Introduction
Bitcoin is a decentralized cryptocurrency system that allows online users to make a transaction using units of measurement known as bitcoin. The transactions are documented on a virtual ledger called blockchain which everyone can see; thus, it is transparent. Bitcoin is not issued or regulated by any central authority like the central bank or the government. It allows its users to transact with others without dealing with an authority such as banks or the government. It also allows for discretion, and this means that the user transactions are not associated with personal identity unless the user volunteers the information. The users can track and control their spending and are not subjected to traditional banking charges because the system eliminates intermediaries. The transactions are fast because they do not have to wait for authorization. Bitcoin is very accessible because users only require access to the internet and a digital device to transact. This system can solve the main flaws associated with the fiat currency system, as explained below.
Billions of people remain unbanked
There are more than two billion unbanked people in the world today. This is due to several issues. Many people in remote areas have to travel long distances to access financial institutions, which wastes time and other resources; thus, many prefer not to have bank accounts. The modern banking system also requires the bank to Know Your Customer (KYC); therefore, the customer must provide identification to access banking services. This bars people without identification documents from accessing banking services. Bitcoin does not require identification to transact; users only need an internet connection and a digital device, for example, a mobile phone. Bitcoin is also ideal for people in remote areas because it is always online and accessible to its users regardless of their location. Thus, the system does not require identification; thus, many people who are not banked because of the lack of identification can bank with Bitcoin. The system gives many people who have no access to the modern financial system a chance to bank. It is also not restricted to a specific geographic area and can be traded worldwide, promoting international trade and appealing to the unbanked to bank with bitcoin.
Global literacy level remains low
A lot of people in the world have little or no knowledge of how modern financial systems work. Many do not have a clear understanding of how to open a bank account, deposit money, and receive payments. The majority of people do not also know how to calculate the costs of these transactions. This makes it hard for these people to make the correct financial decisions to improve their economic situations. Bitcoin transactions are transparent and easy to understand. The user can trace the movement of the finances and thus can control their spending. This enables them to make the correct financial decisions that help the users escape poverty and create wealth (Ammous, 2015). Anyone with a smartphone can access and create a quasi-bank account to save and transact (Scott, 2016). It gives the poor financial inclusion and a better chance to trace their finances. Bitcoin users do not require high technological standards and financial literacy other than access to the internet and digital device.
High intermediary costs and slow transactions
The current Fiat currency system involves intermediaries such as banks during transactions. The intermediaries charge the users for storing, sending, and receiving money, making the transactions very expensive. These costs are almost as high as the amount being transacted especially when transacting small amounts of money. They also make it slow because the intermediaries have to authorize the transactions between the users. This causes a significant inconvenience that frustrates many users. Bitcoin transactions are peer-to-peer and do not require an intermediary; thus, it eliminates the traditional banking charges. This also saves time as the transaction does not authorization from a third party. Bitcoin and other cryptocurrencies eliminate these intermediaries and reduce the cost and time spent to transact (Tapscott & Tapscott, 2016).
Low trust in financial institutions and governments
Many people have low trust in financial institutions and corrupt government institutions. This low social trust makes many people shy away from getting services from these institutions. It is hard to create wealth without access to banking services, which hinders the progress of these people and their nations. The Bitcoin system is transparent because all its users can access the blockchain, which stores the transactions at any time. The system also allows free interactions between the users. The user trusts the network and the blockchain. Bitcoin overcomes this lack of trust and provides increased access to financial services (Nakamoto, 2008) to many people, and stimulates economic growth. The system helps fight corruption and strengthen social trust by providing users with a transparent system.
Rising Global Inequality
The gap between the rich and poor has widened to a new record since the United States Bureau started tracking it over fifty years ago. The middle class in the country is shrinking, and the lower-income earners are becoming poorer. However, the rich are accumulating more and more wealth. This is because major financial institutions are controlled by the rich. They have access to credit services, information, and financial expertise, which they utilize to create more wealth. There are many barriers that make it difficult for the rest of the population to access financial services and create wealth. For example, most of the lower classes do not have access to credit services from major financial institutions or get them at very high-interest rates. This makes it hard for them to save money or get the capital required to invest and create wealth. Poverty is driven by economic factors such as low financial literacy levels and limited access to financial services. Bitcoin offers the unbanked access to financial services and thus provides them with a chance to escape poverty and improve economically. Bitcoin also establishes a store of wealth that is globally recognized which facilitates trade and commerce. It gives low-income earners and the middle class a real chance to grow economically create personal wealth. It broadens the economic possibilities of an individual life by providing easy access to financial services. The system allows the lower classes to create their own financial alternative because it is flexible and the barriers of entry are low. The system also enhances better international financing; individuals in developed countries can send small amounts of money to people in developing countries because it eliminates intermediary costs. This gives the people in developing countries a chance to grow and create wealth and reduce wealth inequality in the world.
Currency manipulation and censorship
The government holds the value of currency in a fiat system through the central bank. The government can adjust the value of the currency to meet certain obligations. Governments control fiat currency using monetary policies to exert economic influence in a nation. Governments dictate how the currency will be printed and moved. This can cause problems such as inflation and deflation, which have adverse effects on the currency users. The government also implements policies such as taxation to control the amount of currency in circulation. Government agencies track the spending of money by the users for other reasons, such as track criminal activities. This allows governments to shut down user’s accounts that are suspected of engaging in criminal activities. This can be very unfair and inconvenient to some users who might be innocent. Bitcoin is decentralized, which means there is no authority which to authorize and monitor transactions. User accounts are safe and cannot be shut down by an authority figure. The value of Bitcoin is decentralized and is based on the current demand for the currency without any influence from a central authority agency. Thus, the value of Bitcoin is not affected by inflation or deflation. This gives Bitcoin users complete control of their wealth, and they can easily pass it to their heirs without interference from third parties.
The buildup of systemic risk
The existing financial systems are very complex and centralized, which creates a risk. A single failure from the authority bank disrupts the entire financial system, thus inconveniencing its users. Decision-making takes time in this system, and this causes delays in customer service. Bitcoin introduces a decentralized system that eliminates these risks. It eliminates intermediaries, thus makes the system simpler. The system is decentralized; thus, a glitch in one part does not affect other users. The system is transparent, and thus there is little chance of failure compared to the fiat system. Bitcoin also insulates its users from bank failures and collapses.
Conclusion
Technological advancements in the information and communication industry have already revolutionized other sectors such as transport, hospitality and health. Bitcoin and other cryptocurrencies will revolutionize the financial sector as more in the world continue to get access to digital devices and internet connection. The system has a few problems, such as being “too slow” and it’s value being denominated in fiat, make Bitcoin very volatile in the short term. However, researchers are constantly working to solve these issues and improve the system.
References
Ammous, S. (2015). Economics Beyond Financial Intermediation: Digital Currencies’ Potential for Growth, Poverty Alleviation and International Development. Ammous, Saifedean, 19–50.
Scott, B. (2016). How can cryptocurrency and blockchain technology play a role in building social and solidarity finance? (№2016–1). UNRISD Working Paper.
Tapscott, A., & Tapscott, D. (2017). How blockchain is changing finance. Harvard Business Review, 1(9), 2–5.
Nakamoto, S. (2008). Re: Bitcoin P2P e-cash paper. The Cryptography Mailing List
