END OF THE CASH ERA AND THE RISE OF CRYPTOCURRENCY
By Uzair Awan
According to a study done in the UK, a 35 percent drop in cash transactions was seen in the year 2020. While another study done in 2019 showed a figure of 13.7 million people leading a “cashless life”. Global food chains like Itsu, Prezzoetc, and Côte Brasserie, etc are not accepting cash payments and are on a growing list of restaurants that have gone card-only. Even companies like Ikea are gradually moving towards cashless payment in some countries (like the UK).
All of the facts and figures stated above give one crystal clear picture and that is the inevitable rise of digital payments. But why was there ever a need for digital payments in the first place? A payment that was convenient, fast, safe and reduced the costs of printing and handling cash gave birth to digital payment methods like credit/debit cards, PayPal, Square, CashApp, Venmo, etc. Later payment methods like Square bridged the gap where some small merchants weren’t properly equipped to take cards, by allowing any small contractor to easily accept payments and signatures on their phone. But there was one thing common in all of these payment methods and that was that they were controlled by a centralized system meaning banks or central authorities maintained records and processed transactions.
It was not until 2008, when a man whom nobody had ever met or spoken to (except via emails and online forums) Satoshi Nakamoto recruited a handful of programmers and set out to build a revolutionary new digital payment system known as Crypto-currency today. What began as an experiment by a few programmers is now a trillion-dollar ecosystem.
Still the hot question remains; what exactly are crypto-currencies? How do they work and what potential do they hold? So, crypto-currency is a digital currency through which you can make payments but here the transactions are verified and records maintained by a “decentralized” system. That means there is no government stick behind crypto-currencies. Then who records the transactions? Well, over here it is the collective effort of a community of peers to individually verify each transaction and the details are recorded in a shared immutable ledger called the blockchain using consensus algorithms. Let’s try to understand this procedure with the help of a comparison with the traditional centralized system.
- Whenever you buy something online a transaction takes place. The bank and the platform are notified about it so that they can store the necessary information about the transaction. Similarly in the case of crypto, the block is notified about the transaction.
- Next verification is done by E-commerce store and the bank when you make a purchase since crypto doesn’t have a centralized entity; a consensus method is used to verify payment. The participation of the peers is crucial for making the consensus method work.
- Once the payment is verified it is recorded in the ledgers or block in the case of crypto.
- Lastly each block gets a unique hash value. A hashing algorithm takes an infinite number of bits (for example the data of your transactions), performs calculations on them, and outputs a fixed number of bits called as hash. So basically, instead of remembering the input data which could be huge, you can just remember the hash and keep track.
From an individual perspective, cryptocurrencies are an easy way to escape capital control however they are also a natural fit for money laundering and tax evasion. Moreover, the extreme price volatility of cryptocurrencies like the Bitcoin with its price at the mercy of speculators and social media influencers raises an argument against the use of cryptocurrencies. These factors are the major reasons why the use of cryptocurrencies is banned in some countries. On the other hand, some countries like El Salvador legalized Bitcoin for receiving remittances and reported savings of 400 million dollars on fees for money transfer services such as Western Union. While PricewaterhouseCooper (PwC) reported that some 60 governments are currently developing their own digital currencies using blockchain technology but unlike crypto, they are heavily centralized.
Just like we had the technology to produce electric vehicles since the 1980’s but didn’t have the industry acceptance for a change in the system or infrastructure until Tesla disrupted, causing sales of new gas-powered vehicles to fall, making the big players aware of the necessary change. Similarly, there may need to be a similar event for cryptocurrency. But one thing is clear that it’s coming. It’s inevitable, just like electric vehicles.