Since the creation of Bitcoin in 2009, the investment market all over the world has changed drastically. There was a time when cryptocurrencies were only viewed as virtual currencies used for investment, but now, their value has increased a lot. Cryptocurrencies are now used as a medium of exchange to buy goods and services.
The cryptocurrency started with Bitcoin, but now there are over 18,465 cryptocurrencies in the market. A huge number of the population are investing their money in these cryptocurrencies not as an investment but also as a viable currency. Thus, the economic impact of cryptocurrencies is inevitable. And with these comes a lot of regulations.
The governments can be divided into two groups on this basis. The first are the ones that are “crypto-friendly” and the latter ones are those that are not. Those who do not support cryptocurrencies feel that these decentralized digital currencies will take over the traditional currencies in the future, thus posing a threat to both the central banks and the economy of the nation as a whole.
So, does cryptocurrency have a huge impact on the national economies? It has indeed been only 12 years that cryptocurrency has been in the market and is still a very new concept, but does it have the power to shape the national economy?
How Do Cryptocurrencies Work?
Before understanding how cryptocurrency is impacting the economy, let us understand how cryptocurrencies work. Cryptocurrency is a digital currency that is decentralized in nature and works on blockchain technology. All the transactions that take place on the blockchains are completely secured with the help of cryptography, thus the name, cryptocurrency.
The cryptocurrency works on a blockchain network that is a digital ledger. This ledger records all the data related to the transactions that take place on the blockchain network. Other than that, the access to the ledger is also shared by the users and every transaction that takes place is transparent. The transactions that get recorded cannot be deleted, altered, or modified.
Decentralization is also one of the most important features of cryptocurrency. Unlike traditional currency that is controlled or regulated by the central authorities, cryptocurrency is completely decentralized in nature and no authority is responsible for its rise and fall.
In the cryptocurrency network, only the transaction data gets stored and it claims that no personal information about the people involved in the transaction can be traced. Thus, this network is very secure. But how does it really work?
Mining – So the first process is the creation of Cryptocurrencies which is also known as mining. This process requires the crypto miners to set up some tools and computer systems. The computer system that is connected to a continuous source of energy then solves various mathematical and cryptographic puzzles to get rewarded with a coin.
One of the biggest drawbacks of this process is the huge consumption of electricity. It also takes approximately 30 days for one coin to get created.
Buying, selling, and storing – Only cryptocurrency miners invest their money in tools and computer devices to create newer coins. Other than that, most people buy the already created cryptocurrencies for various miners. There are a lot of platforms where you can buy or sell your cryptocurrencies easily.
Not just that, cryptocurrency is also viewed as a great investment option, and thus, people also tend to store it in their digital wallets and sell them once its value increases. These digital wallets are also very safe and secure.
There are majorly two types of wallets – hot and cold. The hot wallet is connected to the internet which makes it easier to complete any transactions, but at the same time, it also makes your cryptos vulnerable to theft or fraud. The cold wallet is an offline wallet, thus making it difficult to make any transactions easily, but your cryptos stay completely safe.
Investment or transaction – Cryptocurrency can also be used for making various transactions. Most cryptocurrencies like Bitcoin can be transferred from one digital wallet to another and used for purchasing goods or services. Cryptocurrencies can also be traded or exchanged for cash.
Cryptos like Bitcoin have gained so much popularity that major business houses or brands are only accepting payments as cryptos and not in traditional currency. But, it has been only a decade since cryptocurrency has been in the market, and thus, it is still quite risky to invest all your money in it. You might end up losing all your money as well.
But the trends of cryptocurrencies show that their values have only taken a rise in the past few years and their value has increased immensely.
Are Cryptocurrency Transactions Completely Anonymous?
Since 2009, the one thing that has been called the fundamental feature of cryptocurrencies is its anonymous nature. But there are more than 18,000 cryptocurrencies in the market not that have a market capitalization of about $1.66 trillion. This shows that a huge number of people are investing in cryptocurrency every day and making transactions that the government has no idea about.
The concern of the policymakers is that this anonymous feature of cryptocurrencies helps antisocial elements in society to make illegal transactions without having to disclose their identity. In a report from the Russian central bank, even they have talked about their concern about this and how cryptocurrencies can encourage illegal activities like terrorism financing, money laundering, and drug trade.
