Digital currencies could help solve cryptocurrency dilemma
Barry He


Editor's note: Barry He is a London-based freelance columnist. The article reflects the author's opinions and not necessarily the views of CGTN.

Following recent news that the international cryptocurrency platform Binance is under criminal investigation by such Asian countries such as Malaysia and Indonesia, it is more important than ever for states to be able to regulate cryptocurrencies and protect investors against financial loss. Although, the innovation behind cryptocurrencies and blockchain technology cannot be ignored, and incorporating the benefits of the latest in fintech must strike a fine balance between the protection of investors and national safety. 

The anonymous nature of decentralized cryptocurrencies provides a safe haven for criminals to conduct illegal activities, a worry to many governments. Initiatives such as China's digital yuan due to be rolled out in the next few years may present a viable solution in this new rapidly developing field.

The volatile nature of the cryptocurrency markets means that many amateur investors more often than not are taking an uneducated gamble. Just like any other financial assets, cryptocurrencies are at the mercy of market manipulation. That means wild swings in cryptocurrency value in the last few years stripped many unsuspecting amateur investors of their life savings. Investor awareness is typically much lower than in traditional stock markets, with higher potential risks associated with virtual currencies. 

Key information on the larger well known coins may be freely accessible, while thousands of unfamiliar coins exist, with countless new ones created every day with rudimentary amateur coding. Research and regulation on novel virtual currencies is difficult and so their market entry must first be determined as stable and safe.

The risk does not end there. Technological changes in the future could improve upon blockchain efficiency and render the system irrelevant for people’s needs. The past decade has seen an exponential explosion in how we create and value digital assets, and the long term-viability of volatile cryptocurrencies is not guaranteed. Careful investors stand to profit. However, the sheer number of casual investors means that they must be made aware of the risks involved. Such risks have to be made public, allowing financial advisors to educate investors while regulators look into the stability of prospective technologies.

A digital Chinese currency is displayed on a mobile phone interface in Tangshan, Hebei Province, north China, February 13, 2021. /Getty

A digital Chinese currency is displayed on a mobile phone interface in Tangshan, Hebei Province, north China, February 13, 2021. /Getty

But, this does not mean that virtual currencies should be shunned as a whole. Initiatives such as China's digital yuan would make electronic money legal tender. This should not be confused with traditional online payment methods, which are simply a method of moving money. Existing payments such as Wechat or Alipay may on the surface provide quick transactions. These do rely on secure internet connections. Behind each payment is a complicated network of transactions between the banks of separate buying parties and sometimes even intermediary banks which can only process payments in hours or even up to several days. The digital yuan will instead be able to transfer money even between two offline devices, and provide instantaneous transactions smoothly.

Many other countries are watching China's innovation closely. Japan and South Korea are in the process of rolling out their own virtual currencies, and the EU has stated that a digital euro may also appear in four or five years' time. Those which fail to keep up with this trend will find difficulty in managing their economies. If uncontrolled non-sovereign currencies become widely used for payment purposes, central banks will not be able to manage economies in the traditional sense, for example through setting interest rates or controlling the cash supply. Banning cryptocurrencies outright risks losing all the benefits they bring and so governments must find a way of incorporating digital and hard currencies.

In the future, these virtual currencies will improve the efficiency of international financial operations, no matter how big or small. Sending international transfers instantly and more cheaply than traditional systems will help families and small businesses easily pool funds across long distances, a big improvement to transactions crippled with current heavy transaction fees. Economic growth will speed up and benefit the masses through making funds more accessible globally.

The stability of financial systems will also become safer. By allowing people to directly settle through the central bank instead of depositing cash, the total amount of liquidity and credit held in a centralized system is reduced. A shift from bank deposits to digital cash would reduce the burden on governments to produce guarantees on deposits, and it would reduce risk within the system. Making financial ecosystems more resistant to crashes such as those seen in the past two decades is paramount to global stability. 

By introducing technology which can provide the benefits of cryptocurrencies while at the same time providing a safe and regulatory framework will be a major step forward for all nations.

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