HowDecentralized Currency Has Affected the International Market
The effectsof decentralized currency on the international market are farreaching that it can be imagined. Bitcoin, which is the most widelyadopted decentralized currency in existence today, is gainingmomentum in its usage, although it faces a lot of criticism frommajor financial institutions around the world. The currency hasseveral advantages that are making it to be adopted by many countriesand companies around the world. Major advantages include lowertransaction fees, anonymity, decentralized, and controlled inflation.(EPRS 4).
There are also severaldisadvantages that are associated with it and which are making thecurrency to be received with skepticism worldwide. The maindisadvantages are that bitcoins have high volatility, many securitythreats, immature, lack supply elasticity, and can be used in moneylaundering and tax evasion. (EPRS 4)
The currencyis highly decentralized, meaning that no single government, centralbank, or financial institution has control over it. The currencyflows through a peer-to-peer computer network without the involvementof third parties to monitor the transactions. Additionally, bitcoinsare not backed or dependent on precious metals such as gold andsilver like other conventional currencies. Other coins in addition tobitcoin that are decentralized include Ripple, Nxt, Peercoin, andLitecoin. (Bankof Canada 1).
Both theadvantages and disadvantages of Bitcoins and the other forms ofdecentralized currencies have had several effects both negative andpositive on international markets as I will highlight in the rest ofthis paper.
Most studiesthat have been carried out in regard to how decentralized currencyaffects international market have been based on illegal business ofdrugs and other related businesses. (Carmody n.p). The actualrepercussion that the currency poses to other conventional currenciessuch as the US Dollar have been given little attention. As a result,I will be discussing how the decentralized currency is affectinginternational markets together with currencies that dominate themarkets.
The mainresearch question that the current study seeks to answer is “how isthe international market affected by decentralized currency?”Additionally, it will also seek answers to a number of sub-questionsthat include:
– How do othermajor conventional currencies get affected by the emergence andcontinued acceptance of decentralized currency?
-Whatare the strengths and weaknesses of decentralized currencies?
-Isdecentralized currency safe and destined to last?
Research Aims and Objectives
The mainobjective of the study would be to find out how the internationalmarket is affected by the emergence and continued adoption ofdecentralized currency. Apart from that, it also aims at:
-Finding outwhy decentralized currency emerged.
-The extent ofuse of decentralized currency in developed and developing countries.
The EuropeanParliamentary Research Service (EPRS) has spent a lot of resources instudying the decentralized currency, bitcoin in particular todetermine how it works and all the dynamics that pertain to it. Theresearch found out that bitcoin is not a secretive currency at all asmany people may think. It is open for use by members of the public inany country anywhere. The currency aims at achieving some form oftransparency to its users by maintaining a log of all transactionsthat have ever been performed since the inception of the currency. Itcan be put to any form of use that any other currency can be usedfor. It has been used to buy and sell services and products on theInternet and other networks.
The currency emerged becausethere was need for a currency that is specific to the needs ofInternet users an effort that has been going on for several years.The currency is aimed at making transactions easier and faster whileensuring that purchases and sales involve little or no charges atall. The group that introduced the currency remains anonymous and isonly known by a fake identity.
Exchange ofbicoinc of any form results in the creation of a transaction. Whenone party sends coins to another party, a public key is attached tothe coins to confirm that they belong to the new owner. The transferis confirmed by a signature from the sender, which is normally aprivate key. All parties with access to the bitcoin network canaccess a history of all transactions performed since the inception ofthe currency in the year 2009. The currency is normally divided intosmaller units just like the dollars are divisible into denominations.The smallest unit in the Bitcoin currency is 1 Satoshi.
All transactions are confirmedbefore they can be said to be complete. Recent transactions arecategorized into “blocks”. A transaction cannot be confirmed tohave happened if it does not appear in a block of recenttransactions.
Mining is theprocess through which new bitcoins are created. Mining is also aprocess through which blocks are connected to blockchains. Theaddition of a new block to a the blockchain confirms the integrity ofthe previous block added earlier. The mining process is designed tobe very complicated and resource intensive, making it very difficultfor any single party to be able to amass the computing power requiredto control 50 percent of the entire network.
