Introduction:
A little more than ten years have passed since a selected group of cryptographers received letters from an unknown Satoshi Nakamoto to their email addresses announcing the launch of the innovative Bitcoin monetary system. Since then the developers of cryptographic algorithms have offered many digital alternatives to existing payment systems. Consumers and investors have tested various options for digital currencies, governments and central banks have developed approaches to regulating the crypto market with more or less enthusiasm.
However, discussions about the intrinsic nature of cryptocurrencies continue. Is it money, a financial instrument or an operating system? Do cryptocurrencies have value? What are the risks of cryptocurrency users? Is it possible on their basis to create a global cybernetic financial system that completely replaces modern mechanisms for creating money and financial inter-mediation? Preliminary answers to these questions can be obtained by examining the advantages and disadvantages of this digital phenomenon. However, first you need to take a short excursion into the history of money.
The development of money is directly related to the use of new technologies and the introduction of innovations. The enterprising British played a leading role in this process. For centuries, one of the key problems of monetary circulation was the damage of coins, when as a result of cutting the edges, their gold or silver content was constantly reduced. This defect was eliminated by Isaac Newton, who led at the end of the 17th century. During the Great Re-coinage, Newton ordered to withdraw from circulation all defective and counterfeit coins and replace them with new ones, which were created by machine with a round ribbed rim, which complicated their further damage. Over time, increased foreign demand for high quality English silver coins led to a shortage in the domestic market and necessitated the transition to paper money. The flooding of the UK economy with paper money became possible after the centralization of money circulation. The Bank of England, created in 1694 not only received the right to print paper money but also secured the obligation of the government to cover the entire issue by issuing government debt.
Thus, its holders were provided with a guaranteed income in the form of interest payments. A similar centralized model of money circulation was reproduced in the United States after the establishment of the Federal Reserve System (FRS) in 1913. Despite the fact that today the size of the US national debt has exceeded the $23 trillion mark, the fiat economy has many influential supporters given that along with the FED, the owners of American debt are private American investors and central banks of other countries. So In 2019, the US governments net interest payments on public debt amounted to about $390 billion, which is twice the capitalization of all cryptocurrencies in circulation.
However, before paper money gained worldwide acceptance It was twice anathematized. The first time this happened was in China back in the XIV century, when the inflation of paper money led to the prohibition of their subsequent issue. The paper money suffered another fiasco in 1720 during the unsuccessful experiment of the Scottish financier John Law, carried out over the financial system of France, which delayed their mass circulation in continental Europe by more than a hundred years. The transition from paper money to electronic money also began in London, where the world's first ATM was installed on June 27, 1967 . The prototype of the first debit cards appeared even earlier in 1914, when the American telegraph company Western Union introduced the card for making interest free payments. Though the card was still made of metal sheet and not plastic as it is today. Despite the widespread use of electronic money today cash payments continue to be popular not only in developing but also in highly developed economies.
In general, in the modern world, the share of cash in transactions reaches 85%. For example, cash accounts for 65%, 53% and 30% are the total value of transactions in Austria, Germany and the United States, respectively. At the same time only Norway and Sweden are conducting an experiment of complete rejection of cash where their share in the money supply has decreased to a symbolic 2.5%. Even after the emergence of mobile payment platforms such as Apple Pay and Venmo in the United States the amount of cash in circulation has consistently increased, reaching $1.7 trillion in 2019.
Money or technology
In addition to inertial barriers of a political and technical nature, the mass distribution of cryptocurrencies at the present stage is hampered by the difficulties arising from their recognition as money. Any monetary system is based on trust in the ability of money to perform three main functions - a means of payment, exchange and accumulation. The most painful for society is the depreciation of money leading to a proportional decrease in the value of the created values. Therefore trust in money is based on its enduring social significance.
Cryptocurrencies certainly represent a new word in the monetary sphere but not so much as a monetary surrogate but as a new transaction accounting technology that has the universal ability to embody the properties of money, goods, property, financial asset and payment system without responding to any of them in fully.
To draw the difference between money and technology consider the following examples, Over the past 30 years, the average cost per gigabyte of hard disk storage has dropped from $100,000 to a few cents. Does this mean that confidence in dollars has increased or information has lost its social value? No, it doesn't. Reducing the cost of storing information on a hard disk is a consequence of the development of technology and does not change the essence of money as a regulator of social interaction.
