Controversy on adoption of cryptocurrency as legal tender

24th of February 2022

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Cryptocurrencies are digital currencies that can be used to buy goods and services but use online ledgers with strong encryptions to secure the transactions. Cryptocurrencies work using a specialized technology called a blockchain. The blockchain is a decentralized technology spread across many computers that manage and record transactions. Blockchain

The main appeal of this technology is the security it upholds. Cryptocurrencies receive much support from enthusiasts for several reasons.

There was once a time when the barter system existed in the world. Someone who would like to sell or exchange their products would have to find another person willing to trade those products for the exact other products they were looking for. This is called double desire coincidence.

Fiat money solved this problem by creating a store of value. Cryptocurrency is therefore expected to relapse fiat just like fiat replaced the barter system. It provides an alternative store of value that not only allows users to pay for items but also allows them to pay for other currencies. The innovation has also been utilized for applications other than money, for example, machine-to-machine trades in the IoT supply chains, advanced character management.

Just like the unregulated Mortgage-Backed Securities and Collateralized Debt Obligators that was partly blamed for the 2008 Global Financial crisis, cryptocurrencies have proven too attractive for banks and other big financial institutions to ignore. 

For example, in 2019, JP Morgan, a multinational bank in New York, led by the Bitcoin supporter, Jamie Dimon announced that it was revealing its Cryptocurrency, "JPM Coin", which would be used for institutional investor exchange settlements.

Reason behind Bitcoin's popularity

Some crypto enthusiasts believe that cryptocurrencies are the future currencies and ones with the ability to replace fiat money. They think that it can efficiently fulfil the three primary functions of money; unit of exchange, store of value, and medium of exchange.

Other proponents are appealing because the decentralized nature of cryptocurrencies removes central banks from controlling the supply's money. Over time, these banks tend to impose monetary regulations to reduce cash in-store, causing inflation.

Others believe that cryptocurrencies are a more secure payment system than traditional money. The technology behind cryptocurrencies, the blockchain, is decentralized, meaning a particular person does not control it. This makes it more secure.

How Cryptocurrencies work

Cryptocurrencies rely highly on encryptions for the sake of security, thus the word crypto. Before the invention of Bitcoin, many issues were surrounding its predecessors. The problem of double-spending was prevalent.  A double-spending attack usually occurs when the user manages to spend his unit, obtain service or goods and then manipulate the transaction ledger to reverse the transaction.

Blockchain produces digital records that can only be added to transactions, licenses, or contracts rather than altered or removed. As crypto-converts insist, this independent transaction log is much more reliable than paper records or institutional digital accounts that could be compromised.

The platform basically archives both the buyer and seller's details and records it as a string of letters and numbers created by a complex mathematical function. Each hash is directly connected to the hash before it, so immediately after a hash is changed, unauthorized modifications to the ledger may become apparent.

The innovation takes out the part of the broker in transactions. There is a requirement for any non-money exchange in the conventional monetary framework; at any rate, one 'confided in go between' or the third party. In any ledger technology, the cycle of check and record-keeping is finished by every individual who takes part in the framework in a decentralized, open, and straightforward way. Simultaneously, the innovation gives a tenable answer for the twofold spending issue, i.e., cash executed digitally isn't spent twice.

Cryptocurrencies work in a closed structure, which means that there is a fixed number of them, and it is only possible to build new units according to a specific set of guidelines. Some currencies have a software-enforced limit on how many units can be produced, such as Bitcoin. This limited supply, particularly as the currency gains popularity among day traders, makes each unit more valuable.

Crypto seemed a tad shady in its early days, linked with criminals and money launderers. Before the FBI shut it down in 2013, a black market operation, the Silk Road, used Bitcoin as its currency of choice. The Silk Road shutdown

Potential challenges of digital currencies

The emergence of crypto-currency-related technology has some consequences for the macroeconomy, money availability, and the financial system. Blockchain systems minimize the cost of transactions, and this will improve social welfare.

However, the surge of this technology also brings in new threats and concerns. In the past few decades, cryptocurrencies have been an essential topic of policy debate. Notably, they have raised concerns about security regarding market integrity and financial stability.