PositiveEffects of Bitcoins on International Market
There are many effects thatadvantages of bitcoin transactions cause on the international market.The advantages that are presented by decentralized currency are theones that will cause it to last and become even more established thanit is now. Some of the effects include:
Lower Transaction Fees
One of theadvantages that bitcoins present to its users and the internationalis lower transaction fees. The lower transaction fees associated withBitcoins results from the lack of third party intermediary chargesimposed on users. The transactions are peer-to-peer in nature withoutintermediary parties. Although there are no exact figures that revealBitcoin’s transaction cost advantage, some studies claim that onaverage, the fees ranges from 0 to 1 percent. The effect that reducedtransaction fee causes on international markets is that it increasesthe total number of transactions performed in a day as more peoplejoin the network. Many people opt to use Bitcoins to carry out theirtransactions with a view of spending less.
Anonymity issomething that many people want when transacting especially on theInternet. Bitcoins have promoted anonymity of the parties engaging ininternational transactions by hiding their identities and locations.The anonymity provided by Bitcoins has been the main reason why thecurrency has been used widely for illegal transactions. Many illegalbusinesses hide behind the currency to avoid being caught by lawenforcement agencies. One such example is the Silk Road online drugcartel that sold drugs such as heroin and cocaine to clients withoutgiving up the location or identity of clients as well as that of thecartel itself. Identities are encrypted, but all transactions aremaintained on a public ledger that can be seen publicly by anyonewith access to the network.
Another effectof decentralized currency on the international market is controllinginflation. The pre-programed and predictable release schedule ofbitcoins prevents their purchasing power from being affected byinflation. The advantage gained from controlled inflation and lowertransaction fees can however be offset by high volatility thecurrency offers in the market.
The traditional internationalmarket has always required buyers or sellers to have credit card plusbank accounts to be able to transact, but that is unnecessary when itcomes to decentralized currency. The fact that the currency is notregulated by any central institution or government allows it to makethe international market flexible. A computer and a simple Internetconnection is sufficient for one to do any transaction they want.
According toresearch conducted by The Sikh Archives (n.p), decentralized currencyhas proved to be reliable in the past as people continue to losefaith in large central banks, which manipulate and control theirmoney. If people continue to accept the currency like they are doingnow, it is possible that conventional currencies like the US Dollarwill be much weakened and probably replaced with the independentcurrency such as Bitcoin,which is a decentralized international currency(Kleiman 5). Sincedecentralized currency can be changed into any other currency, it canform a standard for doing business. People from different placesconverge in this single standard currency and carry out businesstransactions without having to carry local currencies (Yadav n.p).
Opening the Market
The decentralized currency hasopened markets in Africa, South America, and parts of Asia that areless developed and are practically shut out of the internationalmarket place. Parts of the Asian, American and African continents areclosed to the business because of the way they are set up. Suchplaces lack credit card facilities and other services that make iteasy to shop on the Internet and carry out business transactions. Thelocations lack facilities that make the transfer of money betweenparties possible, making a currency that does not need a credit cardor bank account very useful. Bitcoin can help open internationalmarkets in places where they did not exist before. Currently,examples of countries in which retailers and wholesalers acceptdecentralized currency (bitcoin) include Finland, Germany, andArgentina. Research conducted by money morning staff (n.p) hasindicated that dentists accept payment in form of Bitcoins, in Berlina pint can be purchased using Bitcoin, while in Argentina vacationhomes can be bought using the same currency. People in developedcountries seem to use the currency more than those in developingworlds (Money Morning Staff reports, n.p).
Negative Effects ofDecentralized Currency on the International Market
Decentralizedcurrency is not all perfect. It has several disadvantages that itpresents to the international market including volatility. People whouse the currency are not assured that its value will remain at anyspecific level. It takes a few months for the value to reduce andrise sharply with members of the network having very little they cando. As the prices of the coins fall or rise, people become moreskeptical to invest in them (EPRS 2-5). People who depend on adecentralized currency to do business by allowing foreign individualsto buy using foreign currency are prone to incurring huge losses ormaking exorbitant profits since the value of decentralized currency,primarily bitcoin changes day and night without any certain promiseof stabilizing any time soon.
