Cryptocurrency is a digital or virtual currency that uses cryptography to secure transactions and control the creation of new tokens. It is not governed by any authority like the government or banking sector due to its operation on a decentralized network.
In 2009, the first, the most valuable and popular digital currency, which is Bitcoin, was created and since then other types of digital currency have emerged and grown rapidly in recent years.
Cryptocurrency is the major player in the global financial system, challenging traditional financial institutions such as banking sectors and creating new opportunities for financial innovation and widely used for transactions, investment and as a store of value.
The decentralization of cryptocurrency has made it possible for users and businesses to make peer-to-peer (P2P) transactions without intermediaries, which has led to an increase in the adoption of cryptocurrency.
The Rise Of Cryptocurrency
- Historical Background
The concept of this cryptocurrency was first proposed in the 1980s by David Chaum when he invented an encrypted system of money called e-cash. Since then, there have been a series of trials. However, it was not until 2009 that the first successful and to date, well-recognized cryptocurrency, bitcoin was created by a group of individuals using the pseudonym Satoshi Nakamoto, who published a paper describing a decentralized electronic payment system.
This was designed to solve the issues faced by the early forms of digital currency. Right now, in this case, we will dive into the factors that make it popular around the world.
- Factors Contributing To Its Popularity
The rise of cryptocurrency has been driven by several factors, which include the following:
- Decentralization And Security: They are not governed or controlled by authorities or traditional financial institutions like banks but they allow for peer-to-peer (P2P) transactions without intermediaries. They are well-secured due to the use of cryptography, which helps in verifying and securing transactions and in creating completely new units of currency. This makes it very difficult to hack your account.
- Lower Transaction Fees: The different types of cryptocurrencies come with different transaction fees, which are built into their basic operating system structure. And it is low, compared to the traditional financial system. For instance, bitcoin transaction fees (BTC-1.57%) and Ethereum (ETH-0.38%), compared to those of the traditional financial system, range from 1.5% to 3.5% as processing fees.
- Accessibility And Inclusivity: It is accessible to everyone connected to the internet. In this case, they are known to offer an easy-to-use and great digital alternative to fiat currency. They provide easy access to financial services and specifically offer people without a bank account, a mechanism for making financial transactions
- Global Impact: It can have several benefits that come with controlling inflation and frictionless transactions. It makes it more convenient and cheaper for individuals to use it all over the globe, even with limited access to financial services.
Impact Of Cryptocurrency On The Global Financial System
—Images from gadgtecs
Cryptocurrency is making a great impact on society and the world at large, giving opportunities for financial transformation and challenging traditional financial institutions. Now, we will discuss how cryptocurrency is impacting the financial world.
- Disruption Of The Traditional Banking System: They disrupted the traditional banking system by providing an alternative to fiat currency or a centralized financial system. Since it operates on a decentralized network, it enables peer-to-peer (P2P) transactions without intermediaries. This potentially challenges the traditional financial system and changes the way financial services are provided. That increases the financial autonomy of every individual in the world.
- Cross-Border Transaction And Remittance: They allows cross-border transactions to be made more efficient and faster since it’s a decentralized network and reduces the need for intermediaries (third parties). They also eliminates currency conversion fees and makes it more accessible for traders internationally, especially for small and medium-sized businesses.
- Financial Inclusion For Those Without Fiat Currency: It has the potential to promote financial inclusion by giving access to financial services to individuals without fiat currency. Since cryptocurrency is decentralized, it can provide financial services to individuals who do not have access to traditional banking services, making it possible for them to participate and own digital assets in the global financial system. This will indeed reduce poverty and promote the growth of the economy in developing nations.
