After raising more than $63 million from digital currency donations now legalized its crypto sector, allowing exchanges to operate freely and mandating banks to open accounts for crypto companies.
This move further legitimizes the rise of digital or virtual currencies and raises pertinent questions surrounding their role in geopolitics
Already, some tech companies have the power, resources and influence to rival nation states and as digital currencies become more pervasive, they could test the resolve of a world order based around geography. In an article for Foreign Affairs, Parag Khanna, the founder of Futures Map, describes why technology is beginning to redefine traditional geopolitics. He writes, 'Network proximity is now on par with physical geography, and basic geopolitical assumptions about citizenship, migration, power projection, and the use of force need to be rethought for the digital world.'
However, before looking at how cryptocurrencies and geopolitics intersect, we first need to understand what cryptocurrencies are, and what a future dominated by them could look like.
What is a cryptocurrency?
According to Tim Mossad, a former chairman of the US Commodity Futures Trading Commission, a cryptocurrency is defined by three key elements. First, that it is a digital representation of value, second, that it can be transferred electronically and third, it is recorded in a digital ledger that is widely accessible. There are two primary types of digital currency, one issued by the state, and the other, by a private entity.
Sovereign digital currencies, like China's Digital Yuan, are government issued. Also known as Central Bank Digital Currencies (CBD Cs), they, like fiat currencies, are validated by the central bank of the issuing country.
According to Aaryan, a crypto entrepreneur who spoke with indianexpress.com, CBD Cs have 'very little to do with crypto, with the crypto element in question contingent on how Central Banks issue the currency and keep track of it.' For being decentralized is a core element of 'real' cryptocurrencies (essentially public sector variants) and without that design principle, CBD Cs are very similar to existing currencies, they just operate on newer technology.
In contrast, private-sector digital currencies generally rely on decentralized blockchain technology to settle accounts between users. Those currencies include Bitcoin and Ether, which fluctuate in value relative to the US dollar, and also a subset of cryptocurrencies called stablecoins, like Facebook's Diem, which are pegged to a fiat currency and designed to remain relatively stable.
So, what are the advantages of adopting cryptocurrencies?
For consumers, transferring money becomes a lot cheaper in certain instances, safer as well. Transaction costs of cryptocurrencies are much lower than fees levied by most banks. Additionally, transaction values cannot be replicated. For example, if you were to buy a concert ticket from ticketmaster.com, the issuer would send you a PDF of that ticket. I could then potentially sell that PDF to multiple people, with no one realizing that they have been scammed until the second person arrives at the door of the event. With cryptocurrencies, I couldn't do that. Once you have sent the value to one person, you can't send it to anyone else.
For governments, CBD Cs could be useful if they can exploit first-mover advantage. China for example is miles ahead of its counterparts in the development of a sovereign digital currency and is on its way to set up exchanges with other countries. Similarly, countries can take advantage of cryptocurrencies by introducing favorable regulations (like Portugal) that would incentivize capital landing.
Cryptocurrencies also have the potential to transform the entire financial system. According to Balaji Srinivasan, the founder of Coinbase, Central bankers have largely quashed price discovery, making it very difficult to get a sense of the health of individual companies or the real economy as a whole from asset prices. However, with digital wallets, you could potentially hold every asset on your computer, from cryptocurrencies to CBD Cs to fiat currencies, every stock, and even, a minute of your time or a gigabyte on your hard drive.
In practice, if everyone adopted digital currencies, we would create a decentralized finance matrix (def matrix) where every asset competes against every other asset. Srinivasan argues that such a matrix would represent extreme capitalism, removing geographic advantages from global markets and ensuring complete price discovery. Shanna writes that this change is ushering in a new era of global monetary competition, 'where national currencies must earn their place in someone's wallet portfolio every hour of every day, even among citizens of their own countries.'
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