Risks posed Cryptocurrencies to financial stability

Cryptocurrencies pose a danger to financial stability. The prices are incredibly unpredictable. This could theoretically threaten the financial system's strength, which would result in a collapse of the market.

Currently, however, the aggregate value of digital currencies in circulation appears too small to pose a significant threat the financial stability; they will, in any event, be restricted to individuals’ owners of the cryptocurrencies.

Digital currencies are not playing an essential role in the economy because they meet a limited number of customers. However, the risk of system-wide fraud and disruption occurs if this number increases. Thus, the real danger lies in being systemically relevant in digital currency. 

However, while the banks have "minimal" direct exposure to cryptocurrencies, organizations should still conduct comprehensive "due diligence" at a minimum and disclose any vulnerability to crypto assets in order to mitigate any potential risk to financial stability.

To overcome financial stability, it is critical to investigate financial strength issues identified with these cryptocurrencies and ensure that the macro-prudential guideline is satisfactory both at the public and worldwide level.

This calls for global coordination for those crypto assets that present new difficulties to convectional monetary guideline types and fall outside the current administrative framework.  Banks should also have a "clear and robust" risk management strategy to deal with the "high degree" of risk posed by cryptocurrencies.

The risk to monetary stability

The supply of digital currencies is foreordained and represented by fixed calculations. Accordingly, the inevitable all-out inventory of cryptocurrencies is set; there is no discretion in its determination.

This might actually mean various issues for money-related security since this fixed stockpile could add to deflation or unpredictability in costs and real activity since supply can't adjust to the demand. The most dangerous that could, in principle, be presented by computerized monetary forms to financial security is a disintegration of the capacity of the national bank to impact total demand as a feature of its transmission to accomplish its inflation objective.

To survey if cryptocurrencies are a danger to financial dependability, it is imperative to see how much they are utilized. On the off chance that their use isn't broad, at that point, the national bank can, in any case, influence total demand and accomplish its money-related approach targets. On the off chance that the economy became "bitcoinised," that would represent a genuine danger for a money-related approach. Nonetheless, presently, it doesn't appear to be that this is a possible situation.

Money Laundering

A few onlookers are worried that digital currency exchanges' decentralized nature may also give a way to hoodlums to conceal their unscrupulous monetary dealings from authorities. Since Bitcoins creation, several high profile cases of criminal fraud have shed a light on the possible risks of the use of blockchain.

An example is the 2011 Silk Road saga.  Silk Road was a virtual marketplace that operated out of the dark web, best known for selling illegal drugs. It was a secret Tor service that would allow users to browse it anonymously and safely.(Stab, 2014).

A Russian, Ross William was arrested and close to one billion dollars’ worth in Bitcoin were seized by the US Government. The on-site transactions were done using Bitcoin, which revealed the dark side of cryptocurrencies.

Terrorist use of encrypted currency does not indicate that invention is a net negative for society since the incentives it offers could outweigh the social costs of the increased misconduct facilitated by digital currencies. Notwithstanding the law requirement's capacities to examine wrongdoing, the public authority should have specialists subject digital money trades to the guideline that would reveal the dubious movement.

Tax evasion

According to the IRS, crypto-to-crypto and crypto-to-cash transactions are taxable events.  But this is an expense that traders try their best to avoid. It is not shocking that tax avoiders have been attracted by a coin designed to function beyond governments and banks' domain.

Some say that the essence of the technology itself is libertarian, allowing citizens more rights to manage their funds.

Bitcoin and more private currencies such as Monero enable individuals to behave like international companies, giving average individuals without depending on financial institutions the intriguing possibility of covering untaxed government revenue. Crypto is like a mega tax haven from this viewpoint, with no taxes, total anonymity, and the added advantage of not relying on a bank.

The blockchain-based cryptocurrencies decentralized, but they were practically invisible and left no trace of transactions. The central point of interest that should be tended to is the anonymity encompassing cryptocurrencies. This anonymity, shifting from complete obscurity to pseudo-anonymity, keeps cryptographic money exchanges from being sufficiently checked, permitting obscure deals to happen outside of the administrative edge and criminal associations to utilize cryptocurrencies to acquire simple access to "clean cash".

