Governments and central banks are sitting astride a razor’s edge as they mull over how to handle the growing cryptocurrency market.
Cryptocurrency is not a fad that’s going away any time soon. Trading favourite Bitcoin has been around for more than a decade despite some considerable frauds, rises in value and falls from grace.
Table of contents
- What Is A Cryptocurrency?
- Stablecoins To Become Crypto Workhorse?
- What Did The Bankers On The Basel Committee Say?
- El Salvador Ready To Switch To Crypto
- What Does This Mean For Investors?
- Future Of Cryptocurrency FAQ
- Related Articles
Since Bitcoin burst onto the crypto scene in January 2009, the banking world has regarded cryptocurrency with distrust.
The future for cryptocurrency is gloomy for investors, according to global regulator the Basel Committee on Banking Supervision.
They labelled the market as one of the world’s riskiest investment and want stricter regulation to rein in the impact of cryptocurrency. On the global economy.
Meanwhile, El Salvador wants to adopt Bitcoin as legal tender – the first country to do so.
All that’s for sure is a war is being waged over financial domination with cryptocurrency in one corner and governments and central banks in the other.
At stake is billions of dollars and a conflict between the Old Boy’s Club who currently hold power and a New Order of cryptopreneurs who want a place at the top table.
What Is A Cryptocurrency?
Cryptocurrency comes in two parts – a secure online database that tracks transactions and a coin or token that can be exchanged for goods and services or traded.
The key to understanding how cryptocurrency works is trust.
Everyone must trust everyone else in the crypto world because no government or regulator runs the market. Instead, the software for keeping the database is copied to a peer-to-peer network of computers that update transactions in real-time.
The database – often called a blockchain – is tamper-proof and serves as a record of how much cryptocurrency each user has stored in their wallet with personal security called a key.
Access to the database is free, but the entries are anonymous. Everyone can see a jumble of letters, numbers and symbols that make up a key, but not to whom the key belongs.
To unlock a wallet, users must have their key and other security details.
Understanding the blockchain
Each cryptocurrency has a blockchain running the show and each has a coin or token for making transactions.
Bitcoin is the most popular cryptocurrency – but the market covers thousands of other coins and tokens, listed by market tracker CoinMarketCap.com.
CoinMarketCap reckons the market is currently worth $1.75 trillion, but the size varies and is tiny in comparison to the value of the world’s stocks and shares, which weighs in at around $100 trillion.
Other popular coins include Ethereum, Ripple and Cardano.
Global Top 10 Cryptocurrencies
|Rank||Coin||Symbol||Market cap||Circulating supply|
|4||Binance Coin||BNB||$2,242,927,342||6,042,457 BNB|
|8||USD Coin||USDC||$1,933,752,143||1,932,952,452 USDC|
|Total market cap:||$160,532,273,957|
Stablecoins To Become Crypto Workhorse?
Bear in mind that although dozens of central banks are scrutinising if cryptocurrency has a place in the world economy, white-hot thinking from the Basel Committee on Banking Supervision will generate the policy.
Most of the world’s central banks belong to the committee, which defines its role as setting global standards for the regulation of banks and a forum for discussing policy issues.
Bank of England executive director for financial market infrastructure Christina Segal-Knowles revealed in a recent Westminster speech that her colleagues see long term benefits from establishing stablecoin to pay for goods and services.
The value of stablecoin is pegged to a hard currency, generally the US Dollar with the market value reflecting changes that impact the dollar.
Crypto networks must be safe for users
“Stablecoins and other new forms of innovation in payments potentially offer benefits. They could reduce cost and offer new convenience and functionality. They could increase the resilience of payments – by offering alternative new ways to pay. And there could be potential long term financial stability gains from new forms of digital money. But these opportunities can only be realised if new forms of digital money are safe.,” she said.
“I am not going to focus on what’s new about stablecoins. Instead, I am going to focus on why – even if the technology they are using is new – the basic elements of a stablecoin are old. In fact, as old as money itself. This means that as financial regulators, stablecoins are not launching us off into some brave new world. We know what is required to ensure private money is safe for wide-scale use. The key here is to ensure that just because something is packaged in shiny technology, we don’t somehow treat the risks it poses differently.”
She went on to explain that a lack of confidence in the banks leads to financial crises and that she believes cryptocurrency like Bitcoin are too volatile to become a reliable means of payment, but a pegged 1:1 stablecoins can substitute hard cash.
Central banks cooking up their own digital money
But don’t expect to see Tether take over from the US Dollar any time soon.
Central banks around the world are looking at issuing their own digital currencies – including the Bank of England – and warn that although the nature of money may go digital, regulation will not relax.
“My job, as a central banker and regulator is to ensure that financial innovations, including new forms of digital money, do not impair the Bank of England’s ability to maintain monetary and financial stability,” said Segal-Knowles.
“This shouldn’t be confused with preserving the status quo. Financial stability isn’t about protecting incumbent banks or other existing firms from competition. Instead financial stability seeks to ensure that people and businesses can rely on essential financial services – like the ability to make a payment or the ability to get a loan – in bad times as well as good.”
Global Top 10 Stablecoins
|Global Rank||Coin||Symbol||Market cap||Circulating supply|
|8||USD Coin||USDC||$23,754,976,796||23,747,507,571 USDC|
|16||Binance USD||BUSD||$9,462,960,347||9,459,638,147 BUSD|
|78||Paxos Standard||PAX||$948,122,755||948,063,285 PAX|
|116||Reserve Rights||RSR||$417,351,114||13,159,999,000 RSR|
|121||Neutrino USD||USDN||$377,756,055||377,983,173 USDN|
|Total market cap:||$106,899,977,147|
What Did The Bankers On The Basel Committee Say?
