Impact of Cryptocurrencies

Crypto currencies have widely been considered as an instrument to support the growth process in of countries. Crypto currencies could provide a significant benefit by overcoming the lack of social trust and by increasing the access to financial services as they can be considered as a medium to support the growth process in developing countries by increasing financial inclusion, providing a better traceability of funds and to help people to escape poverty.

  • The first advantage is that crypto-currencies combine important properties to foster trust, such as accountability and transparency, which allows trust free interactions between counter-parties. The underlying blockchain technology uses consensus mechanisms, hash functions and public and private key encryption to control transactions, which leads to the fact that the user does not have to trust the counterparty. However, the user must trust the network and the underlying blockchain. Thus, it is essential to secure the blockchain against fraud and attacks.
  • For central bank-issued currencies, trust is established by third parties like intermediaries, and in every digital transaction in a fiat currency, an agent is employed to oversee the exchange. Transactions conducted by intermediaries do not only take time, but they also result in a risk premium for the user due to higher transaction costs.
  • Another benefit of the decentralization of crypto-currencies is that governments cannot manage them. Hence, crypto-currencies are not restricted to a specific geographic area and can be traded around the world.

Nevertheless, these border independent payments also have some negative aspects, which need to be considered.
There is great potential to further strengthen the development of countries with the help of crypto currencies for example, by reducing corruption through enforcing social trust or by increasing financial inclusion of the population. Moreover, crypto currencies can allow people and firms to utilize technologies and increase the speed of development. However, it must be noted that realizing this potential is often significantly harder than it seems due to various limitations. Examples of such limitations are illiteracy, financial illiteracy, unstable political situations, unstable job markets and price volatility.
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