After reviewing the philosophy of digital currencies, their emergence, and the political factors influencing them in the previous article, we now shift focus to discuss the impact of this industry on the traditional financial system, while highlighting the major challenges and risks it faces. In this article, we will examine a range of points that uncover some of the hidden aspects of the world of digital currencies.
How Do Digital Currencies Impact the Global Financial System?
Digital currencies, like Bitcoin, represent a revolutionary shift in the financial world, reducing the traditional role played by banks and financial institutions in managing transactions. But how does this impact the traditional financial system? Let’s explore the key differences between the two systems.
Financial Autonomy and Direct Control Over Funds
In the traditional financial system:
- Banks and financial institutions control the movement of money, with all transactions being routed through these entities.
- Sending money to another person requires the involvement of a financial intermediary, such as a bank, to complete the transaction.
In the case of digital currencies:
- Money is transferred directly between individuals via the internet using blockchain technology, without the need for a financial intermediary. Blockchain is a decentralized, distributed database shared among computers, where each device (node) stores information across multiple nodes simultaneously.
- Digital currencies give users full control over their funds, eliminating the need to rely on banks or financial institutions for transaction execution.
Reduced Fees and Speed of Transactions
In the traditional financial system:
- Banks usually impose fees on transactions, whether domestic or international.
- Transactions may take several days to reach the recipient, especially when dealing with international banking.
In digital currencies:
- Transaction fees are significantly lower compared to traditional banking transfers, as there is no intermediary involved.
- Transactions are executed at high speed; for instance, Bitcoin can be sent anywhere in the world in seconds, in stark contrast to the days required for conventional transfers.
Centralization vs. Decentralization in Transactions
In the traditional financial system:
- Financial institutions, such as central banks, control the issuance of currencies and regulate financial transactions.
- Major decisions like setting interest rates and managing the money supply are made by these institutions.
In digital currencies:
- The digital financial system operates on a decentralized model, with no single entity controlling it.
- Transactions occur through a global network of computers that independently validate each transaction, recording it on a shared ledger called the blockchain.
- No party can unilaterally control the system or alter the currency’s value, as everything relies on consensus among participants in the network.
- This decentralization promotes greater transparency, giving individuals more control over their funds and reducing the risk of financial manipulation or government oversight.
Benefits and Risks Associated with the New Global Financial System
Benefits:
- Speed and Efficiency: Digital currencies enable faster transactions, far exceeding the capabilities of traditional banking systems. Money can be transferred globally within minutes.
- Transparency: Blockchain technology records all transactions openly and is verifiable, fostering greater transparency and reducing the risk of manipulation.
- Cost Reduction: Digital currency transactions incur much lower fees than those imposed by banks, especially for international transfers.
Risks:
- Value Volatility: Digital currencies experience significant price fluctuations, making them high-risk investments. Their value can rise or fall dramatically within a single day, creating instability for investors and traders.
- Legal and Regulatory Concerns: Many countries remain unclear on how to handle digital currencies. Some governments impose restrictions or outright bans, which may hinder the future use of these currencies.
- Illicit Uses: Due to the relatively anonymous nature of certain digital currencies, they can be exploited for illegal activities such as terrorism financing or money laundering, raising concerns for governments and regulators.
Moreover, digital currencies conflict with the financial and technological power of the United States, as they enable cross-border transactions without central oversight and promise alternative technological solutions to governmental authority. This has alarmed traditional banks, which fear that digital currencies could undermine efforts to combat money laundering and enforce financial sanctions.
Legal and Regulatory Challenges Facing Digital Currencies
Digital currencies face legal and regulatory hurdles that could impact their future and wider adoption.
Lack of Global Standardization in Legislation
Digital currencies do not fall under a unified legal framework like traditional currencies (e.g., the dollar or the euro), meaning each country handles them differently.
