CRYPTOS: Impacting the World Economies

INTRODUCTION

To begin, let’s say I have an aunt in the US and she wants to send me some pocket money, you know, for chocolates. Right now, the system dictates that she’ll have to go through an intermediary. Meaning, she’ll send the USDs to an intermediary, who’ll then check specific details including who she is, who I am and such; charge a fee, and then send the money to me in INR.

Sounds inconvenient, right? What if we could do away with the entire complicated system, and she could send a currency directly to me, simply over the internet, without involving an intermediary? A currency with which, there’s no need for conversion, suppose from USD into INR and both her and I can use the same currency across borders? Sounds amazing, right? Well, that’s just the tip of the iceberg. Cryptos can offer THAT, and so much more.

So, what exactly are Cryptocurrencies?

In technical terms, “cryptocurrencies” are “decentralized virtual currencies” that run on a blockchain. Simply put:

1. There is no central bank that controls, and regulates the currency.

2. It’s Virtual, i.e. It’s a currency that exists in digital form.

3. It’s a currency. Meaning, it is a medium of exchange.

4. Most Cryptos facilitate anonymous

5. Cryptos use the blockchain technology, which acts as an electronic ledger for anonymous digital transactions.

It all started with Bitcoin, first introduced in 2009 and used for the first time to purchase two Papa John’s pizzas. Since then, more than 15,000 varieties of digital currencies have been added, with the global market cap reaching a whopping $2.65 trillion. Now just for comparison purposes, do remember that India’s GDP stood at $3.17 trillion in 2021. THAT’s how big the crypto market is.

Apart from the Transaction mechanism type, the following classes of cryptos are available in the market:

• Transaction mechanism – eg. Bitcoin
• Distributed computation token – eg. Ethereum
• Utility token – eg. Golem
• Security token (in stocks, financial instruments) – eg.ArCoin
• Fungible tokens – eg. ERC-20
• Non fungible token – eg. SAND
• Stablecoins – eg.USD Tether

The top 10 cryptocurrencies based on their market capitalization are depicted in the following table:

 How have Cryptos impacted the world economies?

There’s no doubt that Cryptos have taken the world by the storm and have shown revolutionary tendencies to change the world economy for good. While they have garnered keen interest from the investors across the board who seem to be in a careful rush to get in on the action, it has also sent the Central Banks in a frenzy, trying to figure out a way to regulate this new concept.

A. How governments of different economies have reacted

The early adopters who’ve whole-heartedly accepted crypto as a legal tender include El Salvador and the Central African Republic. Unsurprisingly, both countries have had significant problems with its implementation.

While countries like China and Russia have outrightly stifled the trading of cryptos in their countries, other economies like US, Australia, Singapore & Japan have embraced this new change and have been actively working to regulate the system. Back home, India has recently introduced 30% tax on transfer of cryptos.

Also, many other countries are either developing or thinking of developing their own cryptocurrency, called the Central bank Digital Currency (CBDC).

That said, governments are still vary of this concept given the concerns posed by a largely unregulated market, with risks of volatility and increased illegal activities.

B. Positive Impact of Cryptocurrencies 

1. Decreasing need for Banks as payment facilitators

Right now, if you intend to transfer money, you must make a request and forward it to your bank. The, the bank deducts the balance and transfers it to the account of the beneficiary. This way, the bank “facilitates” the payments. But with cryptos, you don’t need the banks at all! Cryptos are globally accepted digital currencies that can easily be transferred from one person’s account to another, without an intermediary!

Resultantly, with growing use of digital currencies without the involvement of banks, their role in facilitating transactions is being increasingly reduced at a rapid pace.

2. Impact on Global Investments

At the outset, cryptos are expected to be treated either as a speculation vehicle or as a hedging-support against inflation. Their perceived insulation against Inflation is one of the reasons investors are rallying to get in on the action.

The reduced regulatory oversight and the promise of anonymity are also one of the biggest driving factors of the increasing trend of investments pouring in the global crypto market.

In fact, in 2021, JP Morgan came out with a cryptocurrency exposure basket containing 11 stocks. Goldman Sachs also endorsed it as a new asset class. If the crypto trend continues, the world economies may see a significant change in the investment preferences in favour of cryptos.

In fact, some companies have started offering Cryptos in exchange for capital. This might indicate a huge shift in the way investments are made, in the near future.

3. A boon for developing economies

Many high adopters are developing markets, top 3 being Vietnam, India and Pakistan. Reason is simple. You see, in developing countries, cryptocurrencies help buy the resources and provide financial services due to their quick access facility. Thereby accelerating the economic and social development of these economies and hence, are being seen as a boon for their startup ecosystem. Entrepreneurs get more control over the funds received, and thus, access to capital becomes much easier due to the advent of blockchain technologies. India, for example, home to the highest number of crypto owners, has become the 3rd largest start-up ecosystem in the world. With Entrepreneurs benefitting from cryptos, the opportunities are endless.

Furthermore, cryptos help in easier access to credit and funding at a global level even for the SMEs.

