Future Impact of Digital Currencies on Financial Institutions
Question
Write a 6-8 paper (excluding references and title page) on:
Research blockchain and digital currencies and project the potential impact on financial markets and institutions in the future.
Specifically:
· Briefly present a history of the technology, functionality, and how the digital currency markets work today.
· How are current financial institutions participating/threatened by the technology? What are their responses?
· Review recent global financial events to determine the impact it has had on digital currency prices, specifically Bitcoin, and what the implications are for the future.
· Predict the most likely scenario, in your opinion, given what your research has shown you and support with evidence, and site sources.


Solution
Future Impact of Digital Currencies
on Financial Institutions
Blockchain
is a technology behind cryptocurrency that has taken a step towards the
mainstream. Notably, digital and cryptocurrencies are rapidly changing the
nature of money itself. Digital currencies technology has big implications for
financial sectors and how banks make money. Although the technology has
positive implications for financial institutions, its proliferation could
threaten their stability. Also, blockchain technology has helped speed up and
reduce the cost of transactions, which has boosted financial inclusion.
Technology has brought reform in the financial industry because it has changed
the nature of money itself. In other words, blockchain technology has played a
significant role in building economic systems that run without people ensuring
transactions are trust-free. The technology has provided a viable alternative
that has helped eliminate middlemen in the financial institution, thus lowering
operational costs. More importantly, the technology has brought about new
buyers in the financial market and allowed international trade to happen
smoothly. The technology has provided the entrepreneurs in the current market
with incentives that have enabled them to reach the international market rather
than sticking to the national market. Therefore, this paper aims to discuss
digital currencies and their future impacts on financial markets and
institutions.
History of technology, functionality
and how it works in the market today
In
the early 1980s, the world entered the computer age. With the introduction of
the computer, many people took that as an opportunity for society to be
innovative. Technological change has contributed positively to digital currency
technology's current growth. For instance, since the beginning of Bitcoin in
2009, cryptocurrency technology has started to dominate the public. Digital
currency is a kind of technology that is decentralized and not controlled by
the government. In a brief history, cryptocurrency technology dates back to the
1980s, when it was referred to as cyber currencies. Although the technology
started in the early 1980s, gaining popularity began in 2008 after the
introduction of Bitcoin that an anonymous programmer created under the name
Satoshi Nakamoto. It is notable that since the launching of Bitcoin in 2009,
the technology has been all the rage, with the past few years showing how the
popularity of technology has grown as more people have been investing in a
business (Davis, 2021). Consequently, in the 1980s, American cryptographer
David Chaum invented digital cash that relied on cryptography to verify and
secure transactions. Based on this early history of digital currency
technology, it is evident that even after David shared the idea, it was only in
the 1990s that cryptographic software and protocols began to be developed to
help in decentralizing the technology. In addition, the launch of Bitcoin in
2009 has contributed positively towards the increase of popularity of the
technology as with Bitcoin, people in the current market have been able to send
money across the globe without interference from financial institutions and
governments. The history of technology shows that cryptocurrency has been
registering positive growth in the market with the expectation that it will get
bigger in the future (Guardian Nigeria, 2021). With the continued growth of the
digital economy, it is evident that digital currency will play a large role in
what makes up our future money system. Therefore, since the establishment of
digital currency technology in the current business market, people have been
able to transact globally without any interference from the government and
financial institutions like banks.
In terms of functionality, technology has been
a significant tool in promoting development for the betterment of mankind. It
is evident that blockchain, which is the technology behind cryptocurrency, has
played a vital role in the current financial transaction. Cryptocurrencies have
provided many incentives to entrepreneurs investing in online businesses across
the globe. Through blockchain technology, entrepreneurs have reached
international markets rather than strictly sticking to national markets. Also,
the technology facilitates instantaneous peer-to-peer transfers of value, which
was impossible before. The use of technology has helped transfer funds in an
easier way between the two parties, thus helping to avoid large fees for online
transactions charged by many financial institutions. More importantly,
blockchain and digital currency have helped in small-value transactions. The
use of digital currency has yielded a range of benefits that has resulted from
lower costs in the payment execution and transaction in the current business
market. In fact, for entrepreneur, blockchain and digital currency has helped
them to reach an international market. Consequently, it has allowed sellers to
create relationships and foster trust with marketers, which has never happened
before; thus, it has been fantastic for developing nations.
From
the analysis of blockchain technology, it is evident that cryptocurrency is a
great long-term investment in the current financial business. Currently,
cryptocurrency markets are decentralized, indicating that they are not issued
or backed by central authorities such as the government. According to market
capitalism, it is evident that the current digital currency has embraced
bitcoins, which is the largest cryptocurrency in the world. Also, in the
current market, digital currency has been used to carry out business through
bitcoin. With the increased investment in cryptocurrency in the current market,
the financial institutions in the current market need to be strategical to
retain their edge. This is because digital currency has been used in payment
and transactions in the current market, affecting financial institutions'
revenues collection. In addition, the technology has enabled entrepreneurs in
the current market to invest internationally as it allows for international
trade to happen smoothly (Lee & Wessel, 2018). Although the market today
has been on the rise, digital currency has been able to help business
entrepreneurs register positive returns on investment due to low transaction
fees. Moreover, in the current digital market, the digital market runs across a
network of computers as the people in today's market can trade one crypto for
another. For instance, if you are in the digital market, you can convert your
crypto into regular currency and leave it in your account for future trades or
withdrawals. It is also evident that bitcoin is one of the digital currencies
used in the market, and they can be bought and sold via exchanges and stored in
wallets. Therefore, it is notable that in today's market, digital currency is
booming, an indication that is going in the future, it will be bigger because
as the digital economy continues to grow, cryptocurrency will play a large
role, thus making our future money system. Consequently, the current digital
currency market shows different types of cryptos used, with some like bitcoin
proving to be more stable than others and even promising for growth in the
future.
