Is it time to say goodbye to physical cash?

Money has taken many forms through the ages: shells, wheels, beads and even cows. Here’s what it means, it’s a commodity, accepted by general consent as a medium of economic exchange. Some of its characteristics are general acceptability, profitability, durability, portability, limited supply, and uniformity.

Most modern paper currencies are fiat currencies. This currency is a government-issued currency that is not backed by a commodity such as gold. The value of fiat currency is derived from the relationship between supply and demand as well as the stability of the issuing government, with that being said, it gives the central bank greater control over the economy because they can control how much money is being printed. The real danger attached to this, is over printing that will result in hyperinflation.

Cryptocurrency

Cryptocurrency, mostly referred to as “crypto” is a medium of exchange, like money, but digital. It is designed to be used over the internet, you can use crypto to buy regular goods and services, although most people invest in cryptocurrencies as they would in other assets, like precious metals or stocks.

The main point of crypto is to fix the problems of traditional currencies and attempt to solve one or more real-world problems by putting the power and responsibility in the hands of the currency holder. All of the cryptocurrencies adhere to the priorities and functions of money.

The idea of crypto first began in the late 1980’s, this idea was made for a currency that could be sent untraceably and in a manner that did not require centralised entities (banks). In 1995 an American cryptographer implemented an anonymous cryptographic “DigiCash”. It was an early form of cryptographic electronic payments which required user software to withdraw from a bank and required specific encrypted keys before it could be sent to a recipient.

The cryptocurrency markets are currently all over the place, while that is the case, one should bear in mind that aside from the more well-known Bitcoin and Ethereum, there are a number of high quality digital token and coin issuers, with excellent backers, systems and management.

Ten thousand Bitcoin for 2 large pizzas?

The idea seems laughable nowadays, but this is considered the first real-world Bitcoin transaction in history. Now famously known as the “Bitcoin Pizza Day” May 22, 2010, was the first time Bitcoin was used to purchase something tangible.

Bitcoin is an unregulated peer-to-peer digital currency (meaning there is no middleman or bank), the name of the best-known cryptocurrency, the one for which blockchain technology was invented. Bitcoin has inspired hundreds of imitators, but remains the largest cryptocurrency by market capitalisation, a distinction it has held throughout its decade-plus history.

Bitcoin achieves elimination of intermediaries with the help of its underlying technology, blockchain. Normally if you have to transfer funds to someone else, one of the possible ways is by giving physical cash or alternatively, using a trusted intermediary, usually a bank. When intermediaries are involved, there are transaction costs and various documentation needed e.g., Identity document or passport and proof of residence. With Bitcoin you can create a free wallet by downloading the Bitcoin program and all you need is a smartphone and internet access.

Ethereum and smart contract

Ethereum, invented by programmer Vatalik Buterin in 2015, on the heels of Bitcoin, is the second largest cryptocurrency by volume. Instead of creating value as a “digital gold” like Bitcoin, Etherium is a software platform that runs on a blockchain. Users can interact on the platform using “ether”, the cryptocurrency associated with Ethereum. Users are also able to buy and hold it as a store of value. Although Ethereum is usually used by developers, there are people who also invest in the crypto for its potential to be worth more over time.

Think of Ethereum like a smartphone, developers are able to build apps on smartphones, similarly to how they are able to build apps on Ethereum, though they are geared towards crypto users. A developer can create an app, which other users can in turn use to lend and borrow. It is all powered by the idea of smart contracts. 

Smart contracts perform the function that would be normally performed by a third party, people can complete direct transactions over the network. Peer-to-peer lending is gaining popularity on Ethereum as we speak. A lending app developed on the Ethereum network allows individuals to lend money to one another without involving a bank. The smart contracts that power these apps are basically algorithms designed to perform a specific function when certain conditions are met. In the case of a peer-to-peer loan, the contract will fire off the result (lend the money) as soon as the collateral is placed into the correct wallet or account. The benefits of using smart contracts include speed of execution, lower fees and lack of human error and/or bias.

