Today, most contemporary financial news, including budget and monetary policies across the world, discuss and rationalize Bitcoin and other cryptocurrencies. Nepal is also controlling withdrawals from banks fearing its money will go cryptocurrency without an account, further straining its already depleted foreign exchange reserves. The paradox is that, on the one hand, the government is prosecuting cryptocurrency users, and on the other hand, it is researching its possible legalization. China’s use of this currency in specific cities and India’s recent budget bill have given it added prominence. In the context of Nepal, we need an immediate policy on this.
Bitcoin is a cryptocurrency created using blockchain technology. First, we need to understand blockchain technology to make sense of cryptocurrency. Money basically has three roles: (1) medium of exchange, (2) store of value, and (3) unit of account. Bitcoin ticks all three boxes. The world is going digital and so is money. Bitcoin offers a new form of “digital currency” that many leaders and nations have been unable to offer since the beginning of human civilization. The whole world currently uses free-floating fiat currency. It has many flaws and also leads to huge financial crises including the one in 2008. Since then, a person or a group of people by the name of Satoshi Nakamoto has pioneered blockchain technology to successfully deploy a known currency under the name Bitcoin. Because a lot of cryptography is used to develop the blockchain and deploy digital currency, the term cryptocurrency is used.
Cryptographer David Chaum first proposed a blockchain-like protocol in 1982, which was developed by Stuart Haber and W Scott Stornetta in the 1990s. Satoshi Nakamoto conceptualized the first decentralized blockchain in 2008 by solving various fundamental problems encountered by blockchain technology, thus creating Bitcoin.
Simply put, blockchain is an advanced digital ledger system where each ledger or block of data is connected to another ledger or block of data through a chain in the decentralized network, hence the name “blockchain”. . This ledger system is visible to all network participants, and any changes to a previous ledger or data block are visible to the public, making this system more transparent. Anyone can join the decentralized network using a smartphone, laptop or any other computer with an internet connection. This happens because these registers or blocks of data are not stored on a single server but on a decentralized network.
In 1994, American computer scientist Nick Szabo proposed the concept of smart contracts. In 2015, with the launch of the Ethereum blockchain, smart contracts became fully functional. Instead of lawyers, smart contracts are written by programmers using computer code; and instead of the “rule of law”, the “rule of code” is followed. Smart contracts allow automated transactions to occur when certain criteria are set without human intervention. Smart contracts are opening up new avenues for commercial relationships and an increasing range of economic activities between unsuspecting parties via the blockchain network.
So far, we have learned about the advanced digital ledger system linked with each other in a decentralized network and smart contracts, these two tools are fundamental for blockchain. With these two tools, individuals, companies, businesses, and governments can build applications that run on the blockchain network. Applications made using the blockchain platform are called decentralized applications, or dApps for short. Ethereum, Solana, Tron and Cardano are among the most popular blockchain platforms where one can create such dApps. All of these platforms have their own native cryptocurrency which is used to pay for the services provided by the blockchain platform. Many people buy these cryptocurrencies only hoping that their value will increase without knowing their real use cases.
Currently, many financial dApps are launched on different blockchain platforms and are known as decentralized finance (DeFi). DeFi is the movement that leverages decentralized networks to transform legacy financial products into trustless, transparent protocols that work without intermediaries. Traditional financial systems use systems of banks and intermediaries to complete a single transaction between parties. This can take several days and has a cost. A decentralized financial system is a system where transactions occur between one individual and another without an intermediary. It is governed by smart contracts and transactions are almost instantaneous, almost free and borderless. This poses a threat to current banks. Decentralized applications (dApps) built on blockchain platforms can be used in many areas. The most notable are the financial sector, payment system, supply chain logistics, health records and many more.
It is widely accepted that the free market brings innovation. Bitcoin, blockchain technology, and dApps are all open market products. As this is a newly discovered area, central banks and other central monetary regulators around the world are struggling to regulate it. The current existence of free-floating fiat money is threatened by the mere existence of Bitcoin and other cryptocurrencies. Once Parliament creates new laws and regulations regarding this new industry, traditional banking systems can be replaced by DeFi. This means that central banks and other traditional financial institutes must start researching and developing products in this new area. They have the upper hand in this free market as they can integrate newly discovered distributive ledger technology with traditional banking services to compete with new DeFi institutes.
Traditional banking is moving towards a more digital system. In doing so, newly discovered distributive ledger technology and blockchain technology will play a huge role. Bitcoin’s innovation paved the way for the emergence of blockchain technology in the market, which the traditional banking sector must use. Bitcoin will bring drastic changes in the monetary system of the world just like the money which replaced the barter system over a period of time. Using cryptocurrency instead of cash is the future; but in a digitally divided society, the redundancy of the role of the central bank in monetary policies, unexpected fluctuations in the price of cryptocurrencies and other relevant issues must be taken care of by a country like Nepal.
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