From cowrie shells to paper notes, money has evolved over time in pace with changes in human societal and technological development. Now digital currencies have arrived on the scene. While at first they seemed like something only computer geniuses would ever use or understand, they have recently stepped onto the mainstage of the financial markets. What does this mean for society? Will digital currency forever change the face of our financial system?
The Rise of Digital Currencies
Bitcoin first arrived on the scene in 2009. It was created by an anonymous collective of
computer programmers going by the name Satoshi Nakamoto.
Bitcoin value is set through a bidding process. To get Bitcoins, users (and their
computers) race to solve incredibly complex mathematical problems. So far, over 19
million Bitcoins have been “mined.” The company has stated it will only allow a
maximum of 21 million Bitcoins to be mined, but it has processes in place to make it
more difficult to receive Bitcoins for mining efforts as the limit approaches. As a result,
the 21 million mark may never be reached.
Bitcoin is reported to be an anonymous currency, though each transaction can be
viewed publicly through the blockchain. Governments including the United States of
America and Australia both track digital transactions. A user’s digital wallet ID can also
be traced.
Bitcoin’s popularity is due in part to the fact that it’s a decentralized currency, meaning
no government, financial institution, or single corrupt user can influence the system.
This allows users increased independence.
RSnake guest and financial expert Jake Moilanen, Founder & CTO of TXX Group Inc. and
GP at Seraph Group, believes the convenience of digital currency is another key selling
feature. Cryptocurrency is convenient and easy to transfer internationally.
By 2011, Bitcoin’s popularity brought competitors onto the scene. In 2017, there were
approximately 1,000 cryptocurrencies in the world. Today, there are 8,685.
The growth of cryptocurrencies hasn’t been without its problems. The price of Bitcoin
crashed in 2013, and then again in 2022. Between 2022 and 2023, the number of
cryptocurrencies fell by roughly 20%.
Many experts warn prices could go down again this year in the face of a regulatory
crackdown by the Securities and Exchange Commission (SEC).
Still, many people, including Moilanen, are optimistic about the future of cryptocurrency.
How is the Rise of Digital Currencies Affecting the Economy?
Cryptocurrency began as an outlier, with no one quite sure what to make of it. Take, for
example, the man who famously paid 10,000 Bitcoins for two pizzas in 2010. At the
time, 10,000 Bitcoins were worth $41. As of the writing of this article, one Bitcoin is
worth roughly $25,000. Had the man kept his Bitcoins, he could be a millionaire many
times over today.
As cryptocurrencies have become more established, they have been increasingly linked
to the financial system. So much so that many governments are looking for ways to
regulate the cryptocurrency market, and even offer a digital currency of their own.
Many cryptocurrencies, like Bitcoin, are completely untethered to any other currency.
This gives them independence but also makes them unstable. As a result, some
companies have created stablecoins, which are said to be linked to a specific currency,
increasing their reliability.
However, even stablecoins can be volatile. According to a White House fact sheet, in
May of 2022, the “crash of a so-called stablecoin and the subsequent wave of
insolvencies wiped out over $600 billion of investor and consumer funds.”
Others warn a collapse in stablecoins could have further reaching implications for the
bond market, and therefore the economy as a whole.
Still, there are many who say the $1.4 trillion cryptocurrency crash didn’t really affect the
economy. The White House fact sheet stated only 16% of adult Americans are invested
in cryptocurrencies.
The Impact of Digital Currencies on Traditional Banking
Whatever the current problems with cryptocurrency are today, many believe crypto is
here to stay. Moilanen said, “I do think digital assets like Bitcoin will supplant gold at
some point.” He also believes it would be beneficial for the U.S. government to issue its
own form of digital currency.
The White House is considering this, and has created an interagency “National Digital
Assets Research and Development (R&D) Agenda” to explore how this might be done.
However, Moilanen does not believe cash will disappear completely. “I don’t think we’ll
actually see the hard dollar go away, ever,” he said.
Moilanen also postulated that credit card companies, with their high fees would either
have to significantly change their business models, or go under. Even now, credit cards
are facing stiff competition. Debit cards and other online payment methods are
significantly less expensive for both businesses and consumers.
RSnake did point out that credit cards do offer a certain amount of consumer
protection. If someone makes a fraudulent claim on your card, or refuses to refund a
purchase, the company will typically cover the cost. If credit cards do become obsolete,
this is a gap that would need to be filled.
The Downsides of a Digital Economy
While there are many benefits to a digital economy, there are also pitfalls to consider.
One significant disadvantage is privacy. Digital transactions can all be tracked. Most of
us appreciate a certain amount of anonymity in terms of how and where we spend our
money. This would disappear if cash did too.
Similarly, someone’s access to money could be easily cut off at the click of a button.
RSnake discussed the Canadian government’s decision to stop the trucker convoy
protest in 2022 by authorizing financial institutions to freeze the accounts of people
associated with the protests, without a court order.
RSNake said, “When any government gets unchecked, there’s all kinds of problems. And
having very tight monetary control, whether it be to curb terrorism or stop child
pornography or whatever good original premise they might have, ultimately it leads to
them also being able to flip the switch and say, ‘okay we have political rivals, we need to
go take them out’.”
The Chinese government, already known for exercising vast control over its citizens’
lives with its social credit system, has been testing a digital yuan. Though some say it
has not been very popular since apps like WePay already provide the level of
convenience customers want.
Moilanen also mentioned that switching primarily to a digital economy would impact
homeless people. This is also true for people who are housed but living paycheck to
paycheck. While most Americans do have access to the financial system, approximately
4.5% of Americans (5.9 million households) did not have bank accounts in 2021. These
people would be locked out of a completely digital system.
There is also an environmental cost to consider in switching to a digital economy.
According to the White House, “Crypto-assets can require considerable amounts of
electricity usage, which can result in greenhouse gas emissions, as well as additional
pollution, noise, and other local impacts to communities living near mining facilities.” As
a result, the U.S. government is factoring environmental concerns into its evaluation of a
move to digital currency.
The Impact of the COVID-19 Pandemic on the Use of Cash
The COVID-19 pandemic changed how people in America use cash. According to PEW
Research, the number of Americans who no longer use cash for any purchases rose
17% between 2015 and 2022. Although 44% of respondents said they still used cash for
some transactions.
It’s uncertain whether this trend will continue or stay the same, now that COVID-19
restrictions are no longer in place.
Interestingly, a study done by the Federal Reserve Bank of San Francisco found that
although people used less cash for regular purchases between 2019 and 2021, they
stored more cash in their homes, cars, or elsewhere. In 2019, people stored $241 on
average. In 2021 the figure increased to $347. The authors of the report pointed out that
in times of uncertainty, people decide to keep more cash safe in case of emergency.
The Takeaway
Although cryptocurrency is still relatively new, its impact is starting to be felt in financial markets and by governments. Will cryptocurrency replace cash? There are still many questions to be answered. For more on cryptocurrency, listen in to RSnake’s conversation with Jake Moilanen now.