How Cryptocurreny Solves The Problem Clouding National Currencies

Data & Research / 08.11.2020

For as long as the wants of humans remain insatiable, there will always be demand and supply. The two forces have, in turn, created many forms and mediums of exchange for millennia. It evolved to the use of stones, salt, rocks, metals, and fiat currency starting from barter trade.

Digital currencies, more so cryptocurrencies, have been taking the world by a storm. Their usage has surged, boasting a total market cap of around $395bn as of 3rd November 2020. The rapid increase in usage underpins their ability to tackle some key problems faced by national currencies, which remains the most common means of exchange.

A Brief on Cryptos

The concept of cryptocurrencies was first put to practice in 2009 in the form of Bitcoin. Its developer, the pseudonymous Satoshi Nakamoto, developed the first blockchain database. The developer ended up being the first to launch a decentralized digital currency.

Cryptocurrencies leverage a peer-to-peer (P2P) system of computers to verify a transaction, using various consensus types to validate it. Being open-source, the ledgers, and other data regarding the transaction process are available to the public. 

Most cryptos are decentralized, with the current generation of coins resulting from transaction approval actions, referred to as mining.

Problems Tackled by Cryptos

There are some key problems affecting fiat currencies that don’t affect cryptocurrencies, thanks to their digital and blockchain-based nature. The key ideas include;

International Reach

Being the legal tenders of their specific issuing governments, national currencies are usually only acceptable for use within the issuing country’s jurisdiction. By far the most widespread fiat currency, even the US dollar still has its day-to-day usage by the public that is confined mostly within its borders. 

Other foreign national currencies must first be converted into the local, national currency’s equivalent value before being used as a medium of transaction. Such a limit creates a major usability problem for every national currency beyond its national borders.

Cryptos, on the other hand, are international in usage. A user with Bitcoins can, in theory, transact in any locale globally as long as the user can find a Bitcoin-accepting outlet. The continued adoption of cryptos will make the availability of said outlets more common.

Faster and Cheaper International Transaction

While fiat money can be transacted electronically across borders, the costs and speeds leave little to envy. Transaction processing may take days. A trusted third party is required to effect the transaction. 

Usually, banks or money transfer platforms charge quite a fortune for their services. As a result, the transfer of low valued currencies becomes very uneconomical.

Cryptos revolutionized the process exponentially. Transaction processing is instantaneous, with distance not affecting the process. Being peer to peer, the need for a trusted third party is eliminated, resulting in very low fees charged.

Security Issues

National currencies are tangible. The tangibility creates the need for a physical means of transportation at one point, either by the transacting partner or a third party. Knowledge of transacting partners is also readily available. 

At times, this is a mandatory requirement by custodial third parties for long-distance transactions. It creates a major loophole for thieves to rob funds while on transit, while in the bank, and the loss of privacy for transacting partners. Cryptocurrencies, on the other hand, are created and verified in a blockchain nature. Its P2P system ensures a virtual immunity to hacking and theft resulting from the 51% attack rule. 

For fraudsters to either steal or double-spend cryptos, they must either have the processing power or control more than half of all nodes in the blockchain. A typical blockchain may have millions of such computers as its nodes, creating a very low probability of attack or manipulation.

Most crypto protocols keep the personal information of the transacting partners a secret. It serves to boost privacy, in turn reducing the possibility of targeted cybercrime. However, the coin generation and transaction processes are immune to hacking, while storage devices are susceptible to cybercrime.

Currency manipulation issues

National currencies worldwide are usually under the control of a central authority, being their respective central banks. Through the ministry of Finance, the banks usually implement various fiscal and monetary policies to suit their respective political, social, or economic agendas.

The policies aren’t usually sound. Their outcome may lead to rapid unsubstantiated currency value depreciation or forced appreciation. The effect of such policies on the asset value and trade by people is usually far-reaching. In extreme cases, people end up rejecting their national currencies.

Most cryptos lack a centralized control feature, as it is decentralized in nature. Many of them have their value dictated entirely by forces of demand and supply. Therefore, a central authority’s poor monetary policies being a key determinant of one’s asset value are eliminated. 

However, the determination of currency value strictly by demand and supply allows for more volatility. Some cryptos try to resolve this by pegging their value to a reserve asset. They are referred to as stablecoins.

Conclusion

Judging from the past changes in mediums of exchange, it is inevitable that a new medium that solves issues afflicting the current national currencies will crop up. Cryptocurrencies strongly represent that medium.

Created out of necessity, cryptocurrency helps solve several key issues that trouble the national currencies globally. Not immune to issues themselves, cryptocurrencies still need to surmount some barriers for its global adoption.

However, the past developments of this decade indicate solutions being found as part of a maturing process. Cryptos thus create a picture of a brighter future, offering credible solutions to current transacting issues.

Adam is an outgoing young lad who likes adventures and discovering new things. Despite his boring life, he loves writing about cryptocurrencies and exploring what blockchain technology can do for the coming digital world where all adventures will be virtual.