Growth of cryptocurrencies create ‘what’s next?’ question

This article is by cryptocurrency firm Evai 2020

In our last editorial on The Fourth Industrial Revolution, we discussed the reasons behind the emergence of cryptocurrency. Cryptocurrency is born of technological advance, as a response to financial failings and mis-management.

Let’s consider for a moment the causes of the near collapse of the banking system and how this might possibly have spawned the rise of Bitcoin as the forerunner of all of the cryptocurrencies we see today. This will help us better understand what cryptocurrency is.

In essence, the financial crisis was the result of excessive borrowing, but what enabled and encouraged such an excessive accumulation of debt? The simple answer is greed and corruption at the highest level!

We recommend you watch the film The Big Short, which one of our University Professors said should be compulsory watching to gain an insight and understanding behind the reasons of the 2007 crash.

In summary, do you remember NINJA Mortgages – No Income No Job Applicants.? Or the world’s premier ratings agencies, rating “Junk” as triple A rated securities under the name collateralised debt obligations’(CDOs)?

The regulators turned a blind eye, as did the ratings agencies, as did the mortgage underwriters and yet nobody of consequence went to prison. The public funded the bailouts and bankers kept their bonuses.

Instead of making the guilty pay back, governments just created money out of thin air via quantitative easing and made Joe public pay the price!

And so, more Fiat (meaning commandment or decree) money was commanded into existence via QE, to cover up the negligence of government and regulators. Some might describe it as prudent and creative financial management, others as a Ponzi scheme.

Strangely perhaps, some people no longer trust governments to control and regulate our money supply. This centralised control by elite central banks is now being challenged by a decentralised system – And that’s the main difference between Fiat and Crypto currencies!

Cryptocurrency is just the same as other money apart from a few key differences:

1. De-centralised control
2. Limited supply (cannot just be created out of thin air)
3. High speed, low cost transactions

So what are the implications of these differences?

Government and Central Banks control money supply and interest rates for lending and borrowing. They also have powers in times of crisis (even the UK) to seize control of assets and bank accounts.

A recent example being Cyprus as reported by the Guardian online – “Cyprus bailout deal with EU closes bank and seizes large deposits. Draconian terms aimed at keeping Cyprus in eurozone include closure of second-largest bank and big losses for wealthy savers.”

BBC News reported – “The deal was reached after talks in Brussels between the ministers and the International Monetary Fund (IMF). In return, Cyprus is being asked to trim its deficit, shrink its banking sector and increase taxes. For the first time in a eurozone bailout, bank depositors are facing a levy on their savings.”

What then are the disadvantages of cryptocurrency and what are the main barriers to its adoption into our daily lives as ‘real money’?

  • Internally, Cryptocurrency is still an emerging asset class with excessive price volatility and price differentials across various exchanges.
  • Externally, governments will need to find a way to levy taxes.

These transitions will take time but rest assured, the time is coming when Cryptos will reach maturity and wide scale adoption.  Governments will find a way of collecting taxes. Perhaps a levy on all transactions which would mean a government constructed blockchain. In this way movement of money would be taxed with anonymity so that nobody could buy or sell without being taxed.

Cryptocurrency is inevitable but in order to become mainstream, governments will have to find new ways to levy taxes. Clearly this will involve some form of centralisation but how and in what form?

Next week we take a closer look at the cryptocurrencies available and look at ‘Use Cases’.

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