Do We Need Alternate Financial Systems, And Are Cryptocurrencies And Blockchain Technologies The Answer?
by Sarosh Bhatti
Aviation Enthusiast - Strategist - Analyst - Forecaster and Planner
October 4, 2024
Background
The origins of currency can be tracked back to 5,000 years when the Mesopotamian people created the shekel, which is considered to be the first known currency. Before this, people used the bartering system to trade for goods and services. Gold and silver coins date back to around 650 to 600 B.C. when stamped coins were used to pay armies. Some evidence suggests that metal coins may be as old as 1250 B.C.
Since then, humanity has expanded, developed, and grown by leaps and bound, and currently there are 180 currencies circulating in 197 countries around the world, with the euro, US dollar, British pound and Japanese yen being the leading ones.
Fiat Currency
The above traditional currencies (commonly referred to as fiat money) lacks intrinsic value and is established as the legal tender by the respective Government regulation.
Fiat money is a government-issued currency that is not backed by a physical commodity, such as gold or silver, but rather by the government that issued it. The value of fiat money is derived from the relationship between supply and demand and the stability of the issuing government, rather than the worth of a commodity backing it. If the country’s economy is performing well, the value of that currency is increased on the world stage.
Fiat money serves as a functional currency when it handles the role of monetary unit providing a numerical account and facilitating exchange. However, the mortgage crisis of 2007 proved otherwise and raised questions towards the stability and confidence in fiat currencies and the overall financial and regulatory system governing them, specifically the US dollar.
Cryptocurrency
Technology has changed many aspects of the way we live and work and has introduced the same new options for currency with cryptocurrency as a market disruptor and blockchain technology being the underlying technology supporting it.
Cryptocurrency, referred to as crypto, is any form of currency that exists digitally or virtually and uses cryptography to secure transactions. Cryptocurrencies don't have a central issuing or regulating authority, instead using a decentralized system to record transactions and issue new units. These are often seen as more secure, harder to forge currencies.
Cryptocurrency is a digital payment system that doesn't rely on banks to verify transactions. It's a peer to peer system that enables anyone anywhere to receive or send payments. Instead of being physical money carried around and exchanged in the real world, cryptocurrency payments exist purely as digital entries. Some of the prominent cryptos are Bitcoin, Ethereum, and countless others.
Challenges in the current financial system and fiat currency
Dozens of serious financial crises have taken place in the world over the past two decades, and they could even run into the hundreds, depending upon how a financial crisis is defined. Of these, some 40- 70 have had a sweeping macroeconomic impact.
Although the cost of a financial crisis is difficult to assess, it can prove enormous. Assessments depend, among other things, on whether to include only direct expense incurred by the public sector on account of rescue operations, or whether an attempt is also made to assess the loss of production caused by the crisis. If you consider all the direct and indirect impacts of any recession or crisis, the effects add up astronomically.
We have seen the current financial system fail over and over again, whether it be the Asian financial crisis, dot-com crash, or the 2008 financial crisis. The checks and balances, safeguards, or oversight systems didn’t preform and fell flat, with billions of dollars of wealth lost for major organizations, governments, and average citizens.
The value of fiat currency depends on the health of a country's economy and how its government manages interest rates, monetary supply, investments, and inflation. To discourage borrowing and spending, the government can increase interest rates, hence reducing the supply of money. Also, when needed, governments can lower interest rates to encourage borrowing and spending, increasing the money supply. However, this has to be done cautiously as it can increase inflation, as we’re seeing now in many countries, including Canada.
The unchecked printing of money can result in inflation or even hyperinflation, severely devaluing the currency. A number of countries have faced hyper inflation and seen their fiat currency crashed, resulting in an economic disaster.
The road ahead
The current financial system based on fiat currencies has been there for a long time, and the best financial experts in the world have still not been able to insulate from crisis or safeguard the wealth of all. The future requires that we use the technology and currencies available that cannot be manipulated, cannot just be printed as needed, are transparent, and cannot be further packaged (e.g CDO’s) for the monetary gains of the few.
Without the above, we will continue to endure weak financial systems and fiat currency, which lead to uncertainty and instability. We absolutely need alternate systems and currencies to prevent the reoccurring failures of the current ones. Are cryptocurrencies and blockchain technology the answers to global financial issues? Only time will tell, but I think that a forward-thinking economist, looking at all the data and historical evidence, would say that it’s one of the option moving forward.
