A cryptocurrencyis a form of digital currency that uses cryptography for the purpose of security. The currency has rapidly gained popularity in the public eye. There are many types of cryptocurrencies that include Bitcoin, Ethereum, Ripple, Bitcoin cash, Litecoin, Cardano, and Stellar Lumens among others.
While bankers have been against cryptocurrencies, they have incredible benefitsover regular currencies. The banks are often citingthe extreme volatility of this currency and their potential to be used for money laundering.
In this article, we will examine the reasons why banks do not agree with the use of digital currency and why they should carefully consider them as an option.
Will Cryptocurrency Destroy Banks?
Can Bitcoin Kill Central Banks?
Why do Bankers Hate the Cryptocurrency?
Why Governments are Afraid of Bitcoin?
Why is Digital Currency bad?
Should Central Banks Issue Digital Currency?
Will Cryptocurrency Destroy Banks?
We’re seeing more and more actions around blockchain-based technologies and the growing world of cryptocurrencies. Banks want to leverage this technology and an ecosystem of startups is mushrooming around the silicon valley.
Why? Because cryptocurrency is going to change everything. Or at least, the way we make payments in the coming years.
Blockchain is a disruptive technology that allows electronic transactions without a middleman. And cryptocurrency runs on that technology. It allows faster, cheaper and safer method of payments. Yes, you’ve got Paypal and credit card for electronic payments. And that works quite well. But how much are you spending each year on processing fees.
How many people got their credit card is stolen (online or offline). Fraud is exploding for credit cards. So merchants think twice before accepting cards now. And on top of that, they’ve got to absorb 3–5% fees each time they are selling you something.
Think of how Email has disrupted the post office business. 25 years ago, you would need to buy a stamp and wait for a few days, until your friend from across the globe gets your letter. Then Email came along and changed everything.
Picture this: you want to send out money right now to some cousins in a different country. What are your options?
With a Bank: if the bank isn’t closed, you’ve got to the bank, fill in a form, queue in line, give out the instructions, wait, sign some papers, wait, and finally understand that it will take between 3–5 days to reach your cousin’s bank account in Singapore. And of course, the 3–5% bank fee will be applied.
With Paypal: Assuming your cousin has Paypal, your cousin receives the money on its account right away. Great! Now, wait. You’ve just paid 3.5% processing fees and, for your cousin to get its money, he will have to submit a transfer to his bank account… taking about… 5 days!
By Western Union: This works well also. But you have a pay a real high fee to get the money sent out. We’re talking of an average of 7.7% processing fees in average. And I do not mention the time for you to go to a Western Union shop — and the same for your cousin. So much time wasted here.
Now, picture this with cryptocurrency. You take your phone, open your wallet app, input your cousin’s coin address, the amount and… done. How much you paid for that? A few cents on the dollar. In the case of bitcoin, you actually decides the rate you’re willing to pay and the higher, the faster. But you’re looking at a fee of less than 1%.
Now, when you get familiar with cryptocurrency, you understand how old the current payment system is. It feels like middle age. It feels like the postoffice days to send your message. Expensive and slow. With cryptocurrency, we get freedom. It’s lighting fast, through our phone, super safe (I’ll get the safety aspect in my next post) and way cheaper than any other current system.
So the question is — how long do you think before cryptocurrency takes on the whole world and becomes the default method of payment. And which cryptocurrency is going to emerge as the king of cryptocurrency. After all, cryptocurrency is like a social media. You’ll be using the one you’re friends, families and nearby shops are using.
Can Bitcoin Kill Central Banks?
Bitcoinis a digital currency that, in the words of its sponsors, “uses peer-to-peer technology to operate with no central authority or banks.” By its very definition Bitcoin seems well-positioned to kill offcentral banks. Could it? Would it? Should it?
Like just about everything else involving finance, the topic of central banks and their potential replacements is complex with valid arguments for and against.
Central Banks Play an Important Role
The digital era may be taking aim at central banks, but it has not yet managed to kill off the trusty Encyclopedia Britannica, so we turn to the venerable reference to learn that central banking can be traced back to Barcelona Spain in 1401. The first central bank, and those that followed in its wake, often helped nations fund wars and other government-supported initiatives.
The English refined the concept of central banking in 1844 with the Bank Charter Act, a legislative effort that laid the groundwork for an institution that had monopoly power to issue currency. The idea being that a bank with that level of power could help stabilize the financial system in times of crisis.
It’s a concept that many experts agree helped stave off disaster during the 2007-2008 financial crisisand theGreat Recessionthat followed. Today, modern central banks play a variety of roles. TheU.S. Federal Reserve, for example, is tasked with using monetary policy as a tool to do the following:
•Maintain full employment and stables prices
•Ensure the safety and soundness of the nation’s banking and financial system and enable consumers to access credit
•Stabilize the financial system in times of crisis
•Help to oversee the nation’s payment systems
To achieve these objectives, the Federal Reserve and other central banks can increase or decrease interest rates andcreate or destroy money.