Anonymity is additionally a significant issue concerning tax avoidance. At the point when a tax authority doesn't have the foggiest idea who goes into the taxable exchange, in light of the anonymity in question, it can't distinguish nor sanction this tax avoidance.

As of 2016, the Internal Revenue Service had come to realize that digital currency gains were being underreported, finding that somewhere in the range of 2013 and 2015, only 800 to 900-assessment forms proclaimed such payments. At that point, digital currency trades were for the most part not detailing exchange data to the Internal Revenue Service.

The  IRS started court procedures against Coinbase— the most prominent cryptographic money trade working in the US— trying to propel it to turn over client data so the IRS could decide the sums citizens owed (Russell Brandom, 2017).  Coinbase opposed turning over the data until the court, in the long run, ruled against it in November 2017. Coinbase tax fraud investigation

The trouble the IRS experienced with the most significant and most notable digital currency trade may propose that people who try to avoid paying taxes may look to cryptographic money as a potential road to take.

Other potential risks

For cryptocurrencies, there is no customer security. For example, there are no discounts if there is an issue among buyers and retailers. Laws may exist; however, they would be hard to implement. On the off chance that it was named in cryptocurrencies, Purchaser credit would be hard to get.

There could be other potential dangers related to massive volatility in the cost of cryptocurrencies, the absence of straightforwardness about the makers of cryptocurrencies and their thought processes, the issues of security and potential hacking, and the simplicity with which digital cash like Bitcoin can be utilized to fund unlawful exchanges such purchase of weapons and drugs.

Potential Benefits of cryptocurrencies

There are several inherent benefits of transacting cryptocurrency over fiat currencies due to these exhibit's unique characteristics.

A more distributed and complex payments mechanism could theoretically be generated by the technologies underlying crypto assets. They use so-called distributed ledger (DLT) technologies (or blockchain). In a decentralized payment system, this technology requires a digital currency to be used.

According to Luno CEO, Marcus Swanepoel “We've learned how the new financial system can fix issues that none else does, from the very serious, such as unbanked banking, to the seemingly insignificant, such as offering a more effective way to purchase a vehicle”.

Asset Transfers

By paying the seller by Bitcoin, Bitcoins can be used to transfer asset ownership from one name to another name. It all occurs in the ecosystem of the blockchain. This makes it easy for you to execute purchases quickly and efficiently. The cryptocurrencies are planned to add permissions by third parties, which can be finished by the future date.

Simple Transactions

There are many transaction fees that you must pay for each transaction if you are doing business or dealing with brokers or legal representatives. Besides, a lot of paperwork, brokerage costs, commissions, and other things have to be met.

Cryptocurrencies eliminate the need for the middle man. The exchange will take place on the safe network one by one. The transfers would be transparent, and the audit trails would be easier for you to create.

Impact of regulations

Perhaps the only means by which cryptocurrencies can relapse paper currency is through imposing regulations. Currently, cryptocurrencies are not recognized as legal tender and are therefore not regulated.

Regulations provide order such that a system can operate more consistently, safely, and with predictable effects. This suggests that cryptocurrencies should be seen as a natural, less dynamic risk that can be handled with advanced technologies and better security in a more controllable setting.

Regulations will depress the market prices of cryptocurrencies in the short term. Although, in the long run, controls are supposed to balance the economy and make it a better investment if done correctly.

The regulation of Bitcoin has the potential to make the economy much better. It's still going to be a volatile gamble, but with consumer security, the market is less likely to be able to face too much foreign abuse. Overall, for individuals who wish to engage in cryptocurrencies, this is a positive thing. More stable markets mean more public secrecy, which also ensures that rates increase over time.

Conclusion

The possibility of cryptocurrencies replacing paper currency is still blurry given the many inherent risks that come with its adoption. With its forecast, Deutsche Bank is dead on. But, there are always tricky forecasts.

Right now, everybody needs to believe that we can taste the decentralized world, but things take time. There's one major unknown x-factor for Deutsche Bank's forecast to come true. How are policymakers supposed to handle Cryptocurrency to keep transfers legal and secure? We need knowledgeable decision leaders who are going to legitimize cryptocurrencies.  They must first become standard in the eyes of policymakers and the government.

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