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DIGITAL CURRENCIES

In 2021, Bank of Canada reported that cash transaction is done only once in three

transactions, which is much below in comparison to 10 years ago. [4] Canadian Government

through its monetary policy ensures to keep a tab on inflation by keeping it low, under

control, and predictable. Canadian government through its centralized bank, Bank of Canada

is exploring different ways to enter the digital currency domain which can ensure privacy and

traceability to the law enforcement agencies.

Asset Class & Its Types

Asset class is clubbing together of investments with identical features/characteristics and are

being regulated by same laws & regulations. [3] Equities in form of stocks, fixed income as

bonds, real estate, commodities, and currencies are the common examples of asset classes till

2019, with digital currency & crypto being the new entrants in this asset class category.

Financial advisors use these assets classes to diversify the client’s portfolio for maximum

returns/profits. Each asset class has its own risks and returns potential.

Digital currencies/ Cryptocurrency have been adopted as legal tender system by some

countries with El Salvador [1] being the first flag bearer, claiming to have attracted more

foreign investments, tourism and increased access to unbanked population. On the other hand,

many companies [1], for instance, Microsoft, AT&T, Subway, Pizza Hut have started

accepting digital currencies as mode of payment for their services.

Although the digital currencies have been lately revolutionary in some aspects, but the below

mentioned pros and cons must be taken into consideration before bringing cryptocurrencies

into the mainstream, eclipsing the traditional legal tender system.

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 Centralization & Valuation: Cryptocurrencies are not under direct control of any one

entity, whereas, the Fiat Currencies are regulated by centralized banks- a single entity

which can manipulate the currency value. Most of the crypto transactions are

irreversible and the value of the crypto is valued by the amount of market interest

shown by peer investors. Thus, a cryptocurrency can shut off overnight, if the investors

loose interest in it due to security issues or mismanagement of funds. FTX [5] is a

recent example, where $32 Billion cryptocurrency exchange went bankrupt overnight

amid liquidity concerns and allegations of misused funds. Hence, as of now,

cryptocurrency must be used by fearless investors with big pockets who are unaffected

by market speculation and volatility.

 Inflation Prone: Unlike other fiat currencies, cryptocurrencies are less prone to

inflation as there are finite number of digital tokens that can be produced by the system.

The creation of more units will cease upon reaching the maximum potential. Chances

of fiat currencies such as US dollar are high to be eroded further by inflating the US

dollar.

 Transaction Costs & Time: Crypto currencies have proved to be very beneficial, when

it comes to the transaction costs and time involved in international transactions. Firstly,

unlike fiat currencies, cryptocurrencies are not impacted by exchange rate, thus

provides a stable platform for different businesses to happen without any fear of value

loss. Secondly, for international transactions in fiat currencies, the transactional costs

are very high due to presence of more middle-men. Thirdly, cryptocurrency transaction

time is negligible in comparison to fiat currencies transaction time.

 Infrastructure Requirements: Fiat Currencies require brick-motor based office

infrastructure for business, whereas, mining cryptocurrency requires sizable energy

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requirements. (sometimes energy requirements are higher than the total energy

consumption of a small country). The expensive energy costs along with mining

unpredictability have thrown the access to only few players.

 Privacy & Data Theft/Data Loss: The fiat currencies system is a highly regulated

system and a proper record of the dealing parties is being maintained, whereas, the

cryptocurrencies are not regulated and transactions are done between two anonymous

entities. The digital nature of crypto makes it more vulnerable to hacking. Moreover,

cryptocurrencies are stored in digital wallets protected by passwords. In case the owner

forgets the password, all the investments will become worthless. Gerald Cotton [2], a

30 year old Canadian cryptocurrency businessman, died on travel trip to India, taking

with him the passwords that had $190 million in investor cryptocurrency.

 Accountability: Since cryptocurrencies are relatively new and anonymous, there is

lack of legal clarity about which country will charge the tax and how the capital gains

from this asset class will be taxed. Moreover, being anonymous in nature, there can be

some terrible unseen repercussions, if fallen in hands of anti-social elements such as

terrorists and drug-lords.

Conclusion

The bottom line is that although cryptocurrencies have shown their advantages over Fiat

currencies in many ways, but, still there are some grey areas that needs more research and

attract scrutiny, before their inclusion in the mainstream as a trustworthy asset with complete

transparency and traceability by law agencies.

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References

digital money

1. Beigel Ofir (2022, September 1) Who Accepts Bitcoin as Payment? .99bitcoins.com.

https://99bitcoins.com/bitcoin/who-accepts/

2. Chidanand Rajghatta (2019, Feb 6) . Canadian cryptocurrency firm CEO dies in India

taking password to $190 million with him. Times of India.

https://timesofindia.indiatimes.com/business/india-business/canadian-cryptocurrency-

firm-ceo-dies-in-india-taking-password-to-190-million-with-

him/articleshow/67858198.cms

3. Ganti Akhilesh (2022, January 09) .What Are Asset Classes? More Than Just Stocks

and Bonds. Investopedia.com. https://www.investopedia.com/terms/a/assetclasses.asp

4. Murchison Stephen (2019, April). The Road to Digital Money. Bank of Canada.

https://www.bankofcanada.ca/2019/04/the-road-to-digital-money/road

5. Mark Julian (2022, November 10). Why the FTX collapse has plunged the crypto world

into upheaval. The Washington Post.

https://www.washingtonpost.com/business/2022/11/10/ftx-faq-crypto-turmoil/