Cryptocurrencies are digital currencies that have recently experienced a boom in the global financial industry. First appearing in 2009 with the creation of Bitcoin, cryptocurrencies were quickly heralded by crypto-enthusiasts as a way to “democratize the world’s financial system” by excluding governments and financial institutions. Instead, cryptocurrencies use blockchain technology, a “decentralized” database consisting of digital records of all transactions. Today, there exists over 4,000 types of cryptocurrency, with Bitcoin, Ethereum, Tether, and Dogecoin leading the market.
Cryptocurrency, as a democratized, decentralized, and secure alternative form of currency, has brought the potential to transform the world’s financial system. The accessible, financially inclusive, and highly traceable characteristics of crypto allow people to engage with a financial system they may not otherwise have access to, simply requiring a mobile device and Internet connection for the transfer of credits.
Crypto-Economy: El Salvador
In June of 2021, El Salvador became the first country to “adopt [Bitcoin] as a legal tender,” meaning that the crypto-coin must be accepted by businesses in exchange for goods and services, along with the U.S. dollar, which has served as the country’s official currency since 2001.
This law was introduced by President Nayib Bukele in an attempt to “attract investment” in the nation and increase people’s access to the country’s “formal economy.” Bukele claims that this newly introduced law will give 70% of the nation’s citizens without a bank account access to financial services. Additionally, the law will aid the nation’s citizens in the process of transferring foreign payments, which makes up almost a quarter of El Salvador’s GDP. Moreover, Bukele put forward that “if just 1% of Bitcoin is invested in El Salvador, the country’s GDP would surge by 25%.” The bill passed with 62 out of 84 votes in Congress.
Bitcoin is set to be officially introduced into the economy by September 7, despite its volatile and uncertain nature, and its potential to interfere with existing frameworks of financial institutions to manage currency risks. However, with 40% of the country’s population living in poverty, cryptocurrency paves a path for Salvadorans to gain access to financial services, and thus the formal economy. Through its digitalized and decentralized form, cryptocurrency may bring significant opportunities for increased investment in El Salvador’s economy.
Struggling Economies and Political Traction: Nigeria
Despite a recent ban on the use of cryptocurrency in Nigeria, the country “ranked 8th … in cryptocurrency adoption” globally. Many Nigerians have turned to cryptocurrency as a result of the country’s struggling economy and high inflation rates. In light of the increased demand for U.S. dollars, the blockchain-based coin has served as an avenue for Nigerians to purchase them.
Cryptocurrencies have also aided Nigerian citizens in their political objectives, gaining traction among supporters of the movement against police corruption. As protests against the special anti-robbery squad (SARS) arose again in October of 2020, crypto wallets were used to fundraise the #EndSARS movement after “the coalition’s bank accounts were frozen.” Nearly half of the money collected for the movement was made through cryptocurrency.
A Means for Innovation: UNICEF
National governments and private citizens are not the only ones taking advantage of cryptocurrencies’ benefits, with international organizations also hopping on the trend. The CryptoFund was initiated by UNICEF in October of 2019. This fund allows donors to make digital contributions using cryptocurrency and hold those transactions as public record. Through this initiative, UNICEF has invested cryptocurrency into “startups in developing and emerging economies.”
The Bitcoin serves as a highly traceable currency in which “UNICEF, donors, recipients, and the public can track where the money is going and how it is being spent, providing an unprecedented level of transparency in the funding and NGO space.” Additionally, the currency permits UNICEF to trace where these funds were allocated following money transfers to their recipients.
Crypto has been similarly utilised to promote “greater financial inclusion,” as well as safe and secure access to “decentralized financial instruments.” In supporting up-and-coming tech startups in developing economies, crypto provides a process that is completely independent of central banks and governments.
Sustainability: A Downfall of Cryptocurrency
A large issue with cryptocurrency is its energy consumption, which stems back to a matter of security. The currency’s digitized form allows for double-spending, which occurs when “a coin [is] used more than once.” To ensure that double spending is not carried out, all transactions go through an auditing process, in which they are verified and updated in the blockchain network.
The verification process is carried out through the work of bitcoin miners. The mining requires computers to solve complex mathematical puzzles generated every 10 minutes, in order to ensure that the blockchain entering into the network is secure. As each transaction is verified, miners are rewarded with bitcoin.
This large-scale interconnected network consumes large amounts of energy as it uses highly sophisticated computers to solve these complex computational problems. It also requires every part of the network to be updated with the same list of the verified transactions in order to prevent this form of theft. This is increasingly the case as prices of the coin rise and miners are eager to reap the benefits
With this blockchain technology, Bitcoin itself uses over 116 TWh of energy per year, which corresponds to 0.5% of the world’s electricity consumption. Moreover, Bitcoin would be the 33rd biggest energy consumer in the world if it was a country. As a result, there have been increased regulations on crypto-mining in the United States, while China has fully banned it.
A Different Kind of Digital Currency: China
China banned the mining and trading of cryptocurrency in May of 2021 after the country did not reach its climate targets, which it claims is due to crypto-mining. In the past, China has mined roughly 70% of the world’s Bitcoin.
Instead, China introduced its own digital currency to function as electronic money, both within the country and for international use. Unlike Bitcoin, the digital yuan is controlled by the country’s central bank, and may even facilitate monitoring and tracking by the Chinese government.
This form of digital currency brings up an alternative, and maybe even a competitor, to cryptocurrency, posing the matter to other regions of the world to make similar progressions in the global financial system.
What Could Cryptocurrency Do in the Future?
Financial inclusion, accessibility, and traceability are among the characteristics that have accounted for crypto’s success to date. Cryptocurrency holds the potential to propel developing countries and struggling economies forward, and even serve as an avenue for economic and political objectives to be carried out. By cutting out institutions and governments, the currency’s decentralized form allows for more equitable financial opportunities.
The next step would be advancing the network and blockchain technology used to be more energy efficient. As the blockchain-based coin gains more traction in the global financial industry, we may find benefits from this potential future of global currency trade, one of which is already beginning to bear fruit.