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An economy needs not only growth but stable growth. And if left at their own devices markets become volatile and out of control very soon. As you are seeing with the crypto market at this moment. The early investors in the Crypto Market make money while those who are late lose their money. A perfect example of a Ponzi Scheme. But it does not mean that Cryptocurrencies in their nature are Scams/Ponzi Schemes. But, since they are left without any regulations, they have become a tool for scams. Markets if not regulated become explosive in nature very soon and eventually collapse. The 2008 financial crisis was not a product of extreme regulation but less regulation of the market by the governments.
Bitcoin was the first modern decentralized currency that became popular. But after all this involvement of financial institutions in Cryptocurrency and market manipulations to make quick bucks by the institutional firms. I don’t see the purpose for it.
But all of this is not probably the topic of today’s discussion. Decentralisation has been a discussion in the liberal world for a long time. A currency that will not be controlled by any central organisation (mainly Government and Banks) and its value will be decided by its demand. However, this concept caught fire after the financial crisis of 2008.
Someone by the pseudonym Satoshi Nakamoto presents the whitepaper titled “Bitcoin: A Peer-to-Peer Electronic Cash System” which puts the basis for the blockchain system that Bitcoin (A digital decentralised currency) will work on. The chain (process of validating transactions) worked on Proof-of-Work, a concept introduced by Adam Back in 1997.
The revolution was that after the release of these cryptocurrencies, the economic markets would drive themselves without any influence from any government or other centralised institutions, hence preventing the financial crisis and stopping the inaccurate economic policies by those who don’t understand the economy doing the society wrong. These concepts feel good in theory. But have you ever thought if this is how you want markets to work?
Let’s take a look at some examples, where a Centralised Currency justifies itself:
During Economical Crisis:
Instead of the Financial Crisis of 2008 (since many people will argue that this financial crisis was a product of government policies) let’s take a look at the aftermath of the Covid-19 Pandemic. In 2020, the unemployment rate reached 14.8% in the US. Due to market fear, there was less supply of money in the market. Most of the markets were in decline. Hence a decrease of money in the economy. If left at its own tools, the economy would have been hit with a very severe financial decline. But since the government had a tool in its arsenal which was Quantitative Easing using the issuance of currency of around trillions of dollars (the QE effort was in several installments and using multiple methods so an exact figure could not be verified). The practice was common for most nations in the world.
For Government Spending:
It doesn’t matter which country you reside in. Your country needs a government and that government will need money to work for its functions (ranging from the salaries of personnel to building infrastructure for the societies). For some countries, governments source this money from resources of the countries (oil for Burnie, Saudi Arabia, UAE), take loans from the public or other countries, and if these resources do not meet the need then your taxes.
But believe me, even your taxes might not be able to satisfy the need for capital that the Government needs. In this case, they print money (literally though the process is slightly complicated). In the case of a decentralised currency, the burden will just increase on the average public.
Monetary Policy:
After the US Government’s Coronavirus Aid and interest rate decrease to battle the low business activities due to the COVID-19 pandemic, you probably saw an increase in the inflation rate. This was because there was suddenly a lot of money in the market. The government-controlled it by decreasing the supply of money (increasing the interest rates). This is an example of contractionary economic policy. Currencies are an important tool that governments use to keep economies stable.
These are just some examples of why nations might need a centralized currency to work efficiently.
Conclusion:
Decentralisation of currency does not guarantee a better economy. However, it does not mean that we have a perfect system of economies at this moment. But Cryptocurrencies, in their current picture are not the solution we need to enhance/revolutionize the economy.
This article is not financial advice by any means. If you find any mistake or have any suggestions please feel free to contact me directly.
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