Both Kind of Currencies Will Evolve

Business Standard     22nd February 2021     Save    

Context: The difficulties of state-backed conventional currencies have created the market opportunity for cryptocurrencies which have wider implications for individuals, firms and governments.

Problems with Conventional Money:

  • Loss of value due to inflation: when wealth is stored in cash, inflation (anticipated and unanticipated) induces a loss of value.
  • Privacy issues: through mass surveillance system on financial transactions, there is potential for reduced state legibility on cash and gold, which have the most privacy.
  • Restricted access to a current account with Central Bank: making the users suffer from credit risks and fees of the bank.
    • In some countries, holding conventional money introduces difficulties with capital controls.

Competitive Advantages and Opportunities from Cryptocurrencies 

  • Eliminates state interference: cryptocurrencies work through mathematics and algorithms and thus ensure price stability through established algorithmic foundations.
  • Huge market capitalization: of $1 trillion, incentivize scientific innovation which will overcome problems inherent to cryptocurrency (bitcoin wastes a lot of electricity). 
  • Reduced intrusion into privacy: through increased transparency.
  • Free from capital controls: they are like gold and can avoid limitations imposed by capital controls.
  • Seigniorage revenues: Countries with greater capacity for intellectual analysis and the ability to translate diagnosed problems into commensurate financial reform will end up with the currencies that remain important.
  • Impacts on services:
    • For individuals and firms, cryptocurrencies will open up new concepts in transactions and holding liquid balances. 
    • For financial firms, cryptocurrencies will become more important as users will demand associated financial services. 
    • For the Indian information technology (IT) industry, there will be export-oriented IT services work, which will require familiarity with contemporary tools and concepts.
    Conclusion: Cryptocurrencies have work to do on fixing their foundations and getting better at becoming a useful frictionless money, and in parallel conventional money would not sit still.