Benefits of cryptocurrencies
The main advantage of cryptocurrencies is the ability to reduce the cost of transactions and involve the widest sections of the population in financial transactions. The strengths of cryptocurrencies include decentralized (distributed) management which means that no object controls the network; global access, allowing any user connected to the Internet to participate in the cryptosystem; security by means of cryptography which protects the integrity of the means of exchange giving aggregate of their users virtually unlimited freedom of action.
In the foreword of N. Popper's book "Digital Gold", nominated by the Financial Times in the category "best business book of 2015", it is noted that the Bitcoin model is guaranteed from interference and imposition of its services by a third party from blocking and confiscation of other people's funds, excludes political manipulation and abuse associated with the ability to manage the release of money does not have points of failure bypassing the wishes of its users and does not require trust, since the operation of systems is provided by mathematics and cryptography, and not legal contracts .
One of the main advantages of the Bitcoin system and a number of other cryptocurrencies is zero transaction costs and simplified use. By doing this, they attract representatives of small and medium sized businesses as well as low-income citizens to whom access to using bank cards is limited and transferring funds through professional operators is too expensive. The flexible open source cryptocurrency enables programmers to develop these systems almost online. It is believed that Bitcoin or other companies operating in a distributed (decentralized) network cannot be shut down because they do not have a single emission center (central server).
Cryptosystem risks
The operation of cryptosystems is faulty and reveals a number of serious drawbacks. The first problem is related to the limited bandwidth of the payment system. The circulation of blockchain-based cryptocurrencies involves two main actors - miners and users. Miners serve as accountants and maintain the system infrastructure by updating the list of transactions. Users make and receive payments. The financial incentive for miners is the fees charged to users for queuing up transactions. System capacity must be small enough to generate user fees. For example, through the Visa system is charged 3526 transactions per second while through the Bitcoin system its charged 3.3 transactions. Capacity constraints overload the system especially during peak hours and increases commissions. For example, in December 2017 payment processing fees increased to $57 per transaction regardless of the purpose.
The second problem is the lack of guarantees of the finality of payments. A payment recorded in the ledger does not guarantee that it is final and irrevocable. Cryptocurrencies are held by an agreement between miners. If some of them agree and decide to rewrite the transaction history, the payment may be destroyed. In particular, a similar precedent was set on the largest Japanese bitcoin exchange Mt. Gox. In February 2014, this exchange filed for bankruptcy after the loss of 850 thousand bitcoin worth half a billion dollars, which somewhat weakened users' confidence in the perfection of cryptosystems.
The third problem is related to the huge costs of operating a decentralized payment system. In the course of competition, miners add more and more blocks to their ledgers until their profits come close to zero. The computing power of the individual mining farms on which cryptocurrencies are mined is equivalent to the power of millions of personal computers. The total amount of electricity spent on bitcoin mining in mid-2018 was equal to the electricity consumption of a medium-sized country like Switzerland. Other cryptocurrencies also use a lot of electricity. Such amounts of energy consumption can quickly turn into an environmental disaster. In addition, rechecking of all transactions is constantly increasing the volume of the blockchain. For example, simulating the spread of distributed ledger technology across the economies of countries such as the United States or China shows that even with optimistic assumptions the size of the ledger will exceed the capacity of a conventional smartphone in just a few days, in weeks it will exceed the memory capacity of a typical personal computer and in months it will be beyond the storage of information on servers. Thus, only the power of supercomputers will allow verification of all incoming transactions.
4. The fourth problem with cryptocurrencies is associated with their extreme volatility, which is due to the absence of a central issuer designed to guarantee value stability through the use of various monetary policy instruments. The most successful central banks stabilize the intrinsic value of their currencies by adjusting the supply of means of payment in accordance with the demand for them. This is in contrast to cryptocurrency, where its supply is predetermined by the payment protocol. Therefore, any fluctuation in demand leads to a change in the value of the cryptocurrency which causes its extreme instability.
