Cryptocurrency - Future Currency or a Scam?

Cryptocurrency is a digital currency built with cryptographic technology, which secures financial transactions through blockchain technology.

The most important feature of a cryptocurrency is that it is not controlled by any central authority i.e. central banks or governments, and is often referred to as decentralisation. The noise from recent press releases has been overwhelming with regards to cryptocurrencies. However, the majority of people- even bankers, consultants, scientists and blockchain program developers - have fairly limited knowledge about cryptocurrencies and their full potential.

To truly understand the cryptocurrency concept, one has to familiarize oneself with the mysterious Satoshi Nakamoto who authored Bitcoin: A Peer-to-Peer Electric Cash System in 2008, just after the global financial crisis was first triggered. The new electronic cash system was designed to decentralise the traditional cash system after experiencing the failure of a centralised financial model in 2007.

The key technology to fulfill the objective of decentralisation is blockchain technology: it comprises a growing list of records, called blocks, which are linked using cryptography. Blockchain can record transactions between two individual parties efficiently and in a verifiable and permanent way without centralised third parties under an open, distributed ledger system.

The question is, can this distributed ledger system replace traditional centralised ledger systems?

The key differences between decentralised distributed ledger system and centralised traditional ledger systems are to do with irreversibility, pseudonymity, limited supply, divisibility and decentralisation. Once a transaction is made and accepted, it cannot be reversed; senders and receivers in the transaction do not have to identify themselves; central banks cannot issue cryptocurrencies; they enable micro-transactions e.g. 1 bitcoin=100,000,000 satoshi; 1 bitcoin= 13,093.25 USD (10th July 2019).

After just a decade in ‘circulation’, Bitcoin‘s price has increased from zero to over 8,000 dollars and market cap over 230 billion dollars on July 10, 2019. You can check the price at the time of reading here.

Thereafter, the flaws are derived from those aforementioned characters of this open distributed ledger system. Carsterns (2018) stated that a high risk of debasement, lack of trust, high inefficiencies relating to clear transactions requirement and high price volatility, are the main weaknesses of cryptocurrencies which accelerate the doubt of substituting traditional money.

Although cryptocurrencies such as bitcoin currently seem impossible to substitute traditional money as mainstream currencies, the emerging of new technologies such as blockchain has augmented both challenges and opportunities in the entire business circle i.e. new functions required in international financial institutions, laws, regulations and beyond. Some literature (DuPont 2018) criticised that the real use of cryptocurrencies lies almost exclusively in speculative investment and financial asset portfolio diversification. Cryptocurrencies and blockchain technologies have become a new kind of risky and deeply speculative investment. Meanwhile, blockchain technology has been applied in logistics, governance/process control, the sharing economy, data management, stock trading etc. to mitigate the operational risks.

So, what can one conclude after researching cryptocurrency? Maybe it is a harmless, independent digital currency i.e. bitcoin that facilitates transactions. Or maybe it is a scam used in international money laundering… or maybe both or …neither? One thing is for sure, it presents a real challenge to traditional centralised systems.
The verdict is still out…

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Written by Chunmei Guo, a lecturer of accounting and finance for both UG and PG modules in the subjects of accounting, finance and economics in Wrexham Glyndŵr University.