But is that completely true? Are the transactions on the blockchain network anonymous? Cryptocurrencies like Bitcoin and Ethereum do not disclose the identity of the user but the transaction history on such blockchain networks is public.
Not just that, a lot of governments of various countries like the USA and Australia also collaborate with some of the blockchain networks to keep a check on the citizens and monitor their financial transactions, this also helps them to make sure that no task evasion or money laundering takes place.
Also, a user’s personal information is linked to their digital wallet address and thus, the government can easily track or trace the individual for their transactions. Cryptocurrency transactions are not completely anonymous. There is no such cryptocurrency that will maintain a user’s anonymity completely.
Why Should Cryptocurrencies Be Regulated?
The popularity and decentralized nature of cryptocurrencies have been a concern for policymakers all over the world for some time now. Cryptocurrency is not just used as an investment or an asset, but also as a technological infrastructure far away from the reach of the government. That has often made the policy bring in regulations and controls the usage of cryptocurrencies.
Different governments all across the world are choosing various pathways to regulate the use of cryptocurrencies. For example, in China and Russia, most people view cryptocurrency as a threat to the fiscal structure of the economy, but others view it as an opportunity for better economical development of the nation.
This year, the government might adopt policies to put even more regulations on cryptocurrencies, but the trend over the past few years has shown that economies that have accepted cryptocurrencies have reaped economical benefits. There has been a huge rise in job opportunities, investment, and taxes. Even the businesses that have accepted cryptocurrencies have also flourished.
Along with that, the government can also easily control cryptocurrencies with various policies and regulations, as well as, track their citizens. This also shows that cryptocurrencies are not completely decentralized or out of the government’s reach.
Cryptocurrency is the Future
In 2021, El Salvador became the first country to accept Bitcoin as a legal medium of exchange along with the traditional currency dollar. This made the economists, investors, and policymakers all over the world think, where is the future of cryptocurrency really headed? The popularity of cryptocurrencies in just one decade of its creation shows that there certainly is some merit in it.
But some people argue that cryptocurrencies will not have a positive impact on the economy. Cryptocurrencies remove the necessity of centralized intermediaries like banks. Its newness and extreme volatility also pose a threat to the economy. Some argue that the lack of regulation makes cryptocurrencies democratic.
Whether cryptocurrency will ever take over the global economy completely depends on how well people accept the technology and how smooth the transition from traditional to cryptocurrency is. It is also difficult to say how it could benefit the economy in the future, but it will definitely change the existing economic situation.
Nations where Cryptocurrency is Banned
While some countries have been accepting cryptocurrencies and encouraging them, some countries have banned their usage completely. Here is a list of some of the countries that have banned cryptocurrencies –
Algeria – This country introduced a law in 2018 which banned all kinds of cryptocurrency usage. Citizens of Algeria cannot sell, buy, or invest in cryptocurrencies.
Bolivia – Bolivia banned the usage of any kind of currency that is not regulated by a legal body in the year 2014.
Bangladesh – The financial regulations and laws in Bangladesh have banned the usage of any kind of cryptocurrencies.
Columbia – Columbia has also stopped the usage of cryptocurrency. Nobody in the country can invest in or trade cryptocurrencies.
China – China is also one of the first countries to have banned cryptocurrencies in the country.
Impact of Cryptocurrency on the Economy
Cryptocurrency has a great impact on various parts of the economy. Firstly, blockchain technology has majorly benefited businesses. It has improved cross-border economic transactions.
Secondly, cryptocurrency has also improved the economy by bringing newer jobs into the market. The software engineers also get job opportunities in the cryptocurrency industry.
Lastly, cryptocurrency has also helped the unstable traditional currencies that are prone to fluctuations. Such currencies hinder the growth and development of the economy and thus, cryptocurrencies can be used in such economies to deal with such circumstances.
Cryptocurrency has the potential to take over the traditional currencies of the world in the future. With its growth and popularity, more and more people are investing in it. With it, the governments and policymakers are also trying their best to deal with the situation and adopt newer regulations every day to limit crypto usage. So, although cryptocurrency is the future and is positively shaping the national economy, it still has a lot of risk factors associated with it.