Possibility for MoneyLaundering and Tax Evasion
To individual transactors, taxevasion is a relief because no one really enjoys paying taxes to thegovernment. The exact opposite is true for governments that arealways seeking for new ways of taxing their citizens as they try toraise money for their huge military projects. Decentralized currencylike Bitcoin seems to be just the perfect currency for avoiding topay taxes because the principle of anonymity hides the identity ofparties participating in any transaction over the currency`s network.This is a new effect caused to the international market as buyers andsellers around the world engage in tax-free business transactionswith governments having little to do about it.
Another effectis that for the possibility of money laundering. Decentralizedcurrencies are not under the watch of any specific government orfinancial institution and as such, money can be laundered around theworld without being noticed. Drug dealers and terrorist can make useof this possibility to finance their operations and even influencemarkets within their areas of jurisdiction. However, it is worthnoting that this option has not been utilized in any major way bymoney launders.
RESEARCH DESIGN ANDMETHODOLOGY
The study will focus on theeffects caused by decentralized currency on international markets. Asopposed to the studies conducted before, decentralized currency is agrowing standard currency and many people are giving it the supportsit needs to become a standard. The founder of Bitcoin establishedmechanisms that would ensure that the entire or half of Bitcoinnetwork does not fall under the control of any individual or group ofindividuals. I will highlight how the currency has managed to remainindependent of groups of individuals up to this day.
Information would be collectedfrom different databases including the individual websites, journalsand books that have tackled the issue. Internet sources are the mainsources of information and data used in doing the study.
Aquantitative framework would be utilized in data analysis. This isbecauseit makes it possible for resultsfrom a sample to be generalized in order to find out patterns as wellas present facts about a population and the phenomenon. Primary datacollected from various sources and websites will be confidentiallyanalyzed using the SPSS software. Severalvariables would then be identified and will be analyzed and comparedto reach conclusions.
DISCUSSION AND CONCLUSION
TYo concludes that there is needfor a decentralized currency, especially in this century where theInternet has grown so much and many business transactions are basedon the Internet. There is need for a currency that does not knownational boundaries and is not under the influence of any specificgovernment or financial institution. The introduction ofdecentralized currency was received with a lot of enthusiasm andskepticism at the same time. Enthusiasts continue to believe that thecurrency can grow and become accepted worldwide as a standard measureof value while skeptics remain doubtful. Bitcoin in particular comesafter many other decentralized currencies that were launched andfailed to make any significant impact.
The effects that decentralizedcurrency has on the international market are both positive andnegative. The negativity and positivity offset each other in a way,but the positivity still has an upper hand. Dependence on centralizedcurrencies, which the government and the central bank have controlover is becoming a thing of the past as citizens want to be moreassured of the safety of their money. Enthusiasts hold the hope thatif decentralized currency receives governmental approval and supportfrom major companies of the world, it could be the “safe haven”of most economies as one staff of Money Morning put it.
The effects presented bydecentralized currency is mostly perceivable by individuals who usethe currency in doing business online. Even for those who do not usethe currency, the effect is felt either way. The effect comes in sucha way that transactions cost more and moving money around is veryinsecure, leaving many people silently wishing for a system thatwould eliminate insecurity and cost less to do business.
Bank ofCanada. (n.d) Decentralized E-money (Bitcoins). [Online] Availablefromhttp://www.bankofcanada.ca/wp-content/uploads/2014/04/Decentralize-E-Money.pdf.[Accessed: 2/12/14]
Carmody,Timothy. "Money 3.0: How Bitcoins May Change the GlobalEconomy." NationalGeographic Daily News. Oct14 (2013).
EPRS. “Markets, economics andregulation”, 2014
Kleiman, JaredA. "Beyond the Silk Road: Unregulated Decentralized VirtualCurrencies Continue to Endanger US National Security and Welfare."AmericanUniversity National Security Law Brief4.1 (2013): 5.
Yadav, Divya. "The Future ofBitcoin." (2014).