So at the time of the creation of bitcoin in 2009 it cost 0.3 cents. Two years later the price of bitcoin was $2, and at the end of 2013 it was $ 1,000. In January 2015, its price dropped to $ 200 and returned to the $1000 mark only in February 2017. In July 2016, the price dropped again to $640, and by the end of 2017 it exceeded the $ 19 thousand mark. In December 2018, the price dropped to $3,400, jumped to $13,000 in June 2019, and dropped to $7,268 in December 2019. The market capitalization of Bitcoin from December 2017 to December 2019 decreased by 2.5 times - from 320.5 billion to 131.8 billion dollars, and in January 2020 it began to rise again.
The fifth problem of cryptocurrencies is their lack of well-functioning regulation and anonymity, which increases the attractiveness of this system in criminal circles, in particular for laundering illegal proceeds and financing terrorism, committing cyberattacks, organizing the sale of drugs (which, for example, took place on Silk Road, one of the most popular anonymous online trading platforms, which operated in 2011–2013).
Libra project
There is an opinion that all of these shortcomings can be eliminated , thanks to the introduction of the global currency Libra. The White Paper, the text of which is posted on the website of the Libra Association management company claims that the new currency will increase the speed of money transfers, leading to a significant decrease in the cost of borrowed resources and increase the responsibility of the financial sector in creating and offering the market innovative products. By adding hundreds of millions of new users to the Libra system for whom traditional banking services are not available today for various reasons, tens of millions of jobs will be created that will change the lives of billions of people. The involvement of regulators and experts in various industries in this project will lead to the creation of a resilient, secure, reliable, cheaper, more accessible and more connected global financial system.
Libra's creators intend to back up this currency with a reserve of real assets, and tie its intrinsic value to a basket of currencies and services provided by its operators. Currently, the list of participants in the Libra project includes two dozen companies (mostly of Anglo-Saxon origin), including technology, market and blockchain platforms (Facebook, Uber, Vodafone), as well as venture capital companies. Meanwhile, banks or companies in the real sector are not yet on this list. If the digital currency Libra is launched, 2.7 billion users of the Facebook social network can get access to it. If each subscriber makes a $1,000 payment within the Facebook network using blockchain technology then the annual turnover of this network could be $ 2.7 trillion, or 11% of the US federal debt. At the same time, the cost of Libra, as well as this entire turnover, will be tied to the dollar (or a basket of currencies, including the dollar), and therefore to the American economy. It should be emphasized that other cryptocurrencies are also tied to the US dollar, as well as many key technologies of the digital economy. Thus, American companies specializing in the creation and management of social networks offer their solutions in the monetary sphere, which, on the one hand, can be regarded as elements of the disintegration of the world monetary system, and on the other hand, as its transition to a qualitatively new level - the global one. a cyber financial system in which the United States will have an unconditional comparative advantage. The anonymous and decentralized nature of the cryptosystem participants calls into question the existence of a two-tier banking system. A global cryptocurrency opens the door to a digital hypermarket that knows no national boundaries, where today's fee and commission income of traditional payment system operators can be transformed into tomorrow's consumption of hundreds of millions of new digital economy users. Combined with Big Data, cryptocurrencies enable high-tech elites to create a payment system independent of the state and influence the behavior of certain social groups, consumers and voters.
A look from the future
It should be emphasized that the first projects of digital currencies emerged back in the 1990s. (David Chom's DigiCach, Elon Musk's PayPal, Sholem Rosen's "digital dollars"). The digital currencies were developed with the direct involvement of systemic institutions such as Deutsche Bank, Credit Suisse and Citibank.
However in 2001, after the dot-com crisis, all these projects were closed . It is rather difficult to predict the fate of modern cryptosystems given that there are already more than 5,000 digital currencies in the world and their number continues to grow. Digital currencies are only a transaction accounting technology that does not cancel competition in the field of national currencies - the dollar, euro, pound sterling, yen, yuan. To overcome the devastating consequences of the global financial crisis and to protect their national economies from the unregulated elements of the global market, the governments of sovereign states have teamed up with bankers and financiers, which has led to an increase in the trends of protectionism and isolationism in the world economy. Joining this alliance of cryptographers and programmers could strengthen digital nationalism and reverse the globalization of the Internet. However, as history shows, the economy cannot develop without a constant reduction in transaction costs and other costs. Therefore, the question of how this cost reduction will occur in the context of the growing de-globalization remains open.
Bibliography
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