Future of Cryptocurrencies: Emerging Benefits and Risks
Cryptocurrency emerged in 2009 with the creation of Bitcoin, the world’s first decentralized digital currency. The blockchain system developed by Satoshi Nakamoto led to the creation of a decentralized, peer-to-peer electronic payment system that allows for secure and autonomous transactions independent of a central government authority. Since Bitcoin, more new cryptocurrencies have exploded in popularity, with a total market capitalization of $850 billion according to CoinMarketCap reports. Regulation standards differ around the world, with some nations embracing cryptocurrencies and others banning or limiting their use for market volatility concerns. Currently, 114 countries, including the U.S., are exploring their own central bank digital currencies (CBDCs) to compete with the cryptocurrency boom. The world is looking for ways to integrate cryptocurrencies into the global economy.
Countries that Have Embraced Cryptocurrencies
The price of cryptocurrencies fluctuates wildly, which limits their capability of being a reliable form of transaction. Nonetheless, some counties with historically weak currencies, including several Latin American and African countries, have embraced cryptocurrencies in their economy. For example, given the current cash crisis, many Nigerians are viewing Bitcoin as a safe haven for both the underbanked and unbanked as economic conditions worsen. Decentralized and globally recognized Bitcoin offers an indispensable financial safe haven for asset holders in Nigeria.
By contrast, El Salvador seeks to spur investment from abroad by allowing effective transfer of assets through Bitcoins. El Salvador made history by becoming the first country to make Bitcoin legal tender in 2021, allowing residents to pay taxes and settle debt with Bitcoins as well as requiring all businesses to accept cryptocurrencies. However, market volatility in 2022 brought about skepticism among the people. After peaking at over $68,000 USD in November 2021, Bitcoin’s price fell to under $17,000 USD one year later. Many citizens of El Salvador are not utilizing Bitcoin transactions, as only 20% of the population was using an electronic wallet created by the Government of El Salvador and just 20% of business owners were actually accepting Bitcoin as payment. A survey by the El Instituto de Opinion Publica, a think tank in El Salvador, found that seven in ten Salvadorans do not think the integration of Bitcoin into the economy has benefited their family economy. Implementation of Bitcoin in El Salvador only incurred costs with limited success.
Decentralized Money Could Empower Criminal Groups
As cryptocurrencies allow for fast and anonymous transfers across borders, the decentralized nature of cryptocurrencies limits the supervision of a bank that could block the transaction. Authoritarian regimes and terrorist groups have taken advantage of this to acquire assets in Bitcoin to circumvent state controls, including to avoid U.S. sanctions on Russia. Various academic studies revealed the connection between terrorist activity with the Bitcoin market. According to Gabriel Weimann, a professor at Haifa University, terrorist organizations mainly use cryptocurrency to receive Bitcoin donations, which are used to purchase weapons on the black market. Additionally, a study led by Laith Almaqableh, a professor at the University of South Australia, found that Bitcoin price fluctuations are linked to 21 terrorist attacks that were analyzed between 2015 to 2017. As cryptocurrency standards remain in the development phase, policymakers in developed and developing economies must be aware that terrorists could take advantage of cryptocurrencies and their activity can affect Bitcoin price volatility.
Drug cartels and money launderers are also increasingly incorporating digital currency into their activities. According to the U.N.’s Report of the International Narcotics Control Board of 2021, cryptocurrencies are emerging as a new frontier for organized criminal groups battling for control of the vast criminal markets for drugs, arms, sex, and persons. The U.S. Drug Enforcement Agency (DEA) has increased its oversight on websites where anonymous individuals can use Bitcoin to buy and sell illegal goods. However, much of the enforcement efforts still remain short due to disparities in global standards.
Movement Towards Regulation
The regulatory landscape of cryptocurrency in the U.S. is complex with different states and federal agencies having different standards. While many businesses and investors embraced cryptocurrencies, they are at odds with lawmakers who are increasingly enforcing traditional payments. In 2022, several cryptocurrencies and crypto-firms collapsed, including industry heavyweight FTX, causing trillions of dollars in losses. A bipartisan group of senators demanded that Binance, the world’s largest cryptocurrency exchange, provide detailed information on its business operations amid accusations of illegal practices. FTX’s collapse, which affected over 1 million investors, emphasized concerns by lawmakers on transparency and accountability in the crypto industry. Federal Reserve Chairman Jerome Powell and Treasury Secretary Janet Yellen have both called for stronger regulations of stablecoins. Yet, regulators have been reluctant to reinforce oversight or to extend protections to crypto investors like traditional finance.
China, the largest Bitcoin miner in the world, announced the ban on all cryptocurrency transactions in September 2021, causing the price of some cryptocurrencies to fall sharply in the immediate aftermath. The People's Bank of China stated that cryptocurrencies facilitate financial crimes as well as instability for China's financial system. Additionally, several other countries, such as Saudi Arabia, Qatar, and Algeria, have banned cryptocurrencies. However, the demand for accessible and transferable digital currencies remains robust in the private sector.
CBDC as the Future of Digital Currencies?
In an effort to meet the demand of an efficient digital payment system and regulatory requirements, central banks around the world are considering introducing their own digital cash: a central bank digital currency (CBDC). CBDC is a digital liability of a central bank that is widely available to the general public. According to PwC’s CBDC Global Index, more than 60 central banks around the world have considered some degree of research and development of CBDCs. Countries like the U.S. and U.K. have not announced any CBDC development, while other central banks - including Japan and Sweden - have already launched pilot programs to test the effectiveness.
By allowing people to have direct access with the CBDC, the government can establish efficient transfer of stimulus payments and benefits directly to citizens. The central bank's entry to the digital currency would also enhance stability and credibility of other cryptocurrencies like Bitoin. However, some experts fear that CBDC could break the banking system by centralizing an enormous amount of data and power within a single bank, exposing consumers with privacy and cybersecurity issues. This debate over cryptocurrency will be essential to the international economy.