Technology threats to current
financial institutions and their response
From
the analysis of digital currency technology, it is significant that the
technology has brought in the nature of money itself. With the presence of
technology in the current market, numerous financial institutions have been
getting hard to compete in terms of digital payments. Also, digital currency
has made the current financial institutions risk losing control of their
monetary policies. Moreover, the technology has affected how financial
institutions make money, as cryptocurrency has lowered transaction costs and
made it easier to execute payments (Digital Currencies, n.d). They have also
led to a flood of withdrawals from high streets banks, risking financial
stability to banking sectors. Decentralizing financial networks always threaten
financial institutions' long-term viability. Also, financial institutions are
at risk of losing more of their customers because, with digital currency, the
consumers are using credit cards and phones in transactions and payments.
Another threat of technology is that it has reduced financial institution profitability
because it has reduced the number of physical consumers in banks. Consequently,
digital currencies and related technologies have reduced transaction costs,
which sound good for any investor in the current market but destabilize
financial institutions.
However,
with the impact of blockchain and digital currencies on financial institutions
they significant that banks have undertaken to deal with the threats exposed to
them by the technology. For instance, due to digital currency threats,
financial institutions in the current market begin planning on mitigating the
risks of the technology and taking advantage of the technology to thrive in
business. In addition, the banks have embraced technological innovations, which
have enabled them to remain competitive in the current market. Digital
currencies threats caused underlying threats to banks' business models (Guardian
Nigeria, 2021). This has made financial institutions in the current market
adopt new technologies to compete in the current market. Therefore, even though
digital currency and other technologies are important to investors, people need
to know that financial institutions are important because they help create
credit and money.
Recent global financial events
impact digital currency prices and implications for the future
From
an economic point of view, it is evident that factors like financial
misconduct, politics and pandemic play an important part in how the economy
reacts. The recent global event that affected the global economy is Covid-19.
The pandemic affected public health, the global economy, and financial markets
(Sarkodie, Ahmed &
Owusu, 2022). The outbreak of Covid-19 led to reductions in income and
disruption of economic activities. Moreover, the pandemic disrupted business,
making many countries unable to sustain their economic development. Bitcoin is
the most innovative product with simplicity and transparency in the
cryptocurrency business. From the financial analysis during the pandemic
outbreak, it is indicated that bitcoin surged by 300 percent amid speculations
that investors were piling digital currency due to low-interest rates in the
market. The pandemic made bitcoin register positive growth in the market. Most
people thought it was influenced by financial market investors who saw a
potential opportunity to use bitcoin to hedge against inflation due to the
global pandemic (Pak et al.,
2020). However, bitcoins will be a vital investment in the future, given
their growth and value in the current market. The high liquidity associated
with bitcoins makes it a great investment; thus, going into the future, it is
evident that investing in bitcoin will be an important factor because of its
high market demand and lower inflation risk.
Personal Opinion
The
likely scenario going in the future I look at is that there are infinite ways
the future of money will evolve. With the combination of bitcoins, digital
currency and central bank digital currencies and other payments systems, they
will be the demise of physical cash. The first growth of technology will force
financial institutions to embrace digital technology to help in the first
transactions of money. Although I agree that digital currency is infinite ways
the future of money can evolve, one technology alone would not overtake it.
Consequently, I predict in another scenario that Bitcoin will be a store of
value; thus, in the coming years, it can replace gold in terms of value.
References
Davis, K. (2021, November 3). The economic impact of cryptocurrency.
globalEDGE Blog: The Economic Impact of Cryptocurrency >> globalEDGE:
Your source for Global Business Knowledge. Retrieved February 5, 2022, from https://globaledge.msu.edu/blog/post/57042/the-economic-impact-of-cryptocurrency
Digital
Currencies: Risks and Opportunities. Global Association of Risk Professionals. (n.d.).
Retrieved February 5, 2022, from https://www.garp.org/risk-intelligence/technology/digital-currencies-risks-and-opportunities
Guardian Nigeria. (2021, December 26). The
idea and a brief history of Cryptocurrencies. The Guardian Nigeria News -
Nigeria and World News. Retrieved February 5, 2022, from
https://guardian.ng/technology/tech/the-idea-and-a-brief-history-of-cryptocurrencies/
Lee, V., & Wessel, D. (2018, May
21). Digital Currencies: Five big
implications for central banks. Brookings. Retrieved February 5, 2022, from
https://www.brookings.edu/blog/up-front/2018/05/21/digital-currencies-five-big-implications-for-central-banks
Pak,
A., Adegboye, O. A., Adekunle, A. I., Rahman, K. M., McBryde, E. S., &
Eisen, D. P. (2020). Economic consequences of the COVID-19 outbreak: the need
for epidemic preparedness. Front Public Health. 2020; 8: 241.
Sarkodie,
S. A., Ahmed, M. Y., & Owusu, P. A. (2022). COVID-19 pandemic improves
market signals of cryptocurrencies–evidence from Bitcoin, Bitcoin Cash,
Ethereum, and Litecoin. Finance
Research Letters, 44,
102049.




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