Recently, cryptocurrencies have grown from digital novelties to trillion-dollar technologies with the potential to disrupt the global financial system. Bitcoin and hundreds of other cryptocurrencies are increasingly held as investments, and they are used to buy everything from software to real estate to illegal drugs. In this article, we will tell you about the benefits of cryptocurrency.
Cryptocurrencies are a democratizing force, wresting the power of money creation. They are controlled by central banks and Wall Street. Critics, however, say the new technology is wildly unregulated and is empowering criminal groups, terrorist organizations, and rogue states. Electricity-guzzling crypto mining is also harmful to the environment, they argue.
Financial regulators are now scrambling to respond. Regulations vary considerably around the world, with some governments embracing cryptocurrencies and others banning or limiting their use. Central banks around the world, including the U.S. Federal Reserve, are considering introducing their digital currencies to compete with the crypto boom.
Benefits of cryptocurrency: What are cryptocurrencies?
Cryptocurrencies are typically exchanged on decentralized computer networks between people with virtual wallets. These transactions are recorded publicly on distributed, tamper-proof ledgers known as Blockchain.
This open-source framework prevents coins from being duplicated and eliminates the need for a central authority such as a bank to validate transactions. Bitcoin, created in 2009 by the pseudonymous software engineer Satoshi Nakamoto, is by far the most prominent cryptocurrency, and its total value has at times exceeded $1 trillion. But numerous others, including Ethereum, the second-most popular, have proliferated in recent years and operate on the same gen. eral principles.
Cryptocurrency users send funds between digital wallet addresses. These transactions are then recorded into “blocks,” and confirmed across the network. One of the benefits of cryptocurrency is they are used in Blockchain technology. Blockchains do not record real names or physical addresses, only the transfers between digital wallets, and thus confers a degree of anonymity on users. Some cryptocurrencies, such as Monero, claim to provide additional privacy. However, if the identity of a wallet owner becomes known, their transactions can be traced.
Benefits of cryptocurrency: Cryptocurrency mining
Bitcoin “miners” earn coins by validating transactions on the network, a process that requires them to solve mathematical problems using computers to guess and check trillions of possible solutions, known as “proof of work.” Many cryptocurrencies use this method, but some instead use a validation mechanism known as “proof of stake.” In Bitcoin’s case, a transaction block is added to the chain every ten minutes, at which point new Bitcoin will award. (The reward decreases steadily over time.) The total supply of Bitcoin capped at twenty-one million coins, but not all cryptocurrencies have such a constraint.
The prices of Bitcoin and many other cryptocurrencies vary based on global supply and demand. However, the values of some cryptocurrencies fixed because they backed by other assets, thus earning them the name “stablecoins.” For example, the value of the popular stablecoins Tether and USD Coin is purportedly pegged at $1 per coin, though authorities have alleged this is not always the case.
Benefits of cryptocurrency: Why are cryptocurrencies popular?
Once dismissed as a fringe interest of tech evangelists, cryptocurrencies—particularly Bitcoin—have skyrocketed in value in recent years. In 2021, the price of a Bitcoin surged to more than $60,000 for the first time. Different currencies have different appeals, but the popularity of cryptocurrencies largely stems from their decentralized nature. They can transferred relatively quickly and anonymously, even across borders, without the need for a bank that could block the transaction or charge a fee. Dissidents in authoritarian countries have raised funds in Bitcoin to circumvent state controls, for example. Some experts say that digital assets are primarily tools for investment.
Benefits of cryptocurrency: Cryptocurrency value
The price of Bitcoin and other cryptocurrencies fluctuates wildly, and some experts say this limits their usefulness as a means of transaction. Nevertheless, some businesses accept Bitcoin. Many investors see Bitcoin as a speculative asset to hold over time, rather than make payments with. And it often draws comparisons to gold. Some see Bitcoin as a hedge against inflation because the supply permanently fixed unlike those of fiat currencies, which central banks can expand indefinitely. However, some experts questioned this argument. The valuation of other cryptocurrencies can be harder to explain; for instance, Dogecoin was created as a joke yet has surged in price, partly due to the support of some high-profile investors and entrepreneurs.
In countries with historically weak currencies, including several Latin American and African countries, Bitcoin has become popular with citizens. In 2021, El Salvador made waves by becoming the first country to make Bitcoin legal tender, though the move has sparked protests. Some politicians in other parts of the region have expressed support for the idea.
Stablecoins, meanwhile, has the potential to rival fiat currencies as the dominant form of payments, experts say. Their value is relatively stable, and they can be sent instantly without the transaction fees associated with credit cards or international remittance services such as Western Union. In addition, because stablecoins can be used by anyone with a smartphone, they represent an opportunity to bring millions of people who lack traditional bank accounts into the financial system. “Stablecoins are very promising as a form of low-cost, high-speed, inclusive payment technology,” says CFR’s Brent McIntosh.
What is “DeFi”?
Cryptocurrencies and Blockchain have given rise to a new constellation of “decentralized finance” or DeFi businesses and projects. Essentially the cryptocurrency version of Wall Street, DeFi aims to offer people access to financial services—borrowing, lending, and trading—without the need for legacy institutions such as banks and brokerages, which often take large commissions and other fees. Instead, “smart contracts” automatically execute transactions when certain conditions will meet. DeFi is surging in popularity, with investors pouring tens of billions of dollars into the sector.
Most DeFi apps built on the Ethereum blockchain. Because of its usefulness in tracking transactions, blockchain technology has a range of potential applications beyond cryptocurrency, experts say, such as facilitating real estate deals and international trade.
What challenges has this created?
