Blockchain technology, for all its hype and attention, is just an accounting ledger that powers cryptocurrencies. At the center of blockchain technology is decentralized trust, and this is how cryptocurrencies can help the global economy to be concentrated in the hands of the majority.
The emergence of blockchain technology and Bitcoin, its most successful application to date, have the potential to help and even disrupt the global economy. While the evidence is not yet concrete, the way banks and governments are moving swiftly to regulate the emerging market is a clear indication that these centralized and traditionally powerful institutions are agitated.
Cryptocurrencies, as complicated and confusing as they are, are just an accounting unit of value. This is the same role that money plays into modern society, and has played since the Chinese people first created paper money and coins in the ninth century.
Today, money is controlled by reserve banks, with the US Treasury serving as a global central bank even though no one, particularly economists, will officially say it. This is probably the reason why the US dollar acts as the world’s reserve currency. The 2008 global financial crisis had its epicenter in the US, and its aftershock was felt in countries as far afield as possible.
While central banks are working out a strategy to curb the adoption of digital currencies as the replacement of fiat, we wonder how cryptocurrency can help the global economy.
Increased Economic Activities
Cryptocurrencies and Bitcoin have been referred to as bubbles and are constantly being compared to the Dutch Tulips Mania. Despite this unfortunate comparison, cryptocurrencies have created a new and thriving industry.
Bitcoin, which is mined using specialized equipment, has created several sub-sectors that have enriched many companies and people. Bitmain, a Chinese-based company, recently filed an IPO prospectus at the Stock Exchange of Hong Kong, and revealed that its profits for 2017 were north of $2.5 billion.
Cryptocurrency exchanges cannot be ignored, as they are the institutions that keep the whole industry going while people trade the digital coins. Writers, journalists, graphic designers, programmers, marketers, and more have carved successful careers out of blockchain technology and cryptocurrencies.
The modern world is driven by economic means of survival. People want to pay their bills, put food on the table, and send their children to school. If the new market allows them to do that, so be it. Sergey Brin, the billionaire co-founder of Google revealed that he mines Ethereum as a "side hustle."
Initial Coin Offerings
The emergence of Bitcoin in 2009 disrupted the financial sector, particularly the payment system. However, it created a new liberal and decentralized "Silicon Valley" not controlled by venture capitalists.
Initial coin offerings (ICOs) are the equivalent of Initial Public Offerings (IPOs) but for blockchain projects. In 2017 alone, blockchain projects raised more than $6 billion through ICOs, and have already raised more than $13 billion so far this year.
The majority of projects that have been funded by Initial Coin Offerings wouldn’t have seen the light of day had their fate been decided by venture capitalists. ICOs have also taken away the power belonging to venture capitalists only, and placed it in the hands of the masses. Anyone can invest in ICO projects.
Ripple Labs, the company that developed the Ripple protocol, makes a legitimate claim when it says that the current payment system was built for the "disco era." Despite the high failure rate and slow transactions, the payment system is worth $1.6 trillion per annum. This is too much and unacceptable.
The world has known this for years, but couldn’t do anything because there was no alternate solution. Cryptocurrencies, starting with Bitcoin, changed it all. Banks have also responded by lowering their transactions fees.
Trade, at all levels, has always been centered around uncertainty and trust. Banks, corporations, governments, and even universities are products of uncertainty and lack of trust between transacting partners.
These centralized institutions became the grease that kept the economic wheel turning. However, the institutions became all too powerful and are now working towards consolidating their power. Though blockchain technology was only introduced in 2009, it remains a novel way of lowering uncertainty between transacting parties.
Smart contracts for revenue sharing, pioneered on the Ethereum platform and now utilized on almost every existing blockchain, have shown the world that technology can be used to lower uncertainty. Transactions in real estate, healthcare, the automobile industry, and more can be automated in order to allow organizations to conduct businesses in a radical way.
Distribution of Wealth
Except in the history of bubbles, nowhere else in the world has other industries seen the growth experienced in the crypto market. In 2017 alone, the year of the famous crypto bull run, Bitcoin and Ether grew by a staggering 2,000 and 3,000 percent.
Ever consider why so many young people are investing in cryptocurrency? Early adopters were in for the taking. Overnight millionaires were created. People with zero knowledge in investing came upon significant returns while Harvard-educated Wall Street money managers throw big parties when they achieve 70 percent returns.
Cryptocurrencies are changing how wealth is created and distributed. A level playing field has been created and everyone has an equal opportunity to make money. A true egalitarian financial society is in motion, but some governments are fighting cryptocurrencies through innovation-inhibiting regulation.
For close to a decade, governments and central banks watched as the cryptocurrency market grew exponentially. Critics joined the bandwagon. The financial status quo was changing. Startups with only a concept and not even a minimum viable product were raising millions in seconds.
Governments, led by China, enacted a blanket ban on cryptocurrency exchanges, Initial Coin Offerings, and more. China was joined by other countries, such as South Korea, India, and more. Christine Lagarde, the chief of the International Monetary Fund (IMF) called for the regulation of Bitcoin and cryptocurrencies. Lagarde claimed that lack of regulation would open new channels for financial crimes such as finance terrorism and money laundering.
However, not every country adopted the stance of China or Lagarde. Malta saw the potential of the technology and spotted an opportunity to bolster its economy. Malta, also known as the Blockchain Island, enacted friendly laws that attracted some of the biggest companies in the crypto industry such as Binance and Bittrex. Jobs have been created, a telltale sign Bitcoin is going mainstream.
At the same time, China, due to its protectionism, sent some of its blockchain companies packing, leading them to settle in countries such as Singapore, Estonia, and Liechtenstein.
Countries suffering from hyperinflation and the collapse of fiat currencies have turned to cryptocurrencies and blockchain technology to lead them out of their financial quagmire. Venezuela, whose economy was partly crippled by US-imposed sanctions, developed and issued a national cryptocurrency to bypass the sanctions.
Many people see cryptocurrencies as a threat to fiat currencies. This is far from being true. Cryptocurrency and blockchain technology have a long way to go before they can completely overhaul the existing financial structure.
It would also be naïve to think that blockchain technology can solve all of the world’s problems. It is still far from doing so. It is young, and more research and mistakes need to be made before the technology can reach its full potential.
However, we can’t take away how it has impacted the financial world. Cryptocurrency can help the global economy, and the fact that Wall Street frets about it is a sign that these alternative currencies are here to stay.