Advantages & Disadvantages of
Crypto Currency (CC);
And its comparison with alternative payment systems.
1. CC Advantage: Once a transaction of crypto currency (CC) is executed, one can’t go back. Comparison: This kind of finality is available for cash payments as well as credit card payments.
2. CC Advantage: There is no regulator, no Government control over a CC. This largely applies to cash transactions also. However, cash transaction is not practical for long distance transactions. CC can be transacted over the internet & hence international transactions are convenient. CC is truly The Money for a Borderless World. Like E-Commerce, it is a challenge to geographical borders, to regulators.
3. Primarily, people wanting to do normal, legal business transactions should have no problem with Government or Central Bank regulating payments.
CC Advantage: However, it has been established that – Governments manipulate prices of currencies. Their own currency as well as others’ currencies. American Financial Crisis of 2007 established that American Government cannot be trusted. Probably this was the important reason why Bit Coin was launched in the year 2008. Proponents of CC claim that unlike Fiat Currencies, CC cannot be manipulated by Governments. Counter Point – Massive fluctuations in CC prices show that someone is manipulating CC prices.
4. CC Advantage: Some Central Banks & Governments impose arbitrary controls on cross border transactions ( FEMA) & on regular loans ( NBFC). Once in power, best of the regulators do not understand that they are enforcing an outdated & absurd law. In this respect, CC is like Gandhiji’s Dandi Satyagrah”. “If you don’t change your absurd laws, we will violate the law openly”.
5. CC Disadvantage: Crypto Currency issuers claim no responsibility to stabilise the price of CC. Hence it is open to massive fluctuations. Bit coin price fluctuations have established that it is not meant for anyone but the hard-core speculators & gamblers.
6. CC Advantage: Since no intermediaries – like banks are required, transactions can be fast & cost efficient. In India, many banks have collected usurious charges - especially on – Foreign exchange conversions. They have also delayed delivery of credit to the recipient (payment lag). During the delay, banks have enjoyed the cash in transit for their own business. This is good cause for people opting CC.
7. CC Advantage: Swift: Nirav Modi has proved that the communication system used for payment transaction – swift – is highly vulnerable. It is the experience of many that when money is transferred through swift, it does not reach the right party. Such a weak system is a serious cause for people seeking alternatives.
Some other Disadvantages of CC that need long term thinking:
8. Unnecessary lengthy record: What is the need to maintain record of an entire cycle of all transactions from inception? In ten years the cycle will be so long that instead of present 30 minutes time taken for processing a single transaction; it may take 24 hours. Amount of computer power required, and electricity consumed may make it unsustainable.
9. Hacking: Bit Coin is entirely based on software. There is no outside the software safety or cross check. When a college student hacked into NASA computers; he proved that software and internet are vulnerable. There have been several attacks on different CCs & their exchanges. Some have been successful.
Established Rule: Any soft product on the Internet will be hacked. All CCs and their exchanges are vulnerable to hacking attacks.
10. Game Theory:
Bit Coin’s continuity is based on several assumptions. Some of them are:
(i) One cannot hack into the Bit Coin system unless – he commands a computer power higher than the combined computer power of all the nodes involved in Bit Coin mining.
(ii) If someone amasses so much computer power, he would rather generate bit coins than harm the existing system. This is the core assumption in Game Theory.
Response to both assumptions:
(i) In computer field, it has been seen that – What is impossible today; becomes the norm tomorrow.
(ii)(a) It is now proved that there are some people who can act against their own interest. Game theory works while it works. When it does not work, all the super structure based on the assumption collapses. A person with massive computer power may just destroy any CC just for the malicious joy.
(ii)(b) We have also heard of share market – derivative speculators who claim that they can make profits both ways – when prices go up; and when prices go down.
11. CC Disadvantage: All the advantages of a CC are lost on the fact that: CC has no intrinsic value. This fact is highlighted below in a PPT.
Notes: Block Chain is a software system. We are not discussing Block chain in this presentation. CC is, in many cases, an abuse of the system.
Some issuers of CC claim to have an underlying business/ asset. Bitcoin issuer has made it clear that there is no underlying business nor any other asset. Hence in the PPT below, I have focussed on Bitcoin.
For PPT file - Click Here