At one time, very few people thought Bitcoin would ever make a serious impact in the world. Many viewed it as more of an obscure hobby or a pipe dream than a real investment opportunity. Today, the story is quite different.
News about Bitcoin and other cryptocurrencies, as well as blockchain, is everywhere. Banks, companies, investors and governments have taken a real interest in it.
Whether they’re looking to get rich or warning of a potential crypto bubble, most people now accept Bitcoin can have a real impact on the economy.
The story of cryptocurrencies is just getting started, but it’s already affecting the economy. Here are five ways it’s doing that.
1. Eliminating the need for middlemen in financial transactions
One of the primary features of Bitcoin is that it doesn’t require an intermediary like traditional currency does. Rather than a bank or other central institution validating transactions, all users of the currency verify it in a decentralized fashion.
It has banks worried, because cryptocurrency eliminates the need for their services. Since they don’t have to pass through multiple hands, transactions take place much more quickly. It also has caused concern because it’s become harder to regulate financial activity, which has especially interesting implications on the international level.
2. Separating transactions from the dollar
The U.S. dollar acts as the reserve currency for the global economy, and mainstream financial transactions that take place around the world have their basis in the dollar. That is a primary source of America’s global power and has enabled the U.S., along with other nations, to place economic sanctions on other countries.
Cryptocurrency transactions, on the other hand, don’t need to have any connection to U.S. government-sponsored currency. It provides financial actors another way to participate in the global economy and circumvent U.S. economic policies. Venezuela has introduced a cryptocurrency it says is backed by the country’s oil supply as a way to get around sanctions. Other nations have tried similar tactics.
3. Removing barriers to entry
Cryptocurrencies have also enabled entrepreneurs to bypass traditional routes of raising capital for crypto- and blockchain-related business ventures. Rather than having to convince venture capitalists and banks to invest in their project, they can bypass the regulation and red tape through an initial coin offering, or ICO.
An ICO is similar to an initial public offering, in which a company offers shares in its company for the first time. In an ICO, however, a startup sells a portion of a cryptocurrency to backers to fund the project.
Many countries have started placing restrictions on ICOs, and the People’s Bank of China has banned them. The Securities Exchange Commission does not regulate ICOs and none have registered with the agency, prompting the SEC to issue a warning about potential risks to investors considering ICOs. The fact that this fundraising approach has gotten so much attention indicates that it’s disruptive.
4. Complicating regulation
As we briefly touched on earlier, one potential challenge related to cryptocurrency transactions is that they’re hard to regulate due to their anonymous nature. It’s what facilitated the growth of the Silk Road, the massive anonymous online marketplace where users could buy illegal items without consequence until the FBI shut it down. This anonymity also enabled various scams.
Another reason governments are concerned about cryptocurrency is that it makes it easy for people to avoid paying taxes. This fact has caused various countries to consider stricter regulations on crypto and even develop their own government-sponsored cryptocurrencies.
5. Enabling more international transactions
Around 2 billion people worldwide don’t have a bank account, and in many countries around the world, businesses still cannot accept credit card payments. For people in these typically less developed countries, crypto offers a way to engage with the global Internet economy.
Connecting to the Internet economy has, in part, enabled many businesses in the United States to thrive even in times of economic slowdown. Bitcoin could have a similar impact for people living in countries around the world with weak economies.
It could be especially helpful to migrant workers who send money home to their families while working abroad. Currently, these workers must pay fees that average 9 percent to transfer the money through international financial institutions. If using crypto, they could do it for practically free.
Whether we focus on the potential harm or the benefits the crypto revolution could have, we can no longer deny Bitcoin and related technologies are impacting the economy in tangible ways.
The transformation, however, is just getting started. There are likely many more changes to come.
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