When bitcoins are used to buy something, a global network of computers checks the blockchain to confirm you own the bitcoins. It can instantly check, authenticate and guarantee every bitcoin transaction.
Using a credit or debit card is different. When you use a credit card, a financial middleman, like a bank, verifies the transaction and charges you a fee.
With bitcoin, there is no middleman. The verification and transfer is done instantly at a fraction of the cost. Many believe that as bitcoin-like technology improves, it will be used to process everything from stock trades to voting. This could save bitcoin users billions of dollars.
This could also revolutionize global financial transactions. About 75 percent of the world can’t buy anything online, because they don’t have a middleman to clear the transaction, like a bank or credit card company.
The blockchain allows anyone with a phone to make transactions directly, without a middleman. If this became available to everyone, online retailers, and overall global business, would see huge benefits.
Governments in China, the U.K., Canada, the Philippines and other countries, are looking into developing their own digital currency. But, if they do introduce their own digital currency, alternatives like bitcoin may be banned.
Despite the popularity of bitcoin in Singapore, there are even bitcoin ATMs, there is not any talk of creating a virtual currency here, yet. The head of the Monetary Authority of Singapore, the central bank, recently said, “I would say virtual currencies have a role to play, but I doubt they will replace the fiat money that central banks issue – but I could be wrong.”
But some think countries want their own digital currency for more than just helping their citizens save on transaction costs. There would be more surveillance with fewer cash transactions, and this worries some people.
Many think governments and central banks are waging a war on cash. There are calls for the European Central Bank to scrap the 500 euro note. And some academics in the U.S. are saying it’s time to end the US$100 bill. They say this is necessary to control illegal money funding crime and terrorism.
In Singapore, there is no talk of eliminating any large notes, but there may be efforts to regulate digital currency. And for many of the same reasons – it’s too easy to move money anonymously using digital cash, so it can be easily used to fund criminal activity.
If there is less cash and a digital currency, it would be easier for central banks to control the money supply – which is their main goal. As we discussed here, when prices are falling, or, there is deflation, people start hoarding cash, either in a savings account or under the mattress.
To fight deflation, central banks lower interest rates. The hope is that this makes cash held in a bank account less attractive, so people take it out to spend or invest – and this will stimulate the economy.
But, with rates near zero in most places, and economies not growing, central banks really can’t cut rates any more to stimulate the economy.
So, that is why there is now talk of negative interest rates. With negative interest rates, banks would have to pay to hold cash. The idea is that having to pay to hold cash will motivate banks to lend it out for people and businesses to spend and invest. Or, at least, people would get tired of earning no interest on their savings, and the fees that come with keeping it in the bank, and decide to spend or invest it.
However, when there is paper cash people can just take their money out of the bank and keep it at home. Central banks don’t want this either, they want the money to be spent, not hoarded.
If there was no more cash, or at least a lot less, and most deposits were digital currency, it would be easier for a central bank to “tax” all deposits and force people to spend or invest. In fact, some well-known economists have said that the world would benefit from the “end of cash.”
And China may have other reasons to set up its own digital currency. China is bitcoin’s largest market. Four of the five largest bitcoin exchanges are based in China, and the yuan is the most traded currency on bitcoin exchanges.
Plus, in the 11 months leading up to November 2015, about US$843 billion of money left China, according to Bloomberg.
So, it could be that the Chinese government is looking to not only control and regulate the digital currency market, but to also prevent so much money from leaving China.
As the head of the MAS said, it is unlikely that digital cash will replace paper money any time soon. People like having cash in their pockets and using it to buy things. The biggest question is, what’s the real reason governments and central banks are looking into their own digital currencies.
This article is contributed by Kim Iskyan, the founder of Truewealth Publishing (www.truewealthpublishing.asia
