One of the most influential inventions in the past few decades is blockchain technology which led to the emersion of cryptocurrencies. Blockchain was first introduced by Stuart Haber and Scott Stornetta in the early 1990s, who were trying to resolve major issues related to digital information security by creating a block system that could prevent any modification, thus ensuring data integrity. However, this technology only became widely known in 2008 when Satoshi Nakamoto launched Bitcoin: the first generation of cryptocurrency as a peer-to-peer electronic cash system built on blockchain technology. Since then, blockchain has been growing rapidly, and cryptocurrencies’ emergence is considered a turning point that could radically transform the global financial regime. It became one of the hottest topics that stole much attention, not only from business entities but also from countless governments and international organizations. This article will further analyze the impacts of cryptocurrencies on the global political economy and the factors that led to their decline after 14 years of glory.
Cryptocurrencies: A Disruption Towards Global Political Economy?
Cryptocurrencies have become digital currencies that can remove delicacies in conventional financial transactions by using blockchain technology at its core. Today’s financial dealings are solely dependent on the existence of trusted third parties, and implementing completely non-reversible transactions, for example, is nearly impossible to conduct in the current mechanism since financial institutions are likely unwilling to mediate the disputes due to its high costs. Therefore, there would be no guarantee of protection against fraud for producers and consumers when making any money settlements, as the whole process is based on trust. Instead of trust, cryptocurrencies adopted cryptographic proof: employed peer-to-peer networks using proof-of-work in recording the public history of transactions to prevent double-spending; thus, it would be impractical to reverse the transactions that had been made. This way, the possibility of fraud can be minimalized or even eliminated. Further, as the peer-to-peer network also functions to remove the usage of trusted third parties, the transaction fees can be set to the lowest point, which is 0.1 percent of the total transaction amount.
Another prominent feature of cryptocurrencies is the idea of decentralization: creating a spectrum where people can take charge of their finances without central authority within the network. Blockchain technology which supports cryptocurrencies, enables the creation of a decentralized design that could grant users access to the payment system all the time without a single point of failure – no intermediary and control exist, thus transactions could always be sent and received instantly, even the users’ account could not be ‘frozen’ at all cost. After all, cryptocurrencies were built to liberate people from limited electronic transaction processes, and embedded decentralization reinstates this vision.
The first generation of cryptocurrencies was created to criticize a two-level money system consisting of central and commercial banks that combine public and private money into a hybrid money game. With this arrangement, the standard monetary system is weighted with political control and coercive power to achieve stability. However, what brought the hybrid money game into stabilization may also be the factor causing instability which was visible during the financial crisis of 2008. Bitcoin back then emerged as a political experiment to promote a whole new different of money game without coercive power and extensive institutional underpinning except from what could be provided by the computation coding. As the genesis of cryptocurrencies was the emergence of distrust towards existing money games, their popularity also increased in line with the failure of the monetary system. The Cyprus Crisis in 2012 was a turning point as people became more aware of covert political aspects within dominant money games. This led to a sharp increase in interest in Bitcoin-related apps, especially in the states suspected of having issues in their banking sectors.
The adoption of cryptocurrencies then started gaining a solid footing in the early 2010s when the followers of bitcoin launched a campaign of fighting the good fight against perceived oppressive and restrictive established money games. Starting as political challenges to overshadow the money system nationally and worldwide, cryptocurrencies developed into payment options accepted by numerous merchants such as e-Bay and Airbnb. Cryptocurrencies not only evolved as a modicum of exchange but also as tools to store value where people keep their wealth in crypto-assets. By 2021, the market capitalization of crypto-assets has tripled to an all-time high of USD 2.5 trillion. Significant economic activity has also been generated due to the rapid growth and dissemination of cryptocurrencies. For instance, there are chances for new enterprises like manufacturers of mining hardware as well as a rapidly expanding market for investors. Initial Coin Offerings (ICO) and tokenization have gained significant market traction, popularizing cryptocurrencies as a means of financing.
The development of cryptocurrencies contributes to introducing an auditable and transparent payment system. Their existence might challenge the current well-established money games, yet at the same time, it also lays a strong foundation for achieving the idea of a cashless society. Cryptocurrencies could play a significant role in bridging the transitions. However, despite the countless benefits of its rapid growth, cryptocurrencies are still considered disruptive innovations within the global political-economic context. The fast expansion of the crypto ecosystem is accompanied by the emergence of new entities, some of which have poor operational, cyber risk management, and governance framework. Consequently, the crypto ecosystem is exposed to significant downtime risks due to poor designated systems, the hacking-related risk targeting consumers’ funds, and the imbalance distribution of crypto assets which could result in investor losses. Those risks might look insignificant on a small scale, but as crypto popularity increases, they threaten global financial stability.
Further, the transparency offered by cryptocurrencies has become a double-edged sword. Transactions are recorded in a public ledger validated using a computation machine; therefore, transparency can be warranted. However, the protocols are designed to ensure that the computer solving the problem is unaware of whose transaction it is currently working on, which led to the creation of an anonymity nature. This characteristic, along with the lack of regulations for their field operations, made cryptocurrencies have interesting potential for passing the law or conducting illicit actions such as money laundry, dark market payment, or even terrorism financing. Anonymity also presents a loophole for people to avoid tax on their transactions or their wealth. With cryptocurrencies, criminal conduct could never be easier, and these shortcomings would potentially shatter the stability of the global political economy.
The Declining of Cryptocurrencies: Why Now?
After experiencing a peak point in 2021, the value of cryptocurrencies plummeted at the beginning of the year and worsened by the end of 2022. The fall has been sharp and extreme: only in March 2022, the market was projected to be worth more than USD 3 trillion; recently, it is barely valued at less than USD 1 trillion. After 14 years of glory and predicted to be the future form of money games, cryptocurrencies cannot maintain their stability; however, why now? According to Hütten & Thiemann, the vision of radically decentralizing the financial system became one of the prominent factors that brought cryptocurrencies to downfall. When the existence of cryptocurrencies has more and more disruptive potential, further formal regulations are increasingly being applied. Powerful institutions started building a legal framework for cryptocurrencies and establishing infrastructure to integrate the developing technology makes cryptocurrencies lose their political objectives and have to forego their normative demands.
The failure of adoption also contributes to their declining desirability. Instead, as the modicum of exchanges, cryptocurrencies were more popular as speculative assets where people benefit from their high volatility. As merchants have less commitment to using cryptocurrencies and only use them as payment options among many other payment methods, cryptocurrencies have stagnated in their real-life adoption. Further, the increasing integration of cryptocurrencies and stricter rules imposed by powerful entities has made the crypto ecosystem bestowed by political power. It means that cryptocurrencies’ values would be affected by the dynamic of the global political situation, such as rising inflation or war in Ukraine. In the end, after 14 years of popularity, cryptocurrencies might give up the long-life dream of decentralized money games. Instead, they could end up as game-changers to significantly improve central banks’ functions, away from their original visions.
