In recent years, we have seen the start up of virtual currencies such as "Bitcoin". However, we have to question the viability of these currencies and question whether or not they have a long term future.
The viability of any currency, virtual or otherwise, is based on the trust placed in it by users. If any currency loses this trust, people will simply transfer their money into another currency. This will see the value of the original currency tumble causing goods to become increasingly expensive to buy in that currency. So the establishment of any new currency system will take years, if not decades, to build up that needed trust which could quite easily be lost overnight.
Maintaining this trust is why we have central banks to regulate the use of their assigned currencies. As such, the formation of any new currency will need to have a similar system in place to control, regulate and maintain trust in the currency. This control includes maintaining a strong monetary policy controlling the currency's money supply. This helps to "manage" issues relating to the currency such as inflation or its value relative to other currencies.
Another issue requiring control is the area of fraud, money laundering and other such illegal activity. If a currency has a history of fraudulent use, it will not be trusted by those who get paid in that currency and thus, they'll request payment in an alternative currency instead. Thus users will have less incentive to use the currency bringing us back to the trust issue and having people move to another currency. Furthermore, if a currency is known or has a history of being used for criminal or illicit activities, it may become the target of outside authorities. This includes regulators placing sanctions or restrictions on the use of that currency within their jurisdiction. Again, this will reduce the demand and use of the virtual currency and increase prices in areas where it is still accepted. This is due to the greater perceived risk and reduced use and value of the currency compared to other available currencies.
In recent years we have seen "real currencies" such as the Euro come close to collapse even with the strength of European Central Bank and Eurozone economy backing it. Furthermore, any virtual currency will also have the added issue of online "fads" having a relatively short lifespan if they fail to adapt and remain relevant to users. Therefore, if a virtual currency losses the faith of its users and starts to collapse, especially in its infancy phase, it will become pretty much dead in the water overnight.
Therefore, if a new currency is going to succeed, it has to address all the issues describe above plus so many more I have yet to go into. The currency's regulator, like any central regulator, has to keep its ear to the ground and constantly adapt its monetary policy in line with the views of the currency's users. Furthermore, it has to take into account the views of other regulatory authorities as to prevent sanctions and restrictions being imposed on the currency. Furthermore, even if the currency is established and regulated effectively, it is no guarantee of success and any success will be years, if not decades, in the making.
In conclusion, it's safe to say that the so called "real currencies" such as the US dollar or British pound are here to stay. If, when and how a virtual currency ever comes into regular use we cannot be sure of. But if and when it does, it will only do so with the backing of its users and those with power over the international monetary system coupled with a wide enough user base and strict controls over the currencies use.
Thanks for reading,
Jason Cates
The viability of any currency, virtual or otherwise, is based on the trust placed in it by users. If any currency loses this trust, people will simply transfer their money into another currency. This will see the value of the original currency tumble causing goods to become increasingly expensive to buy in that currency. So the establishment of any new currency system will take years, if not decades, to build up that needed trust which could quite easily be lost overnight.
Maintaining this trust is why we have central banks to regulate the use of their assigned currencies. As such, the formation of any new currency will need to have a similar system in place to control, regulate and maintain trust in the currency. This control includes maintaining a strong monetary policy controlling the currency's money supply. This helps to "manage" issues relating to the currency such as inflation or its value relative to other currencies.
Another issue requiring control is the area of fraud, money laundering and other such illegal activity. If a currency has a history of fraudulent use, it will not be trusted by those who get paid in that currency and thus, they'll request payment in an alternative currency instead. Thus users will have less incentive to use the currency bringing us back to the trust issue and having people move to another currency. Furthermore, if a currency is known or has a history of being used for criminal or illicit activities, it may become the target of outside authorities. This includes regulators placing sanctions or restrictions on the use of that currency within their jurisdiction. Again, this will reduce the demand and use of the virtual currency and increase prices in areas where it is still accepted. This is due to the greater perceived risk and reduced use and value of the currency compared to other available currencies.
In recent years we have seen "real currencies" such as the Euro come close to collapse even with the strength of European Central Bank and Eurozone economy backing it. Furthermore, any virtual currency will also have the added issue of online "fads" having a relatively short lifespan if they fail to adapt and remain relevant to users. Therefore, if a virtual currency losses the faith of its users and starts to collapse, especially in its infancy phase, it will become pretty much dead in the water overnight.
Therefore, if a new currency is going to succeed, it has to address all the issues describe above plus so many more I have yet to go into. The currency's regulator, like any central regulator, has to keep its ear to the ground and constantly adapt its monetary policy in line with the views of the currency's users. Furthermore, it has to take into account the views of other regulatory authorities as to prevent sanctions and restrictions being imposed on the currency. Furthermore, even if the currency is established and regulated effectively, it is no guarantee of success and any success will be years, if not decades, in the making.
In conclusion, it's safe to say that the so called "real currencies" such as the US dollar or British pound are here to stay. If, when and how a virtual currency ever comes into regular use we cannot be sure of. But if and when it does, it will only do so with the backing of its users and those with power over the international monetary system coupled with a wide enough user base and strict controls over the currencies use.
Thanks for reading,
Jason Cates
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