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The emergence of cryptocurrency as a global currency
It is noteworthy that over the past decade the entire financial sphere has changed dramatically due to the appearance of cryptocurrencies. While initially treated simply as a curiosity for hackers and anarcho-capitalists, disruptive to contemporary financial systems and on the verge of becoming a global currency, digital currencies have developed at an incredible pace.
The inception of cryptocurrency is said to have started in 2009 when an unknown person or group, or a group of people under the pseudonym Satoshi Nakamoto, launched Bitcoin. The blockchain technology that forms the foundation of Bitcoin has offered efficient, bias-free, secure and INSTANT means of doing business without relying on traditional financial institutions. This advancement featured cheaper transaction costs, faster settlement of transactions, and better anonymized layer two solutions which in return would create a large and diverse set of users and investors.
Since the birth of Bitcoin, thousands of other digital currencies, [also known as altcoins] it seemed to aim to be different in certain ways. As for Ionic, founded in 2015, Ethereum has advanced the use of blockchain through the implementation of smart contracts, i.e. the execution of contract conditions established through code. This development has led to decentralized applications or dApps and has helped push cryptocurrency adoption even further.
When cryptocurrencies started to become relevant in the world economy, they recommended their functions. What were once considered cryptocurrencies that carry high risks in exchanging digital currencies themselves are now being accepted due to the change they bring to several industries.
First, financial inclusion. Despite the current volatile nature of some virtual currencies, cryptocurrencies provide banking services to the financially excluded and neglected sections in today’s growing world, especially in developing countries. Even through a regular mobile phone and the Internet, people can work, borrow and transfer funds globally, and largely without incurring any costs.
Secondly, unlike the hawala system, formal remittance services are expensive in terms of fees charged and can take 1 to 5 days to complete the transaction. Cryptocurrencies have also proven to be more efficient than the traditional form of financial remittance and highly efficient as workers can instantly transfer money to their families at any time with very low fees.
Third, in places where hyperinflation is a worrying issue, cryptoassets have proven to be a safe haven in terms of value. While fiat money is prone to face problems such as inflation due to policies adopted by governments, many cryptocurrencies have agreed-upon limits on the number of coins to be put into circulation.
Fourth, major trading companies have started to involve cryptocurrencies in their activities. Many companies like Tesla and Square have started integrating bitcoin into their payment system, while others like PayPal and MasterCard have planned to adopt blockchain technology for their operations in supply chain, security and more.
Fifth, regarding the growing role of cryptocurrencies, several central banks are in the process of creating their own digital currency. CBDCs intend to promote the advantages of DCs for the stability and reliability of fiat currencies and achieve an effective mix of traditional and digital finance.
However, before cryptocurrencies can become a popular medium of exchange that operates seamlessly in the global market as a world currency or unit of account, there are numerous challenges that they still need to overcome.
First, governments around the world have had great difficulty controlling such currencies. While some countries promote the use of this technology or encourage innovation in this area, other countries simply set high barriers to entry or ban it completely. To this end, it is crucial that there is a coherent regulatory framework in the market that addresses security and fraud prevention issues as well as encouraging the development of new services.
Secondly, and probably more seriously, many cryptocurrencies are infamous for their price fluctuations, which can negate their suitability as a reliable means of payment. Stable coins which are cryptocurrencies stabilized using other stable, less risky assets like the US dollar are a good solution here, but adoption and the level of trust are still being built.
Third, although the technology behind bitcoin and other digital currency systems or ledger technologies is very secure, abuses of the broader cryptocurrency ecosystem include hacks, scams, and downsides. It is crucial that the system is designed to include enhanced security features and a strong support system to safeguard users’ interests.
Fourth, the number of individuals using cryptocurrencies increases, which automatically translates into pressure on blockchain networks. There are currently solutions in development, such as layer 2 protocols and shards, that will allow Ethereum to cope with high transaction rates while maintaining transaction speed and security.
Cryptocurrencies in general and Bitcoin’s journey in particular to becoming a global currency are an evolving process, full of innovation, as well as opportunities and risks.
Some of the motivational factors include the following; With technological improvements and changes in the regulatory framework, digital currencies are likely to revolutionize the financial sector by improving its efficiency and making it more accessible and adaptive.
Although the outlook is still foggy, the emergence of cryptocurrencies is an unmistakable trend, alluding to the organization of society by combining linear and logarithmic financial models.
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The opinions expressed above are those of the author.