Keeping up with cryptos

Bitcoin, Ethereum and Dogecoins are among a number of cryptocurrency names which have become unavoidable in most finance-related conversations. 

But what is a cryptocurrency? 

Simply put, it is a digital currency. It, however, differentiates from electronic currency — the numbers we are used to seeing in ATM machines — in the sense that it never takes physical form.

The first ever cryptocurrency to be created was Bitcoin. Launched in 2009, it soon became the most traded and well-known among all its counterparts. 

Its origins, however, remain cloaked in mystery. As far as anyone knows, it was created by either a computer programmer or a group of programmers. The name associated with the coin is Satoshi Nakamoto, whose actual identity has never been verified.

Over the years, cryptocurrencies have grown in prominence. There has, however, been a strict resistance to it. Central banks around the world have baulked at the idea of having an unregulated currency circulating the markets. 

But there is a change coming as more and more digital currencies are being accepted by the world. 

A digital world

In January, El Salvador, which became the first country in the world to recognise Bitcoin as a legal tender two years ago, approved a law that would regulate the issuance of other digital assets by both state and private entities. 

The U-turn was in the making. As the world moved towards more digital transactions, followed by a boom in in-game purchases, cryptocurrencies were becoming inevitable. 

At this point, central banks around the world started mulling Central Bank Digital Currency (CBDC). 

A CBDC is a digital currency that is issued and overseen by a country's central bank. It's like any other crypto, but with the full backing of the government and less privacy. 

More than 100 countries are currently exploring CBDCs, but only a handful have concrete plans. 

Places with a CBDC already available are: the Central Bank of The Bahamas (Sand Dollar), the Eastern Caribbean Central Bank (DCash), the Central Bank of Nigeria (e-Naira) and the Bank of Jamaica (JamDex), among others.

The Federal Reserve issued a report earlier this year that said "a CBDC could fundamentally change the structure of the US financial system".

Resilient, safer

"Central banks are rolling up their sleeves and familiarising themselves with the bits and bytes of digital money," said Kristalina Georgieva, managing director of the IMF.

During a speech, she said, "If CBDCs are designed prudently, they can potentially offer more resilience, more safety, greater availability, and lower costs than private forms of digital money. That is clearly the case when compared to unbacked crypto assets that are inherently volatile.

"And even the better managed and regulated stablecoins may not be quite a match against a stable and well‑designed central bank digital currency. We know that the move towards CBDCs is gaining momentum, driven by the ingenuity of central banks," Georgieva added.

Noting the importance of cryptos, she mentioned the digital renminbi [called e-CNY,] in China, which "continues to progress with more than a hundred million individual users and billions of yuan in transactions".

She also highlighted three keys to a stable crypto: cryptocurrencies tailored to fit individual countries; importance of financial stability and privacy considerations; and balance between developments on the design front and the policy front.

With pros come cons

Another prospect of cryptocurrency is that it can provide financial inclusion to those who are unbanked. According to the World Bank, around 1.7 billion people do not have access to a bank account. 

Cryptocurrencies can provide a way for these individuals to participate in the global economy and access financial services.

However, there are also several challenges associated with cryptocurrencies, one of the biggest being its volatility. 

Cryptocurrencies can experience extreme fluctuations in value in a short period, which makes them risky for investors. This volatility is partly due to the lack of regulation, which has led to fraudulent activities and scams in the cryptocurrency market.

Another challenge is the lack of understanding and education about cryptocurrencies. Many people still view them as a speculative investment rather than a legitimate currency. This has led to skepticism and resistance from governments and financial institutions, which has hampered the adoption of cryptocurrencies.

While cryptocurrency has many prospects, it also faces several challenges. The key to the success of cryptocurrency is to address these challenges and create a regulatory framework that fosters innovation while protecting consumers. 

As the technology continues to evolve, it will be interesting to see how cryptocurrency shapes the future of finance.