4. Increased Speed and Ease of Cross-Border transactions:

The speed of settlement for cross-border payments varies from the same day to five business days. Enter Cryptocurrency. With absence of an intermediary, payments can be made within seconds and around the clock.

The growth in digital currencies could make cross-border payments more efficient and help address the $1.7 trillion global trade financing gap, which heavily impacts SMEs who typically don’t have established financial records with banks.

5. Reduced transaction costs

Since intermediaries are no longer required, very low transaction costs are incurred. Which in turn increases the volume of transactions! Smells like good news for the economy!

6. A new sunrise for the Digital Art Industry:

You see, generally, digital art can be replicated easily which means, there remains no originality to an artist’s work. Unless you could somehow sign it digitally — An authentic signature that will confirm your ownership. This is where non-fungible token (NFTs) — a crypto that represents ownership – come in. Now, even if your art can be copied, there will only ever remain one original artwork with the NFT.

This has bolstered the digital art industry’s future growth prospects. An interest and involvement from auction houses like Christie’s has further granted a much needed validation to the industry.

Consider, for example, this Cat meme. The original digital rendition sold for $590,000 in an online auction last year!!

In fact, NFTs can also be used to finance projects like movies etc. as a source of crowdfunding.

7. Facilitate Global Financial inclusion:

There are no geographical barriers to cryptocurrencies. The crypto-based economy is moving towards global access to all regardless of nationality or socioeconomic status. The global financial inclusion due to cryptos can provide access to critical financial products to over 1.7 billion people over the globe who have remained unbanked or underbanked. It is estimated that the annual GDP will boost by $ 3.7 trillion for emerging economies.

It can also be said that cryptos support financial inclusion in poor countries because of increased transparency during transactions owing to its decentralised ledger system, low cost of the transaction, and their ability to beat inflation. 

C. Challenges posed by Crypto for the global economies 

1. Loss of Taxes:

Advances have been made by governments across the world to tax the cryptos. For example, India introduced a flat 30 percent tax on income earned from transfer of cryptocurrencies and other virtual digital assets.

That said, it is the hallmark of blockchain transactions is anonymity, meaning one cannot prove the identity of the buyer or the seller. Thus, due to lack of clarity, there is a possibility of tax gaps increasing in this area in the medium and long run. In fact, Barclays figures that the US loses an estimated $50 billion per year from taxes that should be paid on cryptocurrency assets.

2. Environmental Impact:

Mining of cryptos, as explained earlier, requires high-powered and sophisticated computers –and a lot of electricity.

Bitcoin, for example, used an estimated 150 terawatt-hours of electricity annualized as of May 2022 – more than Argentina, with 45 million people! Bitcoin mining accounts for 0.40 percent of the entire world’s electricity consumption as of July 2022!

In Kazakhstan, for instance, power has reportedly been rationed away from miners to conserve energy during electricity shortages. Reports estimate this will cost Kazakhstan’s economy $1.5 billion over the next five years, including $300 million in tax revenue.

Further, Mining for Bitcoin alone is estimated to create between 22 – 22.9 million metric tons of carbon dioxide emissions p.a., comparable to those created by Sri Lanka.

And we all agree, a negative impact on environment smells very, very bad for the future of any economy.

3. Renders extreme volatility to the global markets

Truth be told, cryptocurrencies like Bitcoin are extremely volatile in nature. That is one reason why the governments are wary of trusting the cryptos. Consider for instance, Bitcoin. One minute it could be worth $40,000. A few minutes later it’s at $30,000. This is too much turbulence. The issue of volatility with a cryptocurrency would render the entire economy volatile, if it were to become a mainstream common use global currency.

4. Lack of Regulatory Oversight

With cryptos, there is a lack of regulatory oversight of the Central Banks and the government, owing to it being a decentralized system. Hence, it doesn’t bode well with the Governments as well as investors, who see this as a reason for lack of trust.

5. Curse of Anonymity:

Though Cryptos are welcomed by investors across the board due to its perceived anonymity, the same anonymity of cryptocurrencies is feared to enable illegal activities such as:

• money laundering;
• terrorism financing; and
• drug trade.

However, arguments to the contrary claim that cryptos offer no more than a semi-anonymity as opposed to complete anonymity. In any case, with increased regulatory intervention and measures to ensure transparency, we could see this problem being solved in the near future.

Way Forward

It is no secret that a lack of regulatory oversight, increased risk of illegal activities as well as high volatility has brought about a mixed set of reactions from the economic stakeholders. However, it is clear that even with all its flaws, cryptos have effectively managed to attract global traction as well as trillions of dollars along with it, which makes it pertinent that we, as professionals, need to educate ourselves with its nitty-gritties. Big-name investors and some governments alike, seem to be betting on the revolutionary potential displayed by the concept in such few years of its existence.

Efforts are being made across the world to eliminate the flaws in the crypto system by regulatory oversight, and mould it into something that effectively caters to the needs of the investors as well as the government. Who knows, with effective participation from the government, investors and quick adaptation, we could be looking at a well-regulated crypto-based economy in the near future!