Cryptocurrencies: Too good to be true?

Cryptocurrencies are the new kids on the money block and they are quickly taking the top spot on the popularity podium. Investors, analysts and even Central Banks are increasingly showing interest in cryptocurrency trading as recent figures showed Bitcoin surging to US$4397.32 on August 28 and Ethereum being forecasted to appreciate another 100% by 2018.

A report from the International Monetary Fund (IMF) recently encouraged banks to start making the necessary adjustments to accommodate the crypto revolution. The directive was welcomed by a number of banks, with some of them already keeping a close eye on the possibility of cryptocurrency becoming the new staple currency. The course of action banks are taking to facilitate the adoption of this currency, is by establishing a national cryptocurrency – a regulated and more centralised form of digital coinage.

A prototype of national cryptocurrency, created by the People’s Bank of China, is currently in its testing phase, while Russia’s First Deputy Prime Minister, Igor Shuvalov, has also announced his intentions to follow the superpower. For the past 12 months, the Bank of Russia has been conducting research on how to utilise blockchain technology to boost trading opportunities with Europe. Deputy Chief, Olga Skorobogatova, even expressed openness to a collaboration between the Bank of Russia and the Trading Bloc, for all necessary blockchain application tests.

Estonia, a country known for its scientific contributions and leading edge economic policies, is also jumping into the fray and they are perhaps already ahead of the curve. Back in 2014, the European state launched its e-Residency program, a digital ID available to global residents. The initiative created a vast digital and legal infrastructure with 22,000 members, which could easily become the backbone of a national cryptocurrency. In addition, they already have a strategy in place in order to streamline the introduction of a digital currency. This involves ‘Estcoin’ entering circulation through a crowdfunding-like scheme- Initial Coin Offerings (ICO). It’s a common method for tech startups to raise capital, but has been subject to some controversy of late, with The People’s Bank of China declaring it illegal in early September.

There is a lot to be said for adopting a national cryptocurrency. M-PESA has been the digital money transfer standard for rural parts of Kenya since 2007, possibly contributing to the rapid adoption of Bitcoin, with numbers showing that one in three locals had their own Bitcoin wallet by 2016. Over two billion people across the globe are unbanked, but many of them can access the internet. At the moment, cryptocurrencies offer the best solution to the problem of many citizens being excluded from banking services.

Establishing national cryptocurrencies also looks positive on the asset transfer front. Bitcoin contracts cut out the middleman and can be processed instantly, meaning that similar agreements for a national cryptocurrency can be executed faster and a lot cheaper. The nature of blockchain also cuts down on the possibility of identity theft. In contrast to credit cards, transactions in cryptocurrency only provide merchants with access to the amount, and no other personal information.

While trading Bitcoin and other cryptocurrencies are rapidly increasing in popularity, it will be interesting to see how national cryptocurrencies will differ from standard currencies. Cryptocurrencies owe a portion of their acclaim to their characteristic ‘shield’ against exchange rates, interest rates and political events. National cryptocurrencies however, will not hold the same freedom as their parents and could be a lot more volatile. What is certain is that they will boost accessibility to national currencies and open up growth and trading opportunities to foreign import based countries. Traders will be watching how this new trend develops and integrates into the traditional currency market with great interest.

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