Cryptocurrency Impact on Fiat— Crypto Thai Community (@s_chinnapas) October 4, 2023
The global financial system has completely changed. Two large global companies There are customer bases all over the world such as Mercedes-Benz and HONDA accepting crypto trading. This signals a significant change in the financial system.#Crypto pic.twitter.com/uLfe8MNgWk
Cryptocurrencies can enable transparency and provide an opportunity for regulators actively seeking to shift more transactions from the informal to the formal economy.” — By Alpen Sheth, Mercy Corps Ventures
Challenges And Concerns
This digital currency gives lots of opportunities to every individual, like traders/investors, and developers, to be part of the global financial system around the world, even when you do not have a fiat account in the traditional financial system. This has made such an impact on the global market around the world, but as such, we need to consider the challenges that we might face while dealing with digital currency. They are:
- Volatility And Market Fluctuation:
—image from publish0x
The rise of the cryptocurrency industry has caused a huge amount of funding in transactions, taking place in a relatively unregulated sector, raising concerns about fraudulent activities, cybersecurity, and tax evasion, including broader financial stability. As cryptocurrencies are increasingly dominating the global markets, it could limit the ability of traditional banks to set monetary policy through how they control their money supply, especially for those in smaller and less developed countries.
This means that the volatility of cryptocurrency value is changing constantly, and as transaction fees fluctuate each day, it will complicate the tax situation in such a way that we won’t be ready or prepared for it. The cryptocurrency market fluctuates very high due to the contribution of supply and demand; if prices go up, the demand for cryptocurrency increases and decreases if prices go down.
Another reason why the market is unstable in the cryptocurrency market is that it lacks discipline from the users or investors. For instance, when you put your investment in real estate, gold, silver, or any stock exchange and you put it in a long-term investment, you will probably relax and not bother to know the movement of the price weekly, monthly, or yearly. But in this case, it’s totally different; you will be checking the movement of prices daily.
“Banning cryptocurrencies will not prevent adoption, it will only limit regulators’ abilities to guide market activity around these networks and address their unique potential risks.” –By Alpen Sheth
- Security And Fraud Risks:
–image from helpnet security
Cryptocurrency gives users the liberty to control their assets, just like owning a bank. But relying on the crypto-wallet provider, the user’s crypto asset is only as safe as the protections and security measures the developer has in place. And with this provider, it will be vulnerable for hackers to exploit it. Hackers are increasingly carrying out cyber-attacks, by infiltrating and shutting down the computer network, and they will demand payment to restore it.
However, it’s really important to note that your cryptocurrency investment is completely risk-free, although, there is the possibility that you can lose your assets when investing in cryptocurrency without using a strong password, two-factor authentication (2FA) and storing hardware wallets which can protect your investment.
Furthermore, the easiest way a scammer can commit fraud against cryptocurrency is through a fake website or crypto mobile app created due to the large number of them that are widely found on the internet.
And since their website or their mobile app resembles the cryptocurrency website authentically, many individuals will fall into their trap without properly checking how authentic the website is.
The Future Of Cryptocurrency And Global Financial System
—image from Stanford
- Integration Of Blockchain Technology: It will continue to grow in popularity and become more widely adopted in the financial system globally. The use of digital currency for payments, other financial systems, and investment will become more widespread, and new applications for cryptocurrency will emerge in different industries. With that, it will enhance transparency and efficiency. The integration of blockchain in global financial services is still in its early stages but has the potential to transform the way we think about our assets and finances.
- Regulatory Development And Government Involvement: The future of cryptocurrency will be shaped by government involvement regulations. Presently, around the world, governments have started realizing the trend of cryptocurrency, while other governments in some countries have implemented regulations to control the use of cryptocurrency. Other experts or individuals believe that implementing the regulations will be necessary so that it will protect individuals or consumers and prevent them from fraud and theft.
The main role of government involvement is to regulate cryptocurrency, which will play an important role in the future of cryptocurrency and the global financial system.
Cryptocurrency is changing the global financial system by giving people opportunities for financial inclusion, especially those without bank accounts (fiat currency). They make cross-border transactions available, efficient, and very quick without intermediaries.
And it also disrupted the traditional banking system by providing an alternative to those with fiat currency. But in all this, we have to consider and address the challenges involved, like the market volatility that comes with market fluctuation and also security risks.
The future of cryptocurrency in the global financial system is still evolving; however, the integration of blockchain and government involvement that comes with regulating cryptocurrency and protecting people’s assets will definitely influence the digital currency global market, its trends, and the global financial system.