enabling the black market to commence e-commerce because transactions involving cryptocurrencies are kept anonymous. Some other concerns with cryptocurrencies include money laundering, online gambling, and security frauds like Ponzi schemes. As the market for cryptocurrency continues to grow, innovation is expected to follow. The current expectations and uses of cryptocurrencies is far from perfect and the market will adapt and perform well enough to suit consumers. In this essay, the inside and outs of cryptocurrency will be discussed as well as what we should expect from it in the future.
Cryptocurrency is not physical money like a U.S. Dollar or a Euro, it is purely online and kept in a virtual wallet. This wallet is a software program that stores cryptocurrency and lets users send and receive digital currency. Cryptocurrency is so alluring because of its rather simplistic transfer process which has small fees and the actual process of transferring funds is really quick. Most people are opting for cryptocurrency payments instead of wire transfers because banks and financial institutions usually charge high fees for such services. However, an entire balance of cryptocurrency can be completely erased if the user’s computer crashes if a backup copy of the funds doesn’t exist. Also, cryptocurrency is also a victim to hacking. So far, there have been around 40 thefts, including some that left users losing millions of dollars in value. Since it is decentralized, it is not backed by any government which concerns people that price of cryptocurrencies isn’t stable and has the capability of constant fluctuations. The whole market is driven by the supply of the coin and the demand of the consumers for that coin. Much like goods and services, each type of cryptocurrency has a limited number of supply. As the demand for a coin increases, this is likely going to decrease the price which will also cause the price of the coin to increase. The opposite is also true, as the demand decreases and supply increases, the price of the coin to decrease.
The legality of cryptocurrency is different from country to country all over the world. While the coins themselves might be legal in a country, a lot of the actual transactions involving the cryptocurrencies are illegal activities. In the United States, the Commodity Futures Trading Commission has declared the coins as a commodity and has started to put regulations on cryptocurrencies and will continue to put regulations on the coins as they see fit. Also, the Securities and Exchange Commission has stated that the coins must be registered if they want to continue to be traded in the United States. The Internal Revenue Service has declared it as property and will subject it to capital gains tax. The U.S. government sees the potential for large usage of these coins and seeks a fast start to control the way they’re being used to avoid future problems. Although currently there aren’t necessarily enough cryptocurrencies to affect the Federal Reserve’s ability to conduct monetary policy, some fear that if it gets too big, then it will affect the Federal Reserve’s ability to really perform monetary policy efficiently. Monetary policy is the central bank’s management of money supplies and sets the interest rate set for that country. People are fearful that cryptocurrency usage and dependence could affect the management of the money supply and how high the interest rate is set. Both of these hold great weight to how successful an economy can be. The Federal Reserve would have no authority to regulate or supervise cryptocurrency. According to a recent study done by researchers at the University of Oxford, there are many crimes that are funded by cryptocurrency such as hacks and thefts, illegal pornography, murder-for-hire and terrorism. Money laundering and tax evasion are also pretty prevalent in the cryptocurrency market. With $400 billion in over 1,000 cryptocurrencies, it is very common to have black market transactions occur. According to the University of Oxford study, one-quarter of all users and almost one-half of all Bitcoin transactions are connected to illegal activities. To put this in perspective, the quarter of users that use Bitcoin for illegal activities is equal to about 24 million people. These same users conduct around 36 million transactions a year. These transactions then equate to a value of around $72 billion, and the users share a combined $8 billion worth of bitcoin. Without further regulation, skeptics fear cryptocurrency is allowing the black market to commence e-commerce.
As a market for cryptocurrency continues to grow, there is sure to be more innovation to go along with it. For example, a person’s entire wealth in cryptocurrency can be wiped by a single computer crash. This is expected to be overcome by technological advances. In a world where there is constant innovation, the cryptocurrency market will adapt and perform well enough to serve consumers. It is believed that soon a majority of lager companies are expected to start accepting Bitcoin or other cryptocurrencies as payment. Right now, companies like Subway, Expedia, Microsoft and PayPal are notable companies that have already started to accept Bitcoin as payment. This means that e-commerce will expand and will put some intrinsic value on the cryptocurrency. There are also such theories that individual governments will have their own digital currency. In 2009, the US treasury wrote a report aimed at Congress saying, “…that the dollar will continue to be used as long as the US maintains sound macroeconomic policies and deep, liquid and open financial markets.” Similarly, the European Central Bank President said that no member of the European Union will be able to issue their own cryptocurrency and that the Euro will continue to be used for the near future. Currently Ecuador, China, Senegal, Singapore and Tunisia have already launched their own national cryptocurrencies. Other countries like Estonia, Japan, Palestine, Russia and Sweden look to issue their own as well. China looks to totally replace paper currency with cryptocurrency. Several banks and large financial institutions such as Barclays, Goldman Sachs and Citi are starting to consider to have their own crypto trading desks. Banks are worried that they will lose customers to cryptocurrencies since the customer can store all their assets in cryptocurrency, lessening the need for banks. So, six of the world’s largest banks, Barclays, CIBC, Credit Suisse, HSBC, MUFG, and State Street, have announced backing of the UBS and Clearmatics backed Utility Settlement Coin. This is a joint effort for several large banks to institute their own cryptocurrency. The only way the banks can keep their customers is if they join the craze. This is a good thing for the banks because the banks will back the currency themselves which gives their customers a more secure way to exchange currency.
Whatever the future holds for cryptocurrency, there is a strong belief that it is here to stay. Over the last 10 years, we have seen a world without cryptocurrency turn into several large companies accepting it as payment. Whether bitcoin succeeds or not, there will be new, better versions that will fit our current financial systems the best. As we advance through the infant stage of cryptocurrency, we will see new, larger competitors who want in on the latest fad. Banks and other financial institutions will join, drowning out the power of the smaller coins. Most people see a world within the next 20 years that is completely dependent on cryptocurrency. Central banks will join in as well which will result in cryptocurrency having more power. With more dependence and central banks joining, there will be more federal regulation in countries using cryptocurrency as their main currency. It is far from perfect, but there is sure a lot of potential.