Cryptocurrency As The New World Currency
By Srijani Datta
Cryptocurrency is catching up across the world at an unprecedented pace. Despite this, assuming that the liquid assets of people across the world would effortlessly get converted into legal tender is a very far-fetched approach. Nonetheless, I shall move forward with such an assumption. The merits of cryptocurrency lie in its decentralized structure, and unregulated status, but that is also precisely where it will falter if it's adopted as a primary medium of exchange worldwide.
One of the best examples to show the possible macroeconomic consequences of such a move can be found in the Eurozone debt crisis which began in 2009. A common currency, the Euro was adopted by several European Union states in 1999 in order to be perceived as being unified politically and socially. The main issue with the adoption of a common currency was that it led to the formation of a common monetary policy for the Eurozone whereas fiscal policy was not enforced uniformly. The Euro was governed by the European Central Bank (ECB), with 11 central banks of participating States assuming the responsibility for the monetary policy.
Thus, the European Central Bank fixed a uniform interest rate, even though the internal economic conditions of the eurozone members were very vastly different from each other. The interest rate was fixed in such a manner that it incentivized Northern European countries to give out loans to Southern European countries, whereas Southern European countries were encouraged to borrow since the interest rates were low (Frieden et al,6). The difference in real interest rates was because prior to the creation of the Eurozone, northern European countries were growing at a slower rate than southern European countries. This excessive borrowing by the southern European countries eventually led to an imbalance in capital flows, and the accumulation of deficits by them. In 2009, the government in Greece changed and they disclosed the true nature of their indebtedness. This led to the development of fear among investors about Southern European counties’ ability to pay up, and a quick loss in investor confidence ensued which spread to other countries of the eurozone such as Portugal, Italy, and Ireland. The Greek government’s inability to pay back debts led to investors charging punitive interest rates on the debt. Finally, bailout packages from other countries and institutions such as the International Monetary Fund helped Greece and the other Southern European countries to deal with the eurozone debt crisis (M R Anand,10).
If cryptocurrency were to be adopted as the new legal tender, replacing fiat money, the chances of development of such a crisis are almost certain. Adopting a single cryptocurrency will lead to a common world monetary policy, without taking into account the internal economic conditions of different countries. It is important to have high-interest rates in countries with a high economic growth rate to prevent inflation, whereas it's imperative for low-growth countries to have low-interest rates to encourage borrowing. This would not be possible under a common currency regime, as a uniform interest rate would have to be set, similar to the case of the Euro. A similar imbalance in capital flows would be witnessed, pushing some countries into higher debts than ever before. As cryptocurrency has no central issuing or regulatory authority, no country would be able to mine more of this currency in response to external or internal pressure. Countries would be unable to devaluate their currency in the international market in order to protect themselves from an economic collapse.
On the flip side of it, having a common currency eliminates currency risk in international trade thus stimulating greater exchange of goods and services across borders (Volker Nitsch, Mauro Pisu). It also opens up a country’s economy completely and suddenly to greater foreign direct investment thus leaving national corporations at risk of being taken over. Additionally, as trade barriers break down and there’s a greater flow of capital across borders there is a risk of hyperinflation in countries
such as India. For example, a producer of textiles in India will be incentivized to sell his wares to countries such as the US because of their ability to pay a greater price for the producer’s goods. This happens because there is no cost associated with currency exchange anymore and trade barriers are also lowered due to a common currency. This eventually leads to a loss in purchasing power (PP) of consumers in a developing country, as they will have to pay much more for goods and services than they earlier used to. The differential PP of currencies prevented this uneven flow of goods and services between them. By the time wages increase for the entirety of the population of developing countries due to the trickle-down effect, people would have faced major hardships, possibly causing even starvation and death. The hyperinflation these countries would face would push a large number of people across the world into poverty.
A possible positive outcome of cryptocurrency is of Universal Basic Income (UBI) becoming a reality worldwide. In the near future, automation is set to disrupt employment in several industries. A universal basic income is being seen as a viable solution to such a problem. The obvious barrier to such a program is its funding cost. This is where cryptocurrency can help. Most cryptocurrencies run on a decentralized peer to peer network based on blockchain technology. Miners, who help in keeping the public ledger of transactions updated, are compensated by a certain amount of
cryptocurrency (Satoshi Nakamoto,4). A known UBI program running on cryptocurrencies is Daniel Jeffries’ application platform known as 'Cicada'. The most promising feature of Cicada is that it lets everyone on its network become a miner, at the same time placing some restrictions. This network lets people mine cryptocurrency from their mobile phones too, thus helping a large number of people to get paid for maintaining the blockchain network on which cryptocurrency runs. Such an initiative on a worldwide scale would require some amount of regulation, which is difficult to impose on a network as decentralized as cryptocurrency, but if successful, it can be revolutionary.
The relative anonymity of cryptocurrency provides a fertile ground for transactions related to weapons, drugs and sex trafficking. Dark markets have been thriving on cryptocurrency for a long time now, the best example being Silk Road. Additionally, cryptocurrency also makes tax evasion easier than ever before, because the identities of those involved in such transactions are always hidden. Though increasingly counter-measures are emerging where several of such dark markets have been taken down by authorities and countries such as the U.S are finding ways to tax investments in cryptocurrencies. Lastly, to support worldwide transactions in cryptocurrency, the
digital divide needs to be tackled and digital literacy improved. Filling the digital divide is a humongous task for most developing nations, which was evident in the post-demonetization phase of India. Thus, while cryptocurrency might be taking the concept of free market and capitalism one step further by removing virtually all governmental controls, such a move may prove to be disastrous for the global economy.
References:
1) Frieden, Jeffry, and Stefanie Walter. 2017. “Understanding the Political Economy of the Eurozone Crisis.” Annual Review of Political Science 20 (1) (May 11): 371–390.
doi:10.1146/annurev-polisci-051215-023101.
2) M R Anand, GL Gupta and Ranjan Dash.2012. “The euro zone crisis Its dimensions and implications” (January)
3) Volker Nitsch, Mauro Pisu.2020. "The Euro and Trade: New Evidence." Centre for
Economic Policy Research. (April)
4) Satoshi Nakamoto, Bitcoin: A Peer-to-Peer Electronic Cash System