By: Jawad Tung

Almost everyone has heard of Bitcoin, but what is it? Bitcoin is a cryptocurrency. And they are gaining popularity as a medium of exchange, as an instrument for storage of value, and because of their popularity few central banks around the world are taking interest in issuing cryptocurrencies of their own. China and India have also expressed interest in issuing domestic cryptocurrencies. 

The advantages to an economy for having its own cryptocurrency are:

1) The capital stays in the economy.

2) A concept of centralized ledger will document the economic activity, and this will largely resolve the issue of undocumented economy and put a check on shadow economy.

3) It will save the cost of issuance and printing of paper currency.

4) The monetary sovereignty of the central bank remains intact.

5) Improving financial inclusion.

With these advantages in view, the question arises, will cryptocurrencies replace existing currencies or will they be another simultaneous form of payment? The underlying concept of cryptocurrency is that it will have a finite supply, whereas traditionally banks print and issue currency when they require. If the proposed cryptocurrency will be issued at discretion of the central banks, they don’t exactly meet the criteria of being classified as cryptocurrency. And this may also expose the proposed cryptocurrencies to exchange rate differences, inflation, and other issues being faced by conventional currencies. 

The other factors to consider is the gold like features that they offer. Because of their scarcity, cryptocurrencies are now seen as an investment asset class by individuals and institutional investors because of this feature. If they are not scarce and widely accepted, their appeal as an asset class will be damaged. This financial experiment by few of the largest economies of the world will be good learning lesson for the rest.