Defining blockchain technology and its uses

While cryptocurrency is a novel and existing asset class, purchasing it comes with a number of risks, so doing in-depth research before investing would not be a bad idea. Through conducting your own research, you will most likely come across the term “blockchain”. Bitcoin uses blockchain technology as its transaction ledger, almost like the engine that runs bitcoin.

A simple way to understand blockchain technology is a GoogleDoc. When we create a document and share it with a group of people, the document is distributed instead of copied or transferred. This then creates a decentralised distribution chain that gives everyone access to the document at the same time. No one is necessarily locked out and awaiting changes from another party while all modifications to the document are being recorded in real-time, making changes is thus completely transparent.

Arguably, the most logical use for blockchain is as a means to expedite the transfer of funds from one party to another. Payment processing and money transfers can be settled in a matter of seconds, with that being said, blockchain can also be a perfect way of backing up data. Even though cloud storage systems are designed for that, they are not immune to hackers or infrastructure problems, and it would not be a bad idea to use blockchain as a backup source for cloud data centers.

This technology can also be used to monitor supply chains and it can also assist businesses and customers to view how products performed from a quality-control perspective as they travel from their place of origin all the way to the retailer. Food safety can also be included, allowing food to be traced from its origin to your plate. Should there be a food-borne illness, blockchain technology would allow the source of contamination to be found considerably quicker than it can be traced currently.

In a world with growing internet access, copyright and ownership laws on music and other content have become blurry. Those copyright laws would be beefed up, ensuring that the artist or creator of the content being purchased gets their fair share when coming to digital content download.

There are a number of benefits for this upcoming technology, including digital voting, real estate, land and title transfer, medical record keeping, prescription drugs tracking as well as tax regulation and compliance.

The future of cryptocurrency

It is with no doubt that people’s interest in crypto has skyrocketed, it has definitely become a hot topic not only amongst investors but in popular culture too. Cryptocurrency has become a global phenomenon in recent years, although much is still to be learnt about this evolving technology, there are a number of concerns and worries around technology and its capacity to disrupt traditional systems.

Crypto investors currently have little to no protection in the marketplace, as there is no regulatory framework in place to ensure protection of assets. As cryptocurrency transforms from speculative investments to a balanced portfolio stablemate, it continues to gather pace, but governments around the world remain divided on how to regulate the emerging asset class. It is without a doubt that regulation of crypto remains paramount in order to gain investor confidence and long term sustainability.

The patchwork of regulations in other countries means that cryptocurrency are subject to different classifications and tax treatments around the world. Recent findings on cryptocurrency suggest it’s not a matter of if further regulation will be coming, but when. The US has a dual system of governance, under which different states can have different laws for cryptocurrency but the overall sentiment in the country remains positive towards the trading community.

Conclusion

It is uncertain on how the future can look like for crypto, it is difficult to predict where things are headed in the long term. Lawmakers across the world are trying to figure out how to establish laws and guidelines in order to make cryptocurrency safer for investors and most importantly, less appealing to cybercriminals.

But in the same sense, we could wake up one morning and discover that crypto has been banned by the developed nations and has become totally worthless. Having said that, never put crypto investments above any other financial goals like saving for retirement and paying off high interest debts. It is advisable to only invest what you are prepared to lose and stick to more conventional investments for long-term wealth building.

We know that crypto holds immense potential for spurring economic growth, improving financial inclusion and enhancing privacy and security. Even for those of us who are sceptical of the benefits of crypto, blockchain shows a lot of promise for a variety of useful applications. Cybersecurity will only become more challenging as technology advances, blockchains unique implementation of cryptography and record keeping is sure to become a necessary tool in order to keep track of data and secure it. There’s definitely a gap for assisting policy makers, regulators and individuals to understand the benefits of crypto; by educating people about crypto we can help empower them to participate in the crypto ecosystem for the benefit of all. I look forward to seeing what scientists, innovators and developers will do with blockchain technology in the coming years!

Author: Thembi Makhado

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