For example, if the economy seems to be growing too quickly and causing prices for goods and services to rise so rapidly that they become unaffordable, a central bank can increase interest rates to make it more expensive for borrowers to access money.
A central bank can also remove money from the economy by reducing the amount of money the central bank makes available to other banks for borrowing purposes. Since money largely exists on electronic balance sheets, simply hitting delete can make it disappear.
Doing so reduces the amount of money available to purchase goods, theoretically causing prices to fall. Of course, every action has a reaction. While reducing the amount of money in circulation may cause prices to fall, it also makes it more difficult for businesses to borrow money. In turn, these businesses may become cautious, unwilling to invest, and unwilling to hire new workers.
If an economy is not growing quickly enough, central banks can reduce interest rates or create money. Reducinginterest ratesmake it less expensive, and therefore easier and more appealing, for business and consumers to borrow money. Similarly, central banks can increase the amount of money banks have available to lend.
Central banks can also engage in additional efforts to manipulate economies. These efforts can include the purchase of securities (bonds) on the open market in an effort to generate demand for them. Increased demand leads to lower interest rates, as borrowers do not need to offer a higher rate because the central bank offers a ready and willing buyer.
Central bank-led efforts to steer economies on to the path to prosperity are fraught with peril. If interest rates are too low,inflationcan become a problem. As prices rise and consumers can no longer afford to buy the items they wish to purchase, the economy can slow. If rates are too high, borrowing is stifled and the economy is hobbled.
Low-interest rates (relative to other nations) cause investors to pull money out of one country and send it to another country that offers a greater return in the form of higher interest rates.
Consider the plight of retirees who rely on high-interest rates to generate income. If rates are low, these people suffer a direct hit to their purchasing power and ability to pay their bills. Sending cash to a country that offers better returns is a logical decision.
Manipulation of interest rates and/or the monetary supply also has a direct effect on the value of a nation’s currency. A strong dollar makes it more expensive for domestic firms to sell goods abroad. This can lead to domestic unemployment. A weak dollar increases the price of imported goods, including oil and other commodities.
This can make it more expensive for consumers to purchase imports and for domestic companies to produce goods that rely on imported parts or materials. Arguably, a weak dollar is beneficial for a slow economy that needs to pick up steam while a strong dollar is good for consumers.
Because there is a lag between the time a central bank begins to implement a policy change and that change actually having an impact on a nation’s economy, central banks are always looking to the future. They want to make policy changes today that will enable them to achieve future goals.
Central Bank are Unnecessary
The very complexities associated with national and global economies set the stage for an argument that these economies are too unpredictable to be successfully managed by the type of manipulation central banks engage in.
This argument, made by proponents of theAustrian School of Economics, can be used to support the implementation of Bitcoin-style peer-to-peer currency that eliminates central banks and their complex schemes.
Furthermore, modern central banks have been the subject of controversy since their inception. And the reasons for discontent are wide and varied. On one hand, the concept of monopoly power is profoundly disturbing to many people.
On another, the existence of an independent, opaque entity that has the power to manipulate an economy is even more disturbing. Along these lines, many people (including economists and politicians) believe that central banks make mistakes that have enormous ramifications in the lives of citizens.
These mistakes include increases in the monetary supply (creating inflation and hurting consumers by raising prices for the goods and services they purchase), the implementation of interest rate increases (hurting consumers who wish to borrow money), the formulation of policies that keep inflation too low (resulting in unemployment), and the implementation of unnaturally low interest rates (creating asset bubbles in real estate, stocks, or bonds).
Along these lines, no less an authority than former Chairman of the Federal Reserve Ben Bernanke blamesmanipulation by the central bank(which raised interest rates) for the Great Depression of 1929.
In an era when technology has enabled consumers to engage in commerce without the need for a central authority, an argument can be made that central banks are no longer necessary.
A broader examination of the banking system extends this argument. Corruption associated with the banking system resulted in the Great Recession and a host of scandals. Bankers have caused great angst in Greece and other nations.
Organizations such as theInternational Monetary Fundhave been cited for fostering profits over people. And at the more local level, bankers make billions of dollars by serving as the middlemen in transactions between individuals. In this environment, the elimination of the entire banking system is an appealing concept to many people.
Central banks are currently the dominant structure nations use to manage their economies. They have monopoly power and are not going to give up that power without a fight. While Bitcoin and other digital currencies have generated significant interest, their adoption rates are minuscule and government support for them is virtually nonexistent.
Until and unless governments recognize Bitcoin as a legitimate currency, it has little hope of killing off central banks any time soon. That noted, central banks across the globe are watching and studying Bitcoin.
Based on the fact that metal coins are expensive to manufacture (often costing more than their face value), it is more likely than not that central banks will one day issue digital currencies of their own..................
