It has been 11 years since we had the financial meltdown that shook people as they watched the global economic crash. And still, people wonder if history could repeat itself, have the right measures been undertaken to prevent another from happening? What were the views in consideration for a better financial system and where does Crypto, this disruptive being as they call it, find the way in this new and better financial system?
People started pointing fingers when the banks which seemed too large to fail went down. The auditing/ credit rating companies blamed the lack of information given to them and more financial institutions played the blame-game. This was definitely not going to solve the problem but neither was forgetting the melt down and moving on.
How can we trust the validity of the instruments being sold and bought when the ones selling them are betting against the very instruments they are selling who’s right and who’s wrong? As the stock market jumping points. Securities didn’t feel so secure and trust was nowhere to be seen.
With the new regulations being proposed INSEAD professor of banking and finance Jean dermine had this to say:
““Banking regulations after the global financial crisis, good intentions and unintended evil,because we should not forget that banks are extremely useful in the real economy, to finance lending to consumers and small and medium-sized companies. If you come with stringent regulations, the cost of lending is going to go up tremendously. The cost of bank loans to small firms will increase”
Nothing and No-one is too BIG to fail.
What went and what is wrong?
Firstly, the rise of asset bubbles and speculation around them leading to contradicting the positioning of the stance of investors. Then the incentives being offered to the transaction initiators that tend to be more rewarding to the speculation that the wealth creation itself in the long run. Even the buyer of debt fails to properly assess whether the borrower can repay the amount leading to heavy debt amounts which are subjected to interest rates as well being either fixed or market-oriented interest rates.
Additionally, the models created does not work as efficiently as they are proposed to be leading to the questioning of the basis of the construction of these models.
From transaction fees to interest rates from a national and international perspective financial caging is all around us.
Can crypto solve if not all at least some of the problems?
With crypto, the room for fraud is minimized as all the transactions are maintained on a public ledger with the identity of the parties participating in the transaction encrypted. This encryption helps maintain the safety of identity, with the help of Blockchain technology the security measurements are able to reach new heights to ensure the safety of users of crypto.
An international transaction through a trusted third party, for example, a bank will take close to 3-7 days to process a full transaction and the money transferred at the end of the transaction will not be the full amount because of the fees/ cost of the transaction.
Crypto aims to remove this transaction delay and makes the transaction instant by removing the ‘trusted’ third party and with no fees/cost of a transaction. Accessibility of cryptocurrency was a factor to deal with, with the value of cryptocurrencies such as Ethereum, etc increasing people were intrigued to get in and with the help of a lot of cryptocurrency companies coming up with exchanges and products to help increase better user experience for people engaged with cryptocurrency.
Crypto and finance have a long way to go, but in this journey they must take together they will grow in the aspect of better transactions, easy international transfer and trading, strong security and help overcome an important challenge called inflation.
Cryptocurrency is knight in shining armor for business transactions as it relieves the stress and need for the brokers, agents etc who set up the contract and take the brokerage fees. Cryptocurrency is the simplest form to engage with this transaction without the need for a middleman on a peer to peer foundation.
When transfer of crypto takes place across borders it is not subjected to a transaction rate, interest rate etc pertaining to an individual country instead it is decentralized having a valuation maintained globally.
Security has always been a key measure on any transaction medium, whether it is a transaction at the grocery store or an international transaction security is always an important point of consideration. Strong security is achieved with cryptocurrency as an issue for reverse of funds cannot take place after the miners have validated the transaction.
Apart from the advantages of security and ease of transaction we need to consider another important factor called inflation.
Why inflation? Inflation goes beyond the financial caging and it has been a factor to reckon as it causes uncertainty and falling investment, it also reduces the consumer confidence and high increase in cost. Is inflation a force we will bend too for the years to come? Here what I feel Cryptocurrency can put as a fight against inflation.
Cryptocurrencies fighting limitations
What can be bought today with an amount of a particular currency will not guarantee the same purchasing power in the next few years. Ever since gold was mixed with lead to make more gold coins being passed around within the economy led to a decrease in value. Having a lot is not necessary if a lot doesn’t have a ‘lot’ of value. With the supply of Bitcoin being subjected to the mathematical laws and the limits to computing power inflation was given a thought. If more people start mining then that would result in an increase in the amount of bitcoin, but it was said that there would soon come a halt to the supply of bitcoins and no more bitcoins would be available in the market. Thus Bitcoin scarcity created would result in more of deflation than inflation.
We are bound to the market changes, we are bound to certain factors governing inflation but we are not bound to exercise financial freedom in transactions. Financial caging means centralized authorities govern our wealth, they manage our portfolio while we pay them for churning data out through our daily lives.
Cryptocurrencies puts an end to this centralized governing, its puts a pause on financial caging and builds a ladder for you to manage your own wealth without having to worry about the next economic crash.