Supranational Solutions: How international governments can cope with the blockchain and cryptocurrency regulation conundrum (pt. 1)
Contemporary perspective: What are cryptocurrencies?
Paper money is essentially an I.O.U. Open your wallet, pull out a bill and look at what is printed on it. Aside, of course, from the picture of an esteemed person from the country the money comes from and the valuation of the bill, there will be an explicit explanation that the bill in your hands guarantees you access to the value printed on it from a central bank. The bill is just a representation of the value it holds, promised by the bank it came from.
Have you ever stopped to think about what the value of money really is? Is it the total sum of value you hold in your hand in bill form? Is it the future promise of real value; always in the future and never in the present? Before there were bills, people used chunks of metal such as copper or gold as their currency. But what even is the value of that? Gold is fairly useless in a utilitarian sense and copper is best used as piping for a house. At least since the modern financial system had been first established piece by piece in Italy with double-entry bookkeeping, society has accepted the value of money for what it is and as it is. Value fluctuates via inflation and deflation, sometimes rapidly and sometimes prolonged.
Many issues face modern and post-modern financial systems and the people who use them. Granted, there were scammers using fake gold and painting inferior metals the color of copper to fool unsuspecting buyers. There are counterfeiters today making fake currency in the guise of US dollars or Korean won. Therefore, maybe the value of money is the trust that is put in it to deliver the value it promises. If that is the case, then what happens when a country deliberately devalues or overvalues its currency? Or what would happen if a country could not actually deliver on the promise of value of their printed currency? Can that money be trusted anymore? Furthermore, how can money be trusted when the country it comes from is irresponsible with its markets and banking system by allowing catastrophe to strike?
For some time there has been a viable solution to the money problem. That solution is virtual currency, otherwise known as cryptocurrency, a type of digital currency. Unlike checking accounts and e-Money services, which are also electronic, cryptocurrencies are largely unregulated, created independently from nations’ central banks, disengaged from customary financial institutions, without borders, and lacking any implicit or explicit government guarantees as to their acceptability (e.g., legal tender) or value. A cryptocurrency can have varied and numerous features, focuses, and functions.
The first and still the most important crypto is Bitcoin. This cryptocurrency was designed with blockchain technology to ensure complete security and trust in the currency. To date, that blockchain has yet to be hacked or compromised which is more than can be said about many major financial institution. The blockchain adds trust to the system by preventing individuals from publishing false transactions on its immutable record. It is also decentralized, meaning that no one person or group of people has control over the value or trading volume of the currency. Finally, the fees for trading Bitcoin are ideally quite low, far lower than the fees incurred by banks for wiring money across borders, investing in various funds, or transferring funds to different domestic accounts.
There are currently well over a thousand types of cryptocurrencies to choose from. While they all function essentially the same way, as a way of making transactions over a blockchain, they come from some very different types of blockchains that serve a wide array of functions in various fields of industry and labor.[1] There are closed blockchains used only internally in large companies such as Samsung to streamline supply chain data. The open blockchain Ethereum allows users to establish smart contracts, which are unbreakable contracts between two or more parties.
It is expected that we will see a veritable explosion in the adoption of blockchain technology in the coming decade as they are capable of vastly improving efficiency in the transfer of data. A few problems, however, have arisen because of the increasing adoption rate of blockchain technology. Some people decry the lack of security measures to protect traders. Others are worried that the global financial systems are threatened by the disruptive nature of blockchain. These two issues point to the room for improvement within the blockchain field, and that blockchain technology will usher in a new era of innovation in society, but it is up to the world’s governments to facilitate that development.
To be continued as part of a series.
[1] John Marthinsen, Virtual Currencies, (Thousand Oaks, SAGE Publications Inc.) 3553-3554
