There are 4 cryptocurrency blind spots everyone should be aware of.

There are 4 cryptocurrency blind spots everyone should be aware of.​

           Will cryptocurrencies like Bitcoin become the most widely used currency in the future? Because blockchain technology can verify the exchange of money without intermediaries like financial institutions to verify the authenticity. and has high security Digital payments are no longer made through financial institutions as blockchain technology can prevent hacking of data. However, changing currencies is not easy and has some disadvantages:

1. Payments with more than one currency create costs and uncertainties for the Thai people.

In other words, as long as more than one currency is spent in the country. All Thai people will face currency fluctuations. It is no different from an exporter or an importer whose income is not stable each day because the baht can go up and down. As a result, it is detrimental to economic growth when compared to a situation in which everyone in the country spends in the same currency. 

2. Situations that will eliminate currency volatility

To make the exchange volatility disappear, everyone in the country will switch to the same currency. For example, everyone has to switch to Bitcoin. which is not possible for two main reasons.

  1. When changing currencies, Bitcoin mechanics cannot bring everyone the same wealth. Because the more people buy and switch to Bitcoin, the more the price of Bitcoin will increase. People who buy later will have to buy at an expensive price. Therefore, the latter buyer, despite having a huge number of baht, will receive very few bitcoins and may immediately become poor. It can be seen that if you change the currency, there must be a mechanism to keep everyone’s wealth the same before and after the transition to be fair for all.

  2. If everyone uses the same currency like Bitcoin, there must be no baht left in the system. which is impossible. Because Bitcoin trading is an exchange of money between two parties, if one side brings baht to buy bitcoins, the other side will receive baht instead. The baht is still in the system as well. And sellers who now hold more baht will want to spend in baht. After all, it can’t make everyone spend just one currency.

These two limitations make it very difficult to convert your currency to Bitcoin. Only the central bank or the public sector can amend both restrictions. just as the European Central Bank did when its member states switched to the euro in 2002, keeping the euro exchange rate constant with the local currency. In order not to affect people’s wealth, this means that the European Central Bank can distribute the euro infinitely to stabilize the currency. And when people finished exchanging money, the local currency was destroyed and left behind in the system. Make member countries spend in euros.

3. Static cryptography (stable coin) is the answer or not?

Stable coins come in many forms, both with backed and unbacked assets. which at least Should be able to maintain wealth if the currency can be fixed stable. The answer is that pegging the currency is not easy. Because the creator of the new currency is unable to print any currency other than his own. Therefore, there is a risk of liquidity problems or there is not enough money in another currency to exchange. This puts them at the risk of being unable to freeze the currency.

Not only to the credibility of the currency. But the interest rate also the key factor that will cause problems with stable coin liquidity management as follows:

  1. in the case of stable coins, there is no interest rate. When global interest rates are near zero, that’s fine. because it is considered that there is no interest rate either. But if central banks around the world raise interest rates People probably don’t want to keep their money in stable coins when interest rates go up. The more money is withdrawn from the stable coin, the more it can cause liquidity problems and make the currency unfrozen.
  2. On the other hand, the stable coin will attract people to hold it by giving high interest rates. It is also at risk of liquidity problems. Every 1-coin incoming is converted to 1 stable coin when exchanging outgoing cashback. You must issue more than $1 because interest must be paid. If the outbound is greater than the inbound, if there is a redemption or a currency attack, there is a risk of being unable to freeze the currency. In fact, in the past, central banks around the world, including Thailand, have experienced problems with pegging the currency. It is therefore not surprising that we witnessed a crisis of confidence in stable coins at the beginning of May, with TerraUSD failing to peg the currency. And it’s worth almost zero in a few days.

4. Thai people will lose monetary policy tools in taking care of the economy.

If the currency can actually be changed because central banks cannot control the money supply or liquidity of cryptocurrencies, they cannot direct monetary policy. In that case, interest rates are subject to market mechanisms. This could cause the economy to be unstable. Because interest rates are high when the economy is bad. This is because they have to compensate for higher risks, and interest rates are low when the economy is good because the risk is low. This will cause a volatile economic cycle. The uptrend is heating up. Until there is a crisis, the downtrend has been severely contracted.

It can be seen that just having a technology that can exchange money without a financial intermediary does not mean that we can create new currencies to replace the old ones. By ignoring the understanding of the mechanisms of the economic and financial systems, there are limitations and disadvantages that everyone must know to judge that cryptocurrencies can really be the currency of the future. Or is it just a form of money speculation that is no different from gambling?

Dr. Sra Chuenchoksan

Macroeconomic Department

Column “Jang Si Bia”, Krungthep Turakij newspaper

Dated July 5, 2022, No. 13/2522

This article is a personal opinion. which does not correspond to the opinions of the Bank of Thailand.

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