Cashless Economy, Unstable Currencies and Bitcoin

Cashless Economy, Unstable Currencies and Bitcoin

National currencies are often regarded as the store of value of national wealth. However, this is changing as virtual currencies, such as Bitcoin, bec

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National currencies are often regarded as the store of value of national wealth. However, this is changing as virtual currencies, such as Bitcoin, become more established as a store of value in the financial system. However, holding financial values in a series of binary digits also exposes the financial system to the same vulnerabilities that afflict cyberspace, including cyber intrusion, data corruption, and data manipulation as was witnessed in the recent U.S elections.

Nowadays, if Warren Buffet wanted to become Leonardo da Vinci, then he would need to carefully choose the canvas on which he is going to paint Mona Lisa. The fabric of the canvas is the key element that determines whether the investment done, that is the painting of Mona Lisa, will last for any significant time. A bad or poor quality canvas will disintegrate and the painting, and all the energies put into creating the Mona Lisa, will be wasted. This highlights the need to make appropriate choices. The same applies to the sphere of finance, where investors are required to choose the right currencies to serve as both medium of exchange and store of value. This is because the currency selected determines how much an investor is exposed to the tumultuousness of both the financial markets and international trade.

The way three currencies have fared this year serves to highlights the nature of money. These currencies are the British Pound, the Chinese Yuan, and the Indian Rupee. All these currencies are fiat-money, that is paper money, and their strength and value vis-a-vis other international currencies is determined by market dynamics, and the degree of state regulation. Therefore, each of these currencies has experienced a degree of depreciation, which has automatically resulted in domestic inflation (in their respective countries), following slowdown of international trade; and weakened (in case of Britain), or inappropriate (in the case of India) state intervention through currency regulation policies.

Reserve currencies have earned the confidence of investors due to their stability, which is supported by good economic management. The British Pound was the reserve currency of choice till 1966, when it was devalued. To date, the value of the pound has fallen by 55 percent, from its pre-1967 exchange rate of a Pound for US$2.80, to the present exchange rate of a Pound to US$1.26. Despite the assurance given by Harold Wilson, the U.K Prime Minister, in 1967, that the devaluation of the Pound will not significantly affect the lives of ordinary Britons; it was clear that the inflation rate had started to rise rapidly in 1967 before peaking at 22 percent in 1975. Presently, the UK is trying to dampen inflation and shore up confidence in its financial system by managing imports and cost of overseas holiday trips; but this is unlikely to have any tangible benefit, apart from rhetorical assurance that is akin to that of fake news.

However, Britons are confident that their economic indicators including low unemployment rates, muted inflation, and strong consumer confidence, are testament to the resilience of their financial system, which can shield them from the aftereffects of political uncertainty, especially following sharp political polarization caused by the Brexit vote. Even so, the Pound lost 15 percent of its value against the American Dollar in 2016, and this rate of currency devaluation indicates that the British economy is under stress. Still, the Pound can float freely, even in volatile circumstances, and this allows the economy to have its own critical pressure-release mechanism. The same cannot be said of the Chinese Yuan.

To date, the Yuan has lost 6 percent of its value against the American Dollar as the Chinese economy slows down, and the state accumulates debt. For this reason, the economic indicators of China are not quite promising. The Yuan can be allowed to float freely, but Chinese authorities fear that this will lead to further devaluation of the currency, and further loss of investor confidence which will be occasioned by sharp outflow of their investments. State authorities have intervened and enacted and implemented policies and regulations designed to shore up the Yuan both at home, and in the international market. The Yuan is therefore a managed currency, and the actions of the Chinese government have further placed the economy under more stress, as the international market, and their international trading partners in particular, are unable (or have refused) to take the pressure off the Chinese market.

India faces a similar predicament after the authorities decided to withdraw the 500-rupees and 1000-rupees money notes, with very short notice, from circulation so as to reduce corruption, as well as crackdown on block money and illicit trade. To worsen matters, the authorities were unable to efficiently manage the transition as the amount of new cash was insufficient to replace the old notes that were being taken away. Consequently, the stock market dipped by 7 percent, and the price of gold increased by about 50 percent. However, this move by India was necessitated by the need to transition the nation to a cashless-economy.

India boasts of 1 billion mobile phone users, and 670 million people who have been issued with debit and credit cards. India plans to follow the path of China where mobile phone payments made through mobile phone apps allow people to purchase almost anything, down to household groceries.

The value of Fiat money, or printed currency, is determined by the level of confidence that both investors and general population have in the government issuing the money. However, the rise of virtual currencies backed by decentralized systems have led to monetary value being held in binary codes that is stored, and transacted through, computer systems. Even so, computer systems can be hacked and their data manipulated, and this exposes the financial system to the pitfalls of cyberspace. For example, there was a year when Bitcoin gained 76 percent against the American Dollar, before it suddenly came crushing down. Therefore, the adoption of virtual currencies, and their use alongside national currencies, is bound to affect the finances of ordinary people.