The committee is worried about banks investing more in to cryptocurrency that could undermine their capital reserves and ability to function if the digital money suddenly dips in value.
The answer, says the committee, is to split cryptoassets into two types -the first group will include stablecoins, while the second deals with higher risk cryptocurrencies, like Bitcoin.
The report added central bank digital currencies are outside of the committee’s thinking.
That means banks can deal in cryptocurrencies, providing they set aside capital to cover their exposure and that the capital needed would be more for volatile cryptoassets than for stablecoins.
Besides volatility, the committee is concerned that blockchain anonymity opens cryptocurrency to money laundering by criminals and terrorists, while consumer protection in a non-regulated market leaves digital money investors without any redress if their money is stolen by a fraudster.
El Salvador Ready To Switch To Crypto
El Salvador president Nayib Bukele plans to make Bitcoin legal tender to run alongside the country’s official currency, the US Dollar.
He sees the benefits of incorporating Bitcoin into the country’s economy include access to online financial services for tens of thousands who are too poor to open bank accounts and a cheaper, easier way to send money home by El Salvadorans working abroad.
Around 2 million live and work overseas, remitting $4 billion home each year.
Current money shops and banks charge for transfers which can take days to arrive and require customers to pick up their cash in person.
The new service will be free and carried out in real time.
Although El Salvador will become the first country to adopt Bitcoin as a currency, the tiny Pacific island of Vanuatu accepts payment in Bitcoin for citizenship.
What Does This Mean For Investors?
Basically, carry on trading but don’t expect tax-free profits as central banks won’t regard trades as currency deals but earnings when digital money breaks through to the mainstream.
Investing in Bitcoin or one of the many other cryptocurrencies means signing up with a provider or exchange that want you to play by their rules and spend your money through them. Although the process is free from government or central bank control, investors are still in the hands of the money men who run their crypto.
The message from the banking world is digital money is on the way but may take some time to reach your city – and when it does the format will be digital but the regulatory and tax nets will severely restrict anonymity and trading to make quick profits.
Money without frontiers
Another problem for investors is the global nature of the market. Cryptocurrency knows no frontiers, but each country has a set of rules governing how people there can hold, spend and sell digital currency.
China, for instance, has banned cryptocurrency exchanges for more than a year and is moving to a crackdown on mining Bitcoin.
The Beijing government is also stopping banks and payment firms from providing cryptocurrency services. As a result, trade bodies are warning consumers that they have no protection if they lose money online.
The acid test for digital currency is if you can buy a sandwich and pint down the pub with Bitcoin.
When you can, digital money will be truly mainstream, but until then remains the property of geeks and gamblers trying to make money from playing the margins.
Future Of Cryptocurrency FAQ
How Can I Invest In Bitcoin?
Dozens of exchanges are available. It’s bet to look for one in the country where you live as you may have consumer protection laws that pay compensation in the event of your cryptocurrency transactions going wrong.
This is certainly the case for the UK, where the Financial Conduct Authority polices the market.
Once you have an account and storage wallet, you can buy, sell or hold Bitcoin through the exchange of your choice or spend them online in a limited number of places.
Is Trading In Bitcoin Legal?
However, in some countries, like the UK, trading Bitcoin as an investor to make a profit can come with a tax bill if you make enough money.
If you are a trader in profit, you must report your cryptocurrency activity to HM Revenue & Customs on a self-assessment return and keep detailed business records.
The capital gains annual allowance of £12,300 will wipe out any gains for small investors.
Don’t forget your gains do not crystallise until you dispose of your cryptocurrency, which is when the transactions should be reported to HMRC.
Is My Money Safe Online?
Exchange wallets are the most vulnerable, with many large exchanges falling victim to hackers who steal digital funds from an online vault despite many layers of security.
Keeping cash online is ‘hot storage’ as this increases the risk of a hacker finding you wallet and breaking in.
Cold storage is better and involves keeping your keys and passwords offline on a thumb or hard drive that is disconnected from a computer when not in use.
How Do I Choose What Cryptocurrency To Back?
Certainly, with around 10,000 cryptocurrencies, there are plenty to choose from.
Like any investment decision, some research is needed to put together a short list of likely coins or tokens.
Besides financial gain, you also need to look at security, ease of access and good customer service from your exchange.
What is market capitalisation?
The calculation is simple – take the number of shares/coin/tokens issued and multiply by the current price per unit.
For Bitcoin, the current market cap is $40,295 with 18.7 million coins in circulation, giving a total market value of more than $751 billion.
Can my crypto holding be diluted?
Bitcoin has a cap on the number of available coins set in the blockchain (21 million), so buyers know their holdings will be diluted but hope the cap maintains demand which leads to higher prices.
If the white papers published by your crypto of choice do not include proposals to mint or burn coins, then stay clear as you have no guarantee your holding will not fall in value.
The same could happen if a major fork in the blockchain occurs and coins are redistributed or exchanged.
What’s the difference between a coin and a token?
Coins typically service a broader market, while many tokens are limited to buying products and services offered by the provider.
How much does buying or spending Bitcoin cost?
The transaction fees are much cheaper than those charged by banks and money transfer firms.
Expect a $10 transaction to cost around 15 cents – but these costs can vary greatly between exchanges and should be on your short list of comparison points when choosing the right exchange and wallet.
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