INTRODUCTION
To
provide a comprehensive review on impact of crypto currencies in my country it is
necessary to understand the general
advantages and disadvantages of crypto currencies provide for users
compared to central bank –issued fait currencies, like the Euro or the US dollar,
and to discuss how they emerge from the underlying technology.
For
this purpose, the example of two crypto currencies is used in this paper the
underlying technology of most crypto currencies is blockchain technology. A
blockchain is a decentralized database that is distributed in the network on a
variety of computers. It is characterized by the fact that its entries are
summarized and stored in block.
The
first crypto currency discussed in this paper as an example is Bitcoin which is
technically, “an algorithm that records an ongoing chain of transactions
between members of a decentralized peer-to-peer network and broadcasts these
records to all members of the network” (Ammous, 2015, p 19). Bitcoin is the
world’s biggest crypto currency with a market capitalization of more than $189
billion. It was invented by Satoshi Nakamoto in 2008 when he has published his
white paper “Bitcoin: A peer-to-peer Electronic Cash System” (Nakamoto, 2008)
Secondly,
ethereum is used as an example which is a blockchain-based, public open-source,
computing platform and operating system for smart contracts. This platform
supports a modified version of Nakamoto’s consensus mechanism and was proposed
in 2014 by Vitalik Buterin (Buterin Vitalik, 2014; Rizzo et al., 2016). The
underlying crypto currency is called “Ether”. It is the second biggest crypto
currency in the market with a capitalization of over $18 billion.
GENERAL ADVANTAGES AND
DISADVANTAGES OF CRYPTO CURRENCIES
This
section presents the main advantages and disadvantages of crypto currencies
compared to central bank –issued fiat currencies and discusses how they emerge
from the underlying technology. Furthermore, a comparison with existing
solutions is provided to show the practical relevance of crypto currencies.
The
first advantage is that crypto currencies combine important properties to
foster trust, such as accountability and transparency, which allows trust free
interactions between counterparties. The underlying blockchain technology uses
consensus mechanisms, which leads to the fact that the user does not have to
trust the counterparty. However, the user must trust the network and the
underlying blockchain. Thus, it is essential to secure the blockchain against
fraud and attacks.
For
central bank-issed currencies, trust is established by third parties like intermediaries, and in almost
every digital transaction in a fait currency, an agent is employed to verse the
exchange. Transaction conducted by intermediaries do not only take time, but
they also result in a risk premium for the user due to higher transaction costs
(Pilkington, 2016).
Another
benefit of the decentralization of crypto currencies is that governments cannot
manage them. Hence, crypto currencies are not restricted to a specific
geographic area and can be traded around the world. Therefore, Bitcoin can be
used to provide low-cost money transfers, particularly for those seeking to
transfer small amounts of money internationally, such as remittance payments
(Scott, 2016). This money can often be transferred cheaper than with central
bank-issued currencies, because using crypto currencies allows worldwide financial
transfer without the need of an intermediary institution. In addition, the
speed of money transfer is increased by eliminating intermediaries.
Nevertheless,
these border independent payments also have some negative aspects, which need
to be considered. One characteristic is that it makes it easy to transfer money
from illegal activities or to finance terror activities without the possibility
of government intervention (Jude A., 2019).
Moreover,
the decentralization and “the lack of flexibility in the Bitcoin supply
schedule results in high price volatility”
DISADVANTAGES OF CRYPTOCURRENCY IN NIGERIA
Financial
service, many studies have proven that financial inclusion is essential for the
development of a country. For example, Jude A.,(2018) observed in his study,
that poverty is linked to access to financial services, and that limited access
to financial services is a significant problem itself. Financial services can
help because they provide people with the opportunity to protect themselves
against situations of financial shortage (Jude A., 2019).
Another
problem of the limited access of financial services for companies and
individuals is that they cannot participate in worldwide trade. This is because
a bank account, within international transaction identification, for example
SWIFT identification, is required. Firms without bank accounts are excluded
from wide range of international services and are hindered in selling products
outside their region.
Another
problem in developing countries is a low level of social trust, because social
trust trends to improve economic growth and the standard of living. As social
trust is highly correlated with equality, economic equality and equality of opportunities,
social trust is inferior in my country (Nigeria), Jude A., (2020).
It
will be helpful for Nigeria and other countries to increase high level of
social trust. But many countries with low social trust are stuck in a so-called
social trust trap. The logic of such a situation is that social trust will not
increase as long as there is high social inequality. However, public policies
that could remedy this situation cannot be defined because there is a lack of
trust.
Another problem faced in my country is lack of access to educational training or high level of illiteracy in the northern part of the country which lead to low number crypto traders and financial freedom.
IMPACT OF CRYPTO CURRENCIES IN
NIGERIA
The
impact of crypto currencies on the improvement in Nigeria is noteworthy yet,
because the technology is still at its infant stage, in addition there is
currently only limited adoption of crypto currencies and the positive effects
of crypto currencies will only occur if there is mass adoption,
For
the exchange procedure, it is often necessary to have a traditional bank
account. This requirement limits its impact because those without bank account
cannot use the stored value in crypto currencies. Consequently, “crypto
currencies face the same problems, which traditional banks are facing (Expert
2018). Crypto currency themselves can be used without a KYC process. However,
the exchange of crypto currencies into the local fiat currency requires a KYC
process, for which the applicant needs a government issued document of
identification. People without identity papers are therefore excluded.
CONCLUSION
Finally,
crypto currencies can have a considerable impact in the developing countries
like Nigeria and others by increasing financial inclusion of individuals and
companies. In particular, by reducing the transaction fees and time,
cross-border payments can be improved. This is beneficial for remittance
payments, peer-to-peer lending and international trade. The underlying
technology also supports the fight against corruption by having a more
transparent tracking system for the use of funds. The lack of back-up and
centralization does not support a stable price level. A stable price level
could be reached by stronger regulation and more political support for crypto
currencies.
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