By: Bhavika Bhartiya, Research Analyst, GSDN
In October 2008, an anonymous person or group operating under the name Satoshi Nakamoto released a nine-page document which introduced a new concept for digital currency that would quietly shake the foundations of global finance. The introduction of “electronic cash” that required no banks, no governments, and no third parties’ involvement, it just only has your trust and understanding in mathematics, computers technology, and a way to record those transactions encoded in software. Today, most of the people on the earth know about the digital currency called “bitcoin” either by name or because of the news about its value fluctuations. As the response from various governments from Washington to Beijing continues to evolve. The question is no longer whether Bitcoin matters. The question is whether it has what it takes to reshape the way the world trades.
The Broken Machinery of Global Payments
To fully grasp the perks of bitcoin, one must first understand how clumsy the current global trade payment method really is! In order for a textile exporter in Bangladesh to get paid by a retail store in Germany, the money must be sent through correspondent banks, then go through foreign exchange currency conversion for both buyers and sellers and then pass through compliance checks. This means that what ought to be a straightforward transfer of value has become nothing more than a relay race that can take anywhere from three to five business days to complete and absorb up to six percent of the transaction value as fees. For small businesses and individual exporters operating in developing economies, these fees are not merely an inconvenience, they pose a major obstacle to participating in international trade.
Similarly, there are many nations around the world with either unstable or simply non-accepted by other international currencies. A small producer in Zimbabwe or Venezuela who wants to trade internationally will have to deal with a certain level of currency control, hyperinflation and unreliable banking system. The current architecture of the global financial system was not built to accommodate these types of businesses. It was designed to accommodate transactions done using traditional fiat currencies. Bitcoin was created specifically to support trade conducted with digital assets. Therefore, the purpose was is to support global commerce for all players in the marketplace.
What Makes Bitcoin Different
Bitcoin is built on a blockchain technology, where many people all over the world through computers have access to and can see copies of the same record, thus providing a clear line of accountability for every transaction. No one can exercise absolute control over it because it does not depend on any one government, bank, or organization.
Using blockchain technology, a trader in Nigeria can send bitcoins directly to a supplier in Seoul in minutes without going through a financial institution, doing so without converting the local currency, and at a minimal cost compared to traditional wire transfer fees. Every time someone uses their bitcoin to conduct business with someone else, the transaction is permanently recorded in a manner that all involved parties can independently verify, creating an original record of the transaction.
The most notable example to showcase bitcoin’s potential use was El Salvador’s adoption of bitcoin as legal tender on September 7, 2021. President Nayib Bukele explained that bitcoin will reduce remitting cost, which were charging Salvadorans about US $400 million annually in transfer fees alone. Consequently, no matter how one views about this innovative approach to commerce for an entire nation-state, El Salvador would continue to have a profound symbolic effect by being the first sovereign state to declare bitcoin as a legal tender.
The Volatility Problem: Bitcoin’s Fragile Point
However, there is one overt contradiction to its utility as a currency, money must be stable enough to function as an effective store of value. In November 2021, the price of one Bitcoin reached an all-time high of nearly US$69,000. By December 2022, it had lost almost 77% of its value, dropping to about US$16,000. This means that a business which priced a contract at the peak price of Bitcoin on November 11, 2021 would receive a payment worth only a tiny fraction of the original price in December 2022. Under these conditions, no business can create a business plan or even survive. Such massive fluctuations in value create not only an immense amount of risk, they make Bitcoin essentially unusable as a transactional currency for most businesses to utilize as they operate every day.
Regulation and Competing Technologies
Bitcoin has many challenges to overcome from governments around the world, for example, China prohibited any kind of transaction in cryptocurrency in September 2021. The United States (US) has adopted capital gains taxes on Bitcoin investment as well as strict Anti-Money Laundering (AML) requirements. India has enacted a tax rate of thirty percent on the profits earned through cryptocurrency. The European Union (EU) passed regulations under the Markets in Crypto-Assets (MiCA) which were enforced in 2023. A business attempting to use Bitcoin as a means of international trade will find that it faces an incredible burden in following all of the various laws and regulations that govern cryptocurrencies in all of the various jurisdictions.
Around the world, central banks are working on their own digital version of currency known as Central Bank Digital Currency (CBDC). The CBDC will use the speed and efficiency of blockchain technology, but support it with the full backing of government currency. For example, the digital yuan from China is currently being deployed, and the digital euro from the EU is nearing completion. These finance alternatives backed by government currency are meant to take full advantage of the benefits of using a digital form of payment while eliminating the volatility associated with Bitcoin. If CBDCs are successful, using CBDCs to modernize global trade finance will likely be much smoother.
Conclusion
There is little reason to expect bitcoin to become the worldwide currency for global commerce any time soon. The volatility of the currency, the complexity of regulations, laws surrounding its use, and the huge amount of energy required for its use are unconquerable barrier for now. But while bitcoin may be hugely expensive to use, it is also true that bitcoin has proved that it is technically feasible to move currency across borders, without going through a bank or the government, and that many millions of people around the world actually use that capability today for instance migrant workers sending remittances home, small exporters locked out of formal banking and citizens in countries with failing currencies.
Ultimately, the overall future of global commerce will likely to be digital, implementing the ideas that bitcoin has introduced to the planet’s economy over time. More important than what the name is of the currency that ultimately facilitates that digital economy of the future could be the overall changes in how we think about money and the economy that bitcoin has already created.