Cryptocurrencies have also given rise to a new set of challenges for governments to contend with. The anonymity and portability of cryptocurrencies make them appealing to bad actors such as criminal groups, terrorist organizations, and rogue states. There are also uncertainties about the regulatory treatment of emerging financial technologies. In addition, crypto mining can require enormous amounts of electricity, which has led to concerns about its environmental effects. Meanwhile, the rise of DeFi and crypto payments has raised questions about consumer protection, market volatility, and the ability of central banks to carry out monetary policy.
In recent years, cybercriminals have increasingly carried out ransomware attacks, by which they infiltrate and shut down computer networks and then demand payment to restore them, often in cryptocurrency. Drug cartels and money launderers are also “increasingly incorporating virtual currency” into their activities, according to the U.S. Drug Enforcement Agency’s (DEA) most recent annual assessment. U.S. and European authorities have shut down several so-called darknet markets—websites where anonymous individuals can use cryptocurrency to buy and sell illegal goods and services, primarily narcotics.
Terrorism and sanctions evasion. The primacy of the U.S. dollar has provided the United States with unrivaled power to impose crippling economic sanctions. However, sanctioned states including Iran and North Korea are increasingly using cryptocurrency to evade U.S. penalties. Meanwhile, terrorist groups such as the self-proclaimed Islamic State, al-Qaeda. And the military wing of the Palestinian organization Hamas also traffic in crypto.
Environmental harms. Bitcoin mining is an enormously energy-intensive process: the network now consumes more electricity than many countries. This has sparked fears about crypto’s contributions to climate change. Cryptocurrency proponents say this problem can solve using renewable energy; El Salvador’s president has pledged to use volcanic energy to mine Bitcoin, for example. Environmental concerns reportedly prompted Ethereum’s move to a proof-of-stake model, which uses less energy.
Unregulated finance. The rapid rise of cryptocurrencies and DeFi enterprises means that billions of dollars in transactions are now taking place in a relatively unregulated sector, raising concerns about fraud, tax evasion, and cybersecurity, as well as broader financial stability. If cryptocurrencies become a dominant form of global payments, they could limit the ability of central banks, particularly those in smaller countries, to set monetary policy through control of the money supply.
Benefits of cryptocurrency: What are governments doing about this?
Many governments initially took a hands-off approach to cryptocurrencies, but their rapid ascent and evolution, coupled with the rise of DeFi, has forced regulators to begin crafting rules for the emerging sector, a process that could take years. Regulations vary widely around the world, with some governments embracing cryptocurrencies and others banning them outright. The challenge for regulators, experts say, is to develop rules that limit traditional financial risks without stifling innovation.
In the United States, policymakers have indicated they are moving to regulate cryptocurrencies and the emerging DeFi sector. However, cryptocurrencies do not fit neatly into the existing regulatory framework, creating ambiguity that lawmakers will likely have to resolve. U.S. Securities and Exchange Commission (SEC) Chairman Gary Gensler has called the cryptocurrency sector a “Wild West,” and urged Congress to give the SEC greater powers. Federal Reserve Chairman Jerome Powell and Treasury Secretary Janet Yellen have both called for stronger regulations of stablecoins.
To limit illicit activities, authorities have targeted the exchanges that allow users to convert cryptocurrencies to U.S. dollars and other national currencies. Under pressure from regulators, major exchanges including Coinbase, Binance, and Gemini adhere to “know your customer” and other anti-money laundering requirements. Law enforcement and intelligence agencies, meanwhile, have learned to leverage the traceability of most cryptocurrencies by using Blockchain to analyze and track criminal activity. For example, some of the ransom paid to the Colonial Pipeline hackers later recovered by the FBI. In September 2021, the Treasury Department announced a crackdown on the use of cryptocurrencies in ransomware attacks, issuing its first sanctions on a crypto exchange.
China, which accounts for most of the world’s Bitcoin mining, has moved aggressively to crack down on cryptocurrencies. In September 2021, Chinese authorities announced a sweeping ban on all crypto transactions and mining, causing the price of some cryptocurrencies to fall sharply in the immediate aftermath. A handful of other countries, including Bolivia, Nigeria, and Russia, have also moved to limit the use of crypto. And others are considering restrictions. Still, most governments have so far taken a relatively limited approach.
What is a central bank’s digital currency?
To assert sovereignty, many central banks, including the U.S. Federal Reserve, are considering introducing their digital cash, known as central bank digital currency (CBDC). For proponents, CBDC promises the speed and other benefits of cryptocurrency without the associated risks.
Experts say interest in CBDC intensified in 2019 when Facebook announced it would create its digital currency called Libra, potentially offering a new payment option for its more than two billion users. (The company has since scaled back the project, renamed Diem.) China is another motivating factor: A digital yuan could give Beijing even more control over its economy and citizens. And threaten the U.S. dollar’s status as the favored international reserve currency, experts say.
One way to implement CBDC would be for citizens to have accounts directly with the central bank. This would give the government’s powerful new ways of managing the economy—stimulus payments. And other benefits is credit to people directly. For example—and the central bank’s imprimatur would make CBDC a safe digital asset to hold. But their introduction could also create new problems, CFR’s McIntosh. And other experts say, by centralizing an enormous amount of power, data, and risk within a single bank and potentially compromising privacy and cybersecurity.
Some experts say the potential for CBDC to cut out commercial banks as intermediaries carries risks. Because these banks perform a critical economic role by creating and allocating credit (i.e., making loans). If people chose to bank directly with the Fed, that would require the central bank to either facilitate consumer borrowing. Which it might not equipped to do, or find new ways of injecting credit. For these reasons, some experts say private, regulated digital currencies are preferable to CBDC.