The Transformative Effects of Cryptocurrency on the Modern Financial System

Cryptocurrency, a digital and decentralized form of currency, has been making waves in the world of finance for over a decade. Since the inception of Bitcoin in 2009, cryptocurrencies have grown in popularity, challenging the traditional financial system in profound ways. In this article, we will explore the benefits and risks of cryptocurrency on the modern financial system.

Risks:

However, cryptocurrency also reduces the influence which the government has on the state of currency in the nation. Bitcoin and other cryptocurrency coins are known for their price volatility; Bitcoin at times can fluctuate over $1000 in 24 hours. If millions of users are actively trading and using Bitcoin, it can spell financial instability for the U.S economy. In addition, the lack of government regulation has led to numerous scandals over the rampant corruption of the crypto industry. Some notable examples include the FTX scandal and the government investigations into Binance. In one fiscal year, the U.S economy lost 500 million dollars due to fraud. Part of the reason for fraud and for fluctuating price changes is the limited amount of buyers and sellers, who can artificially manipulate the price and sale of crypto coins by buying in bulk and shorting it just as fast. A historical parallel is the U.S stock market pre-1929; stock markets fluctuated and the main players could influence market trends. By doing so, the crash of 1929 was possible.

How Does Cryptocurrency Work?

Understanding cryptocurrency can be a daunting task. To begin, one key point to understand is that cryptocurrency involves innovation in financial technology. The hallmark technology which makes this new form of currency responsible is blockchain. Blockchain technology differs from the current financial structures in that blockchain allows for the decentralization of currency. Too many big words? Let me back up a bit. Blockchain works like this: instead of one building or agency controlling the flow of money in and out of the economy, such as the Federal Reserve or Treasury, or even banks, blockchain technology allows for each computer or device on the network to flow money through itself. Basically, each node on the network is its own "bank", in a sense. By doing so, all middlemen in the current financial system are removed; this includes banks, government, and other financial intermediaries. The U.S government has in the past, expressed their concern about cryptocurrency due to this aspect, and intend to create a new U.S crypto coin for official economic use, under the supervision of the government. People can trade crypto "coins" on cryptocurrency exchanges, similar to the NYSE. These coins are not tangible; rather, the value is attached to their electronic picture.

Benefits:

While being a relatively novel financial innovation and technology, One of the most notable effects of cryptocurrency is its potential to increase financial inclusion. In many parts of the world, traditional banking services are inaccessible or expensive. Cryptocurrencies offer an opportunity for individuals without access to traditional banks to participate in the global economy, enabling financial transactions and investments.

Blockchain technology, the underlying technology of cryptocurrencies, offers a transparent and secure way to record transactions. Each transaction is recorded on a public ledger, reducing the risk of fraud and ensuring transparency. This feature has the potential to enhance trust in financial transactions. Also,

cryptocurrencies challenge the traditional financial system by reducing the need for intermediaries, such as banks and payment processors. Users can conduct peer-to-peer transactions, which can lead to more direct and efficient financial interactions.

The rise of cryptocurrencies has sparked financial innovation. Beyond digital currencies, blockchain technology has been adapted for various purposes, including smart contracts, decentralized finance (DeFi) platforms, and non-fungible tokens (NFTs). These innovations are reshaping how financial services are offered and accessed.

Risks:

However, cryptocurrency also reduces the influence which the government has on the state of currency in the nation. Bitcoin and other cryptocurrency coins are known for their price volatility; Bitcoin at times can fluctuate over $1000 in 24 hours. If millions of users are actively trading and using Bitcoin, it can spell financial instability for the U.S economy. In addition, the lack of government regulation has led to numerous scandals over the rampant corruption of the crypto industry. Some notable examples include the FTX scandal and the government investigations into Binance. In one fiscal year, the U.S economy lost 500 million dollars due to fraud. Part of the reason for fraud and for fluctuating price changes is the limited amount of buyers and sellers, who can artificially manipulate the price and sale of crypto coins by buying in bulk and shorting it just as fast. A historical parallel is the U.S stock market pre-1929; stock markets fluctuated and the main players could influence market trends. By doing so, the crash of 1929 was possible.

How Do We Move Forward?

The solution for going forward with cryptocurrency is a complicated one; the benefits and risks listed above make it so. However, a historical parallel can be drawn; back to three decades ago, with the advent of the Internet. The government proactively restrained from putting any superfluous restrictions on the growth of the industry; this led to the widespread adoption of it across not only the U.S, but globally as well. However, those very same decisions came back to haunt us; today, the Internet is not as regulated, and with the use of social media and its effects on American society, it leads to the eventual conclusion that cryptocurrency should be left to grow for now; however, before widespread adoption on levels such as the Internet happens, the government should make some laws and regulations to protect the interests of consumers and companies involved against malicious actors and societal ills. For now, the best thing is for all of us to read more about this novel technology, to understand it, and to begin changing it to prevent us making the mistakes we made with the Internet. Cryptocurrency is not going away, but we can change it so that it becomes more than just a new fad; it can change the current system for good.