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The Cryptocurrency Argument:
Its Effect on Trade, Economies and Countries’ Financial Stability
The birth of cryptocurrency, or the money of the future!!, goes back to early 2009, with Bitcoin emerging as a side product of digital cash, a new electronic cash system that uses a peer-to-peer network to prevent double-spending, and becoming the first completely decentralized cryptocurrency with no server or central authority. If we take away all the noise around the cryptocurrency and reduce it to a simple definition, we find it to be just a limited entry in a database no one can change without fulfilling specific conditions, it is nothing but a digital asset designed to work as a medium of exchange using cryptography to secure the transactions and to control the creation of additional units of the currency. Cryptocurrencies are classified as a subset of digital currencies as well as a subset of alternative currencies and virtual currencies. Today, cryptocurrencies have become a global phenomenon known to most people with hundreds of cryptocurrencies around. While still somehow geeky and not understood by most people, banks, governments and many companies are aware of its importance. Back in 2016, we hardly find a major bank, a big accounting firm, a prominent software company or a government that did not research cryptocurrencies, publish a paper about or start a so-called blockchain-project. However, as nobody can predict the future course of cryptocurrencies that will dominate the mature marketplace, analysts can only speculate that markets will mature into forms that solve real business problems in ways that are cheap and robust and that cannot be solved by other technologies.

China Plans to Restrict All Bitcoin Domestic Exchanges
China accounts for about 23% of bitcoin trades and is also home to many of the worlds biggest bitcoin miners, who use vast amounts of computing power to confirm transactions in the digital currency. However, a recent news release has reported that China is planning to ban trading of bitcoin and other virtual currencies on domestic exchanges, dealing another blow to the $150 billion cryptocurrency market after the country outlawed initial coin offerings earlier. The ban will only apply to trading of cryptocurrencies on exchanges, according to people familiar with the matter, who have asked not to be named because the information is private. Authorities do not have plans to stop over-the-counter transactions, the people say. Chinas central bank said it could not immediately comment. Bitcoin slumped after news reported Chinas plans, capping the virtual currencys biggest

weekly retreat in nearly two months. Trading volume would definitely shrink, says Zhou Shuoji, Beijing-based founding partner at FBG Capital, which invests in cryptocurrencies. Old users will definitely still trade, but the entry threshold for new users is now very high. This will definitely slow the development of cryptocurrencies in China. There has been a general tightening of the screw on regulating financial and monetary conditions, says the chief economist at Union Bancaire Privee SA HK in Hong Kong. All of these things suggest a longer term process of tightening scrutiny of activities that are not in the normal sort of monetary realm. While bitcoin users will still be able to trade cryptocurrencies in China without exchanges, the process is likely to be slower and come with increased credit risk, analysts have argued. The exchange ban is unlikely to have a major impact on the prices of cryptocurrencies globally because venues outside China will continue trading, according to FBG Capitals Zhou. The countrys role in the bitcoin market had already started shrinking in recent months as authorities tightened regulation. At one point, exchanges in China accounted for more than 90 percent of the worlds bitcoin transactions.

Central Banks across the World Are Testing the Potential of Replacing Cash with Cryptocurrency
A new journal article published by the Bank of International Settlements (BIS), a kind of central bank for central banks, suggests a more straightforward approach than trying to use cryptocurrency to replace cash. In the article, Garratt and Morten Bech, a researcher at the BIS, draw an important distinction between a retail cryptocurrency as FedCoin and a wholesale one that would only be used by banks. One important role central banks play in the global financial system is to facilitate large payments between commercial banks. Commercial banks make deposits at central banks, and when they need to send a large payment to another bank, as they might during the sale of a company or house, they can rely on a central-bank-operated payment system. The central bank handles the clearing, or the updating of each partys account to reflect the new transaction, and the settlement, or the literal transfer of the money. Many central banks wholesale payment systems are facing a problem: theyre based on obsolete programming languages and outdated database designs, and governments are looking for ways to modernize them. The central banks of Canada and Singapore both recently demonstrated prototype distributed-ledger-based wholesale payment systems that handle clearing and settling simultaneously, via a cryptocurrency token. Since such a system would be restricted to banks, it would not have the same impact on monetary policy as a consumer-facing one, says Garratt: You are just replacing the current back-office financial-market infrastructure. Despite proofs of concept, however, the technology is still immature, and the current round of modernization efforts is unlikely to end up using distributed ledgers. Riksbank, Swedens central bank, is not the only central bank taking a serious look at blockchain, the technology that makes Bitcoin and other cryptocurrencies run. These systems, also called distributed ledgers, rely on networks of computers, rather than a central authority like a bank, to verify and record transactions on a shared, virtually incorruptible database. Government bankers across the world believe this has the potential to replace cash and make other payment systems more efficient. The Peoples Bank of China has developed a digital currency that is designed to scale to the number of transactions made every day across the country. Central-bank-backed cryptocurrencies would be ironic indeed, given that Bitcoin was created as a way to circumvent the need for banks. Beyond that, the idea raises complicated questions about how such systems should be designed, built, and maintained, as well as how they could affect a countrysor the entire planetsfinancial stability. Thats why Riksbank is hedging its bets, investigating not only distributed-ledger technologywhich it describes as unproven but progressing incredibly rapidlybut also traditional, centralized accounting methods for its e-krona project. Some economists have argued in recent years that a cryptocurrency tied to central-bank-backed money could give governments a way to issue digital tokens that are a lot like cash. Users of such a FedCoin would enjoy the level of anonymity that Bitcoin provides, goes the theory, while being protected against the volatility that has plagued cryptocurrencies. Many countries central banks are investigating this idea, but Sweden looks to be the furthest along. But a cryptocurrency thats available to all consumers opens up a whole host of issues and would pose new challenges for makers of monetary policy, says an economics professor at the University of California, Santa Barbara.
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