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Several events have recently taken place that have boosted many people’s opinion of cryptocurrencies. Tesla recently announced it would accept Bitcoin as payment, and it has invested $1.5 billion in the digital currency. Robinhood made big news with the GameStop trading roller coaster as its one of a few investing apps that accepts cryptocurrency. (Dig deeper into a investing apps with this Bold Business breakdown.) And several other businesses are gradually considering adding these forms of payment to their menu options. On the surface, it appears that we might be shifting toward a new financial structure in the coming years. But as with anything related to currencies, things are never as they initially seem.

Throughout the world, surveys have shown that 86 percent of all nations are considered a digital currency in some fashion. But the vast majority are simply researching the idea. A few countries, like China, are forging ahead aggressively, but others are not, including the U.S. There’s a number of reasons for hesitation that include consumer protections as well as defining clear monetary value. But at the same time, there’s a number of potential advantages, especially for central banks, making it worth consideration. With this in mind, let’s revisit that current state of cryptocurrency and related models as it stands today.

“Critical issues related to digital currencies remain unresolved, ranging from consumer protection, education and privacy to technical and regulatory interoperability. The opportunities and risks for digital financial inclusion have yet to be fully evaluated.” –World Economic Forum Digital Currency Governance Consortium

Digital Currency Versus Cryptocurrency

Though often used interchangeably, all digital currency is not cryptocurrency. The former also includes virtual currencies that don’t use blockchain technologies. They also include central bank currencies established by specific countries that also may ignore blockchain. This is currently the case in China where the country has been developing its electronic currency (eCNY) since 2014. In essence, these types of central bank currencies are quite similar to other electronic payment platforms (like Venmo and Cashapp). But because they are controlled by the central bank, they have much greater power and oversight.

Cryptocurrency, on the other hand, is a form of digital currency that does utilize blockchain technology. Bitcoin is a prime example of a cryptocurrency. This allows the use of these currencies to be decentralized without any single entity, including central banks, having oversight control. In many ways, this decentralized platform enhances security, reliability, and accuracy of digital currency transactions. But concerns about cryptocurrency regulations exist, especially within nations striving to maintain sovereignty and global economic position. (Read more about cryptocurrency regulations in this Bold Business story.) Thus, while many private businesses are embracing these new currencies, national systems are not.

“We have not landed on the design governance and arrangements for a lasting digital currency. Cryptocurrencies as originally formulated are not it because people need assurance that their payments are made in something with stable value.” – Andrew Bailey, Governor of the Bank of England

Digital Currencies Offer More than Convenience

In comparison to traditional currencies, digital currencies offer speed and convenience. As anyone who has used PayPal, Venmo or Cashapp appreciates, such platforms have advantages. But the use of a digital currency has an additional benefit that now everyone appreciates. These systems can provide a wealth of data and information about spending. It is readily assumed that China is aggressively pursuing its own national electronic currency because of this. Every transaction made with these currencies can provide detailed information about citizens’ behaviors and the overall economy. But this is only possible with centralized control and not with a decentralized cryptocurrency model.

Expanding on the centralized digital currency concept, this would also allow central banks to potentially better regulate economies. Traditionally, central banks lower interest rates and increase supply to stimulate consumer spending. This is a common strategy to offset recessionary pressures. But with a digital currency, a central bank could program a loss of value of a currency over time within its system. This too would encourage consumers to spend now rather than saving. China is already experimenting with these approaches by placing a spending expiration data on their electronic currency. Thus, data mining and enhanced economic control are additional features of a digital currency potentially attractive to nations.

“Our philosophy on cryptocurrencies is straightforward: It’s about choice. Mastercard isn’t here to recommend you start using cryptocurrencies. But we are here to enable customers, merchants and businesses to move digital value – traditional or crypto – however they want.” – Raj Dhamodharan, Executive VP of Digital Asset and Blockchain Products, Mastercard

The Future of Cryptocurrency in the U.S.

In the U.S., it’s clear that private businesses are moving in a direction that’s increasingly accepting of cryptocurrency. Mass Mutual, Square, and Marathon Patent as well as Tesla have demonstrated support for Bitcoin in recent months. Likewise, software company MicroStrategy now has over $3.3 billion in Bitcoin, which is more than double what Tesla owns. Even Christie’s auction house is accepting Ether as a cryptocurrency payment in its digital art dealings with non-fungible tokens. Despite concerns about the lack of anything tangible supporting digital currency value, these companies are rapidly coming on-board.

The U.S. Federal Reserve Bank and related policymakers have been less enthusiastic to adopt digital currencies to date. Regulatory considerations of cryptocurrency are in the works, but an actual national digital currency has not been pursued. Many are concerned that this could place the U.S. at a disadvantage compared to nations like China. However, as others have noted, reliance on the U.S. central bank isn’t required. Should a company like Apple suddenly choose to operate in Bitcoin, it would completely disrupt the cryptocurrency sector. In fact, such a move alone would be enough to make the U.S. a leader in the digital currency market within a decade.

Adoption of Digital Currency Is Inevitable

The shift from the gold standard to paper-based currencies was challenging for the entire global economy. But eventually, the shift was made, and economic markets embraced this now traditional form of currency. Undoubtedly, the same will occur with digital currencies over time. The advantages that electronic currencies offer will continue to push adoption forward. Regulatory and consumer protections will eventually be addressed. The bigger debate, however, is whether or not cryptocurrency will survive in the process. If nations each adopt their own digital currencies that ignore blockchain, cryptocurrencies may lose their value. At least at the present time, this appears to be where the battleground lies. It will be interesting to see how it all plays out.

 

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