Bernard CHAUSSEGROS’ weekly economic column
The simple term “cryptocurrency” carries in itself, in the public mind, the idea of something impure, the prefix “crypto”, from ancient Greek, giving the feeling that one is hiding something. Even if we know that in this case, it means that crypto-currencies are built on the basis of encrypted data, or even encrypted.
But just as a cryptogram is an enigma based on an encrypted message, cyber currencies remain an enigma in public opinion, outside informed circles. Is this a new reality of the economy or a new style of scams of all kinds? The Blockchain
Cryptocurrencies are based on a “Blockchain”, which is a technology for storing and transmitting information without a control body, a gigantic database. The information it contains is sent by users, linked together, verified and grouped in blocks.
By integrating into the chain, each new block validates and authenticates the previous one, making it impossible to make any subsequent changes. And it is the entire chain, through its internal links, that is secured by cryptography tools. In accounting, we could say that it is a ledger, shared and secure, which traces all the information (or transactions) made by and between users, and which is linked to each other, which makes them “safe” and guarantees their integrity.
It is a decentralized system, since there is no central authority or trusted third party. Cryptocurrencies
A cryptocurrency is a digital currency issued peer-to-peer (digital asset), without the need for a central bank, usable by means of a decentralized computer network. It uses cryptography technologies and involves each user in the processes of issuing and settling transactions.
In France, institutions (including the state that holds the monopoly of the right to “mint” money) refuse to talk about “crypto-currency”, considering that they are not currencies, these being the responsibility of central banks. In their opinion, it is appropriate to use the term “crypto-asset” to mean that they are only “virtual assets stored on an electronic medium allowing a community of users accepting them in payment to carry out transactions without having to resort to legal tender”. Since 2019, the legal and tax term enshrined in the law is that of digital asset. Objectives and benefits of cryptocurrencies
Since the early 2000s, cryptocurrencies have been a real success, especially among the younger generations. Some see it as a matter to speculate, others hope to find a way to advance the economic world.
Avoiding intermediaries and securing exchanges and personal data are the main benefits that can be derived from the implementation of crypto-currencies.
Above all, they bring great freedom, with users exchanging with each other without financial intermediaries dictating rules. They make it possible to free ourselves from the constraints imposed on us by the banks. A cryptocurrency like “Bitcoin” is managed on a computer network connecting thousands of computers spread across the globe and open to all.
As we have specified, transactions are stored transparently within the Blockchain, and are, therefore, guaranteed, secure, tamper-proof and accessible to all. This system is much more transparent than traditional currencies whose traceability of transactions excluding transfers is almost non-existent. Users have full power over their cryptocurrency. Conventional money is not under the control of those who own it, because they are constrained by the rules imposed by financial intermediaries.
Cryptocurrency exchanges are characterized by their speed, and by fees much lower than current bank fees.
More broadly, the use of crypto-currencies facilitates exchanges and accelerates them. Unlike state currencies, cryptocurrencies do not suffer from the rules of exchange rates, the weight of interest rates or fees of any kind imposed by financial institutions. They therefore allow a use without real constraints on a global scale. Users or companies that use it save a lot of expenses and see their exchanges accelerate, saving valuable time. Obviously, cryptocurrencies also facilitate transactions between companies.
Thus, users remain the owners of their account, as long as they alone hold the private key and the associated public key that constitutes their cryptocurrency address.
The system is in its infancy, however, and for public opinion, it will still take a long time for cryptocurrencies to replace official currencies in trade. But the movement is underway, as cryptocurrencies will offer users to retain full control over their funds and secure, fast and lower-cost global transactions. But some states now make it their official currency like in El Salvador where you can buy your wand with bitcoins.
Some imagine, but isn’t it utopian that this new “monetary” system could spread wealth throughout the world, while guaranteeing the sustainability of citizens’ goods? The disadvantages of cryptocurrencies
On the other hand, we can identify two major disadvantages in the use of cryptocurrencies, the absence of any regulation and their complexity.
Cryptocurrencies will be relatively difficult to set up, especially because of the absence of any regulation (since it is intrinsic to the Blockchain) which disturbs and worries potential users, institutions, traders and citizens who see a real lack of guarantee. And such a lack of guarantee, combined with the fear, founded or not, of fraud, prevents the system from developing. Especially since many see it as a fad, as we have often experienced in recent decades, with the feeling that this “bubble” is likely to explode.
The meteoric rise in the value of Bitcoin in recent years does not tend to reassure those who would be tempted to subscribe to it. This explains why, despite the benefits they could provide, cryptocurrencies are not yet used in everyday life. And it is of course worth noting, on the one hand, the influence, in this area, of conspiracy theories and, on the other hand, the poor quality of the information, even its biased interpretations, disseminated by the media.
If crypto-currencies are not yet considered as a tool of the future for the development of the world economy, they are, on the contrary, seen as a new webized strategy game whose essential purpose would be speculation.
Still, certain signals must alert us.
First of all, with regard to the incredible speculation that is developing around Bitcoin (the reference cryptocurrency, if there is one), who still remembers that the very first transaction in the world was carried out in 2010 when two pizzas were sold for the sum of 10,000 Bitcoins? If the restaurant owner or customer had had the good idea to keep these Bitcoins, he would now be at the head of a staggering fortune of nearly $600 million. 600 million dollars is precisely more or less the amount that a hacker recently managed to temporarily divert with a click by hacking a platform of exchange of crypto-currencies. To secure your assets, it is better to have a good old bank….
Also regarding the ecological impact of the mining of crypto-currencies, it now represents an electricity consumption equivalent to that of entire countries. In Iran and China, mining farms have created power shortages and power outages among the population, while in the United States, where they are now settling en masse, since their recent ban from China, they are warming entire lakes whose water they use to cool their servers, and killing their ecosystem.