For example, China has completely banned digital currency trading, fearing its potential impact on financial stability. In the United States, regulations are in place to govern digital currency trading, but they are not uniform across all states, making legal compliance complex for investors and businesses.
As a result, users and investors face legal risks when dealing with digital currencies, as it is not always clear which laws apply, especially in cross-border transactions. This uncertainty creates hesitation among potential users.
Fraud and Market Manipulation
While digital currencies allow direct peer-to-peer transactions without the need for a financial intermediary, this feature also opens the door to fraud.
In some cases, fraudsters create fake digital currencies or investment schemes, convincing investors to join projects that offer no return. Some digital markets lack sufficient oversight, allowing certain parties to manipulate prices and cause artificial market disruptions.
Without regulatory safeguards, users face the risk of losing their money, weakening trust in digital currencies and limiting their widespread adoption.
Government Approval and Legislative Framework
To integrate digital currencies into the global financial system, a legal framework must be developed that balances innovation with investor protection.
Taxation: Governments need to implement clear laws to tax digital transactions, helping to integrate them into the formal economic system.
Anti-Money Laundering: Due to the lack of central oversight, digital currencies can be used for illegal activities like money laundering or terrorism financing. Therefore, countries are working to establish laws to regulate these activities and ensure that digital currencies are not misused.
The Challenges of Cryptocurrency Volatility
Digital currencies are known for their sharp volatility, making them less stable compared to traditional financial assets like fiat currencies or bonds. This volatility directly affects their use as an investment tool or a savings vehicle.
Loss of Trust Due to Volatility
The extreme fluctuations in digital currency prices undermine user confidence. A currency that can lose a significant portion of its value overnight is not considered a reliable means of payment or a long-term investment.
Impact on Economic Stability
The instability in some markets may cause ripple effects in other markets. For example, a sudden increase in U.S. bond yields could lead to a drop in digital currencies, creating broader market instability, which often triggers concern among investors and businesses.
Donald Trump and the Cryptocurrency Lobby: Can He Turn Chaos into Opportunities in a Turbulent Market?
Before his election victory, President Trump received significant support from the cryptocurrency lobby during his campaign, as well as backing from several congressional candidates. The goal of this support was to expedite the legalization of digital currencies in the future. This lobby contributed over $130 million in funding, creating a debt between Trump and the crypto lobby.
This support is one of the key reasons Trump has shown continued interest in cryptocurrencies, despite his previous attacks on them. Will Trump succeed in this endeavor despite his failures in other areas?
With the political momentum—unrelated to economic fundamentals—cryptocurrency markets have recently experienced sharp fluctuations and declines. Digital currencies have become politically exploited, resulting in widespread instability, as there are no clear foundations for their rise or fall.
The crisis deepened after the “Bybit” platform breach and the theft of $1.5 billion worth of Ethereum (over 400,000 ETH), further escalating concerns in the market.
Reasons for the Decline in Cryptocurrency Adoption
Despite being a modern financial innovation, digital currencies face challenges that hinder their use in everyday life. Here are the main challenges:
Limited Merchant Acceptance of Cryptocurrencies
Most stores and services, both online and offline, do not accept cryptocurrencies as an official payment method. This limits the ability of cryptocurrencies to become part of everyday financial transactions, restricting their use to only a small group of merchants and users.
High Price Volatility
The economy relies on stability and clarity, which cryptocurrencies lack due to their sharp value fluctuations. These fluctuations make cryptocurrencies impractical as a payment method or a long-term investment, as their value cannot be predicted from day to day.
Digital currencies represent an incomplete technological revolution, but they require a long period of time to become an official part of the global financial system. Despite their high potential, their integration could lead to losses in competing sectors, making their future impact difficult to predict.
Therefore, investors must be cautious when making investment decisions, especially in the absence of regulations to protect their assets. They should closely follow developments in this field and avoid jumping into investments without a complete understanding of the associated risks. Wrong decisions often stem from incomplete or misleading information, so ensuring the credibility of information is essential.
