With the inception of bitcoin, the market of cryptocurrencies was inaugurated over a decade ago. Since then, the emergence of cryptocurrencies disrupted the world by entering the existing financial system. However, financial innovation brought by cryptocurrencies isn’t considered remarkable by many. For instance, outlining flaws of cryptocurrencies, chairman of the Federal Reserve (Fed), Jerome Powell discussed the downsides of cryptos in Zurich, Switzerland.
According to him, lack of cybersecurity and ability to create as much cryptos as needed are extremely unbearable defects of digital currencies.
Highlight: “We are following the whole question of digital currencies,” says Fed Chair Jerome Powell. “It’s not something that we are actively considering. For us, it raises significant issues that we would want to see resolved.”https://t.co/xpAujlCWBd pic.twitter.com/n5M5XDU5AZ
— Yahoo Finance (@YahooFinance) September 6, 2019
At a forum in Zurich, Powell clarified that the United States Federal Reserve is only observing cryptocurrencies and not developing or planning to develop a cryptocurrency of its own. While explaining the prerequisites of a suitable currency for U.S., Powell taunted the imperfections of cryptos. In this regard, he said:
If you think about one currency that was for the United States, it would really need to be cyber secure because it’s one thing to be able to counterfeit paper currency, it’s another thing to hack into a cyber currency and create, with a computer, however much of it you want.
Although Powell’s description implies that cryptocurrencies can be made as much as one wishes for, this is more of a case with fiat currency than digital cryptocurrencies. As traditional financial system encompassing fiat currencies is centralized, authorities have control over the money.
Particularly, the central bank of every country has control of the national fiat currency. For example, European Central Bank controls the Euro whereas, in the U.S., Federal Reserve System gets to control the U.S. dollar.
Capable of controlling the entire financial system, central banks are capable of printing as much money as they want. There’s no fixed algorithm or rules, determining the exact volume of money to be printed. Due to prolong practice of printing money, several damages have been inflicted to the world.
Now, individuals, commodities, and businesses are under tremendous pressure of debt, that is destined to only increase. Apart from that, due to unavoidable inflation, money is losing its value at a high rate and another financial crisis is on the rise.
Fiat currency itself and the practices of central banks have brought intense damage to the present financial system and thus, the remarks of Powell against cryptocurrencies can not be justified. Opposed to his statement, the decentralized cryptocurrencies can’t be created as much as one wishes for.
Bitcoin, the world’s first decentralized cryptocurrency, has only a limited supply of 21 million. This means that no more than 21 million coins can be minted. In addition to that, there are strict rules and algorithms, programmed for maintaining the creation rate of new coins. At the moment, 12.5 bitcoins are created approximately every 10 minutes and after BTC halving, the number of coins will be reduced to 6.25.
Powell emphasized mainly on the possibility of creating a desirable amount of cryptos, however, he also criticized the security offered by the cryptocurrencies and view cryptos lacking in cyber-security.
As there are numerous hacks and fraudulent practices going on in the crypto space, Powell’s compliments are quite accurate. But still, this doesn’t give fiat a superiority over cryptos because incidents of hacks and cyber attacks are very popular in the traditional financial system as well. Billions of dollars are laundered and used in illegal practices every year.
Besides, Powell revealed a thought by questioning the role of intermediaries such as banks, if people continued investing in cryptos rather than depositing their funds in the bank. In reality, bitcoin and other cryptos were launched primarily to limit the participation of third parties in a financial transaction. Supporting peer-to-peer communication, cryptocurrencies disrupted the financial system providing a fast, secure and economical payment method.
Michael Ippolito, Co-founder of BlockWorks Group, talked to BlockPublisher and pointed to the fact, how bitcoin provided an alternative to the current financial system;
Banks exist to facilitate commerce. They allow people who do not know each other to transact safely by outsourcing trust to a third party, for which they charge a fee. Bitcoin can be thought of as automated trust. Rather than relying on a trusted third party (who, by the way, do not always have your best interests at heart) you can rely on a distributed network of participants that validate transactions through math and algorithms. The distributed network is desirable in some cases because transaction fees will be cheaper and could (in the future) be less fallible or corrupt than individual humans making decisions.
Although several aspects of cryptocurrencies such as bitcoin were criticized by Fed president, it is clear now that fiat also shares many of the flaws outlined in cryptocurrencies. Although Fed President was straightforward and determined to prove that creating its own crypto is not on the agenda, the intent of Fed might change in the future.