Tuesday, August 16

In five years all the coins will have their digital avatar

In the next 5 years the main currencies they will have their digital equivalent. A study conducted by EAE Business School concludes that the current number of cryptocurrencies It is “unsustainable” due to the “exorbitant” energy consumption and that in the next five years there will be an accelerated concentration process facilitated by the fact that the current main currencies will create their avatar digital. Professors Javier Rivas, Victoria Eugenia Sánchez and Sofía Ruiz draw a future in which digital currencies based on ‘blockchain‘will settle, although many of them will disappear. “There are huge challenges but, today, it is about the technology that provides greater security in transactions. In the same way that the adoption of fiat money over money based on raw materials, or the credit card involved enormous efforts , for example, to fight fraud. We are facing a new type of money that will increase the security, in the medium term, of the strength of the system and will reduce the number of intermediaries, “says Rivas.

The report notes that the current number of cryptocurrencies is “unsustainable.” Deregulation has made thousands of cryptocurrencies appear without practically “any type of control”, generating a market that today is worth about two trillion dollars. “This in itself is a danger for international financial markets. Any control measure must be gradual and an attempt must be made to ensure that the disappearance of the vast majority of these assets generates the least possible systemic risk ”, explains the analysis of these experts.

In addition to Bitcóin, the authors of the study highlight Ether, the second cryptocurrency by level of capitalization. In 2020, its value has gone from around $ 150 to over 2,000 and is currently trading at $ 4,400. This sudden revaluation is also observed in other currencies such as Cardano, Cosmos, Dogecoin or Tezos. “The institutionalization of cryptocurrencies and their adoption by relevant companies such as PayPal, Tesla, Mastercard or Square in recent months has raised expectations regarding them,” says Rivas.

One of the disadvantages of cryptocurrencies that the EAE report points out is the “exorbitant” energy consumption, not only because of its cost, but also because of the environmental implications. The study details that the carbon footprint to produce a bitcoin is approximately 20 times what it costs to extract the gold equivalent to the value of a bitcoin, and that the gold mining industry is highly polluting. If they were to become common currency, their mining would require much more energy than is now capable of being produced. Another disadvantage is the “difficulty” of collecting tax. “The move to official cryptos can produce just the opposite effect (total supervision and obtaining behavioral guidelines), although there may be intermediate ways, such as cryptos that are already used by some banks and that adapt to the current rules of the financial system” observes Professor Rivas. The alternatives that will open the digital versions of conventional currencies, the digital avatars, can modify the current map of cryptocurrencies and transform the equivalence relations.

The study authors urge “urgency in regulating the sector.” “Although at the moment the weight of illicit operations is not so great, the potential of these assets to finance illegal activities, terrorism or money laundering is enormous. There must be a regulation that prevents it and it must be international, since it is a global problem ”, they point out in the report.

Regulatory scenarios

The first scenario would be the non-regulation and the delay in the creation of official cryptos, which would mean “a collapse” and a very important impact on inflation. In this sense, the study recalls that on October 16, 2021, the Bank of England said that the enormous inflation of crypto assets has the potential to generate a crisis like the one in 2008. “In such a scenario, central banks would take action”, the authors anticipate.

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The second scenario would be the coexistence of official crypto, regulation and the best crypto assets. In this context, the Central Banks would give them support and advocate their use among citizens, as the study collects. This would have “a devastating effect” on some assets that are based on a 1 for 1 relationship with the dollar or other currencies, although “they would probably not disappear completely”, there can always be a marginal use in countries where the purchase of other official currencies is limited and in some highly speculative crypto assets. From this regulation, cryptocurrencies that have a higher degree of regulatory compliance (current or potential) or those cryptos backed by strong business development would benefit above all.

The third scenario would be the prohibition of cryptocurrencies, “a long shot”, but it could occur if official crypto cannot be launched due to bureaucratic / legal problems, or they do not have the possibility of competing with the original crypto. “This reality would cause a very marked shift in the use of these assets towards use outside the real and regulated economy and a progressive worsening of business conditions,” says Rivas.


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