Throughout much of human history, physical money has evolved from tokens connected to goods at warehouses to precious metals to promissory notes and now into paper and plastic notes backed by central banks.
In a nutshell, any “legal tender” backed by faith can be labelled and used as ‘money’.
Ray Dalio, the co-CIO and founder of the world’s largest hedge fund Bridgewater Associates recently tweeted his thoughts on Bitcoin and as to why it may not be the “future of currency”.
Any “legal tender” that can be used to purchase or sell other goods is essentially what people can label as a currency but there are a few other things that constitute what money is.
According to textbook definitions, “ money needs to be divisible, represent a store of value as well as be a medium of exchange”.
The version of money being used nowadays is “electronic money” whereby you swipe your credit/ debit card and the person upfront gives you the good/service that you swiped your card for.
When you swipe your credit/debit card, your information is immediately sent for processing to a merchant bank, which in return sends this signal to the servers of Visa/Mastercard to check for any kind of fraudulent transaction and if the signal reciprocates in a positive manner, the customer’s query is then sent to the ‘customer’s bank’ which sets aside the funds from the customer’s account and sends this information back to Visa/Mastercard and then eventually to the merchant bank again, before the customer gets the chance to finally walk out of the store with the required items.
This entire process makes use of several intermediaries that cryptocurrencies don’t.
In essence, most cryptocurrencies like Bitcoin and Ethereum are decentralized. Monetary transactions are governed through government-controlled currencies, which cryptocurrencies don’t fall under.
Crypto transactions are dealt with through a digital ledger called a blockchain and is monitored through peer-to-peer transactions. There is technically no central authority that processes these transactions when it comes to cryptocurrencies.
Blockchain, bundles transactions into blocks which are then chained together and broadcasted to the nodes in the central network. This central network is better known as Distributed Ledger Technology (DLT).
The public aspect of blockchains generally implies that anyone can use blockchain while serving as a validating node to the system. Anyone assigned as a node can in return, act as part of that blockchain’s governance mechanism. Thus theoretically, blockchains are decentralized and resistant to undue control or influence from any single party.
In contrast, a distributed ledger generally doesn’t enable most of these public features. It can impose restrictions on its users which is why it is often referred to as a “permissioned network”. It restricts who can operate as a node and in most cases, governance decisions are left to a single centralized party.
The conflict of interest between banks, big businesses, and the government should now appear to be crystal clear. If any particular government, wants to impose a “centralized digital banknote” system combining the permissioned network feature of DLT’s and the payment mechanism of blockchain, it would mean that there would be no need for banks to act as intermediaries!
If they fail to obtain deposits, they simply cannot issue any form of loans.
People would simply utilize blockchain for transaction purposes, without having to deposit their savings with commercial banks. Only the central issuer of the “digital banknote” monitoring the system, would have all the required data to facilitate for such transactions. In most cases, this would imply one large state-owned entity.
Thus, the need for banks as intermediaries would be eliminated, driving them out of business.
Thus, in essence, cryptocurrencies can be deemed to be safe, but unless it’s regulated most governments and corporations would not accept them as a “store of value”.
