The Evolution of Finance: Why Money Is Going Digital

From the advent of the telephone to advancements in flight, technological developments throughout history have often taken giant leaps forward.  Finance is no exception. Such as automobiles were dismissed when first revealed as frivolous, inefficient, and undesirable, cryptocurrencies and their corresponding blockchain technology have largely been ignored for much of the last decade.  However, as public knowledge attests, the story doesn’t end there. As advancements in automotive technology made cars more accessible, easier to use, and more alluring, they surpassed their contemporaries to become the dominant form of transportation and replaced the horse and buggy in almost every instance of daily life. You’d be hard pressed to find a horse and buggy in use today.  Likewise, today’s legacy versions of money are scrambling to keep up with a new technology that threatens to rapidly pass them by. Besides the fact that much of our world is increasingly going online, why exactly is money going digital?

The Security of Blockchain

The shift to digital money is no accident, and cryptocurrencies are desirable first and foremost for the security their underlying technology provides.  Whether you are a bank or an individual, you want to know that any transaction you make is viable – meaning your transaction cannot be tampered with, and its authenticity will not be questioned.  In other words, you want your transaction to be immutable.  While there are several flaws that make current payment systems vulnerable, the advanced cryptography underpinning digital currencies makes them mathematically impossible to manipulate or alter.  Literally meaning “secret writing,” cryptography protects the data you send or receive in a transaction as well as locks in the records of those transactions. How exactly? While its true that the encryption techniques used in cryptography have a lot of complex details, having a basic understanding of how it works can help illustrate what makes it so valuable.  In the simplest terms, cryptography uses military-grade encryption to keep transaction information private, and complex mathematical equations that cannot be worked backward once complete to link records of transaction information together.

Decentralized vs. Centralized

It’s blockchain’s security and immutability that make it a powerful tool in the hands of whomever chooses to use it.  This has created an important distinction in the digital world between cryptocurrencies and digital currencies. While the tech behind them is essentially the same,  “cryptocurrency” is typically used to refer to networks that are decentralized. Decentralized currencies are community managed and controlled, and anyone can choose to participate in the network.  The term “digital currencies,” meanwhile, is more often used to refer to networks that are centralized, or controlled by a single entity. A central bank, for example, would have complete autonomy over a digital currency, maintaining sole power in mandating its function and use.  The ideology and values vary substantially between the two, but the benefits of blockchain apply to both camps. So what are these visions of the blockchain future and how are they useful?

Finance for the Individual

Cryptocurrencies are viewed primarily as a tool by which to put financial power in the hands of the people.  Offering a trustable solution for peer-to-peer transactions, this means individuals no longer have to rely on the power of a state to enforce their validity.  They also don’t have to take the risk of being scammed if they transact outside national authority. Since cryptocurrency transactions don’t rely on a central state, they are also borderless – meaning they can be transacted across the globe with anyone who has an internet connection.  Cryptocurrency offers the ability to transact as people see fit, in whatever markets and with whomever they choose.  

Cryptocurrency transactions don’t require an intermediary.  Dramatically lowering costs and making sending payments affordable regardless of financial status, cryptocurrencies have the potential to put those who previously couldn’t afford to send and receive money on the financial map.  Micropayments, specifically, that would have previously carried large fees, can be made with crypto for fractions of a penny. And because they exist purely online, storing and managing one’s own funds is as easy as downloading an app – removing the hassles and barriers to entry often presented by bank formalities.  Retaining individual control also eliminates certain risks associated with access to funds. In countries, for example, where bank-held funds have been affected by sanctions or subjected to capital controls, cryptocurrency usage in some cases has spiked as much as 500%.

Lastly, inflation is another factor widely cited by the cryptocurrency community.  Cryptocurrency can be programmed with a limitation on the number of coins that can ever exist, allowing for the condition of scarcity.  This means their value is derived via supply and demand – much like scarce resources such as gold. Those who tout the benefits of cryptocurrencies over government-issued digital currencies often argue they are superior because of this trait – an argument that has only been strengthened in recent years as central banks print vast sums of money for stimulus and spending, driving down the purchasing power of their currencies.  

Security for the State

As previously mentioned, there is crossover in the benefits these currencies provide to both individuals and governments.  For proponents of cryptocurrencies, for example, lower costs are an equalizing factor. Meanwhile, for governments, they are also beneficial – but in that they are a cost-efficient alternative that helps cut government spending.  Paper money costs governments an estimated one point five percent of gross domestic product each year. Moving financial transactions online saves in not only transportation, printing, and management costs, but also minimizes losses from theft or fraud.  In the same way, the benefits of blockchain that provide individuals with records they can trust also provide governments with greater insight into how their currency is being used. The ability to influence the network unilaterally, meanwhile, means that governments can also use digital currencies to exert greater control over where their currencies go and to whom.  

Beyond the benefits, for governments pursuing digital currencies is also a necessary exercise in maintaining influence.  Central banks around the world have been increasingly faced with the specter of losing monetary control to private companies far ahead of them in the digital world.  When Facebook, a global company with over two billion users, announced they would develop an in-app currency, governments across the globe lept to condemn the move as a threat to national sovereignty.  Meanwhile, weighed down in Congressional hearings and regulatory tape, central banks have moved swiftly to close the gap in creating their own digital substitutes.

Survival of the Fittest

Electronic money institutions, or EMIs, are a new breed of financial entity taking on an increasingly vital role in the creation of digital currencies.  Backed by technology companies in the space, EMIs, as well as exchanges and other similar institutions, are poised to take a larger role in global finance.  They are lighter, faster, and more technologically adaptable than their cumbersome traditional counterparts, and their presence implies a new classification of an old standard: finance in the digital age.  As the advantages of digital wallets and benefits of doing autonomous transfers begin to overshadow traditional accounts and third party transactions, the new world is also looming large over institutions such as banks, credit card companies, and currency remitters from Western Union to Venmo.  

For the cryptocurrency world, the growth of digital alternatives has long been a call for financial freedom and monetary autonomy.  Since the financial crisis of 2008 that plunged millions across the globe into economic hardship – many through no fault of their own – this call has only grown louder.  However, central banks and their traditional counterparts have also come to the realization that regardless of the cause, a new system is rapidly springing up – one that threatens to take the place of inflexible legacy versions unsuited for technological speed.  The change to digital money is both technological and social, but it has also become a race for survival. To existing financial systems across the world, crypto and digital currencies have shifted from what was once a frivolous curiosity, to a technological challenge, and finally to the catalyst behind an existential crisis in which they must evolve or be left behind.

The Future of Money

The evolution of digital money began in a small corner of the internet eleven years ago.  Growing from a clever mathematical proof to a mature system backed by years of successful functionality, its popularity has been steadily growing. Entities across the globe are taking note of the advancements it offers, and the myriads of possibilities it presents.  Cryptocurrencies and digital currencies both offer their own version of the future, and the digitization of money is a race to determine who controls the future of money as much as it is a technological shift. Regardless of the outcome, money – from gold, to cash, to credit cards and electronic payments – is an ever-changing system.  Just as the horse and buggy gave way to the automobile, crypto and digital currencies are simply the next step in monetary evolution.

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