Impact of Cryptocurrencies on Economies

Following of “Bitcoin craze” in December 2013, cryptocurrencies and stablecoins have become a hot topic of discussion and debate. Some view them to achieve financial independence and high investment returns, while others avoid them due to concerns about volatility and security. This article will focus on potential consequences of adoptingcryptocurrencies, using the cases of El Salvador and China as examples, and discussing whether potential consequences of cryptocurrencies on economies.

Cryptocurrencies are digital currencies that operate on decentralized networks without the need for third parties, such as banks or governments. Bitcoin was penned in 2008 by an anonymous user, Satoshi Nakamoto, who addressed a double-spending problem common to crypto at the time through blockchain technology. They proposed a peer-to-peer (P2P) transaction system, which ensured that the digital money would not be spent twice and required no centralized authority or a third party.

Cryptocurrencies became a hot topic for debate following an article published by Forbes in May of 2011, simply titled Crypto Currency. Bitcoin witnessed one of its first increases in value, as well as a not-so-good reputation for being frequently used in illicit online markets. Since then, several events impacted the world of cryptocurrencies, such as the theft of 744,408 BTC in a major security breach in 2014, launch of Ethereum in 2015, rise in popularity of NFTs, El Salvador adopting BTC as an official tender and China banning trading and mining of cryptocurrencies in 2021. 

One of the main distinctions of cryptocurrencies from fiat money is that they are independent from financial and government institutions, which makes them, in theory, immune to any kind of government interference. Additionally, transferring funds through crypto between two parties is more efficient than through a third-party entity such as a bank. However, cryptocurrencies also are subject to a lot of risk and uncertainty. One of the biggest drawbacks of cryptocurrencies is that it is impossible to issue refunds, cancel or reverse transactions. That feature makes cryptocurrencies’ use limited compared to fiat money. Additionally, as cryptocurrencies are a relatively new phenomenon, there are some regulatory risks as their classification varies from country to country; as with any product that heavily relies on computer technology, there are technical risks, such as online scams, theft, and cyber-attacks. Market manipulation also remains a concern.

In September of 2021, El Salvador adopted Bitcoin as an official tender. This was done mainly to promote financial inclusion, job creation and reduce dependence on the US dollar. During this time, the country launched Chivo Wallet, which allowed for common monetary operations, but using cryptocurrency. However, a survey conducted by the Yale School of Management revealed that many users were skeptical of the app due to a lack of trust and of anonymity in the application. Additionally, a study published in PaymentsJounral stated that only 1,3% of all domestic transfers were done in cryptocurrency in 2023. The direct economic consequences of this policy are still unclear. The country’s GDP seems have been growing, but at the same so has inflation and national debt.

The situation in China is drastically different, when compared to other counties, which had generally taken a neutral stance on cryptocurrencies. In 2021, all cryptocurrency transactions and mining were banned, citing concerns over financial instability, environmental impacts, and the potential illegal activity. This essentially removed China from the global crypto market, which was once a hub for Bitcoin mining. For context, Binance, one of the largest cryptocurrency exchanges, was founded in China. It is possible that this was done to promotethe use of the country’s own digital currency, the Digital Yuan (e-CNY), as a state-controlled alternative to decentralized cryptocurrencies. This decision somewhat neglects the initial purpose of cryptocurrencies, as they were created as an alternative to centralized currencies.

For economies overall, cryptocurrencies can create new routes in international trade and payments, since they eliminate the need for banking institutions. For business, they can be used to reduce transactional fees. For the population overall, cryptocurrencies can be used to foster financial inclusion. On the other hand, cryptocurrencies are often highly volatile, and a lack of regulation can lead to illicit activities, such as money laundering and tax evasion, which can negatively impact the economy through less available funds for the government.