After we reviewed in the previous article the philosophy of digital currencies; Its origin, and the impact of political factors on it, we move in this article to discuss the impact of this industry on the traditional financial system, while highlighting the most important challenges and risks it faces. We will show a set of points that reveal some hidden aspects of the world of digital currencies.
What is the impact of digital currencies on the global financial system?
Digital currencies, such as bitcoin, are a revolutionary transformation in the world of money, as it limits the traditional role played by banks and financial institutions in organizing transactions. But how is this effect on the traditional financial system reflected? Let’s review the most prominent differences between the two systems.
- Financial independence and direct control of funds
In the traditional financial system:
1- Banks and financial institutions control money trading, as all transactions are carried out through these bodies.
2- Sending money to another person requires resorting to a financial broker, such as the bank, to complete the transaction.
As for digital currencies:
1- The money is transferred directly between individuals online using a blockchain technology, without the need for a financial mediator.
The “Blockchain” chain is defined as a joint database among computer network devices, where each device is called “node” and stored information distributed over more than one “knot” at the same time.
2- Digital currencies give users full control of their money, eliminating the need to rely on banks or financial institutions to implement transactions.
- Reducing financial fees and the speed of implementation of transactions
In the traditional financial system:
1- Banks usually impose fees on transfer operations, whether inside the country or across the border. Transfers may take several days until they reach the recipient, especially when dealing with international banking authorities.
As for digital currencies:
1- The fees are much lower compared to the costs of bank transfers, due to the lack of a financial mediator between the sender and the future.
2- The transactions are done very quickly; Bitcoin, for example, can be sent to anywhere in the world within seconds, compared to the days that traditional transfers take.
- The difference between centralization and decentralization in transactions
In the traditional financial system:
1- Financial institutions, such as central banks, control the issuance of currencies and the regulation of financial transactions.
2- Main decisions such as determining interest rates and cash quantities are taken by these bodies.
As for digital currencies:
1- The digital financial system depends on decentralization, as there is no single party that controls it.
2- Transactions are carried out through a network of computers spread globally, where each unit of which is valid and recorded in a joint account book known as blockchain.
3- No party can impose its control on the system or adjust the value of the currency individually, but rather depends on the collective compatibility between the participants in the network.
4- This decentralization provides a higher level of transparency, and gives individuals a greater ability to control their money, which reduces the risk of financial manipulation or government control.
Benefits and risks associated with the new global financial system
1- Speed and effective: Digital currencies allow the transfer of funds to quickly exceed the traditional banking system, as money can be sent to anywhere in the world within minutes.
2- Transparency: Digital currencies depend on Blockchain technology, where all transactions are recorded open and verified, which enhances transparency and reduces the chances of manipulation.
3- Reducing costs: Financial transfers are made via digital currencies at lower costs compared to the fees imposed by banks, especially in international transfers.
1- Valuable fluctuations: Digital currencies witness a sharp fluctuation in their prices that make them a high-risk investment. Its value may increase or decrease significantly in one day, creating a state of instability for investors and dealers.
2- Legal and organizational concerns: Many countries are still unclear about how to deal with digital currencies. Some governments impose restrictions or even a complete ban, which may affect the future use of these currencies.
3- illegal uses: Due to the relatively unknown nature of some digital currencies, they can be exploited in illegal activities such as terrorist financing or money laundering, which raises the concern of governments and organizational authorities.
Also, the interests of encrypted currencies contradict the financial and technological power of the United States, as it allows the transfer of money across the border without central control, and is to provide technological alternatives to the authority of governments. These factors concern traditional banks that fear the effect of digital currencies on fighting money laundering and imposing financial sanctions.
Legal and organizational challenges digital currencies
Digital currencies face legal and regulatory obstacles that may affect their future and the possibility of adopting them on a broader scale.
- Unified legislation globally
Digital currencies are not subject to a unified legal system as in traditional currencies such as the dollar or the euro, which means that every country deals with it in a different way.
For example, in China the government completely prevented digital currency trading, for fear of its impact on financial stability.
In the United States, it has developed legislation to regulate digital currency trading, but it is not uniform in all states, making legal compliance a complex matter for investors and companies.
The result: Users and investors face legal risks when dealing with digital currencies, as it may not always be clear any laws that apply to them, especially when dealing across the borders, which creates a state of legal uncertainty and makes some hesitate to use them.
- Fraud and manipulation in digital markets
Digital currencies allow individuals to deal directly without the need for a financial mediator, but this feature may also facilitate fraud.
In some cases, fraudsters create fake digital currencies or fake investment projects, as they convince investors to join projects that do not benefit them with any profit.
Some digital markets lack adequate control, allowing certain parties to manipulate prices and cause artificial disturbances in the market.
With the absence of regulatory guarantees, users face the risk of losing their money, weakening and limiting the spread of digital currencies.
- Government approval and legislative framework
To ensure the inclusion of digital currencies into the global financial system, a legal framework must be developed that achieves a balance between supporting innovation and protecting investors.
taxation: Governments need to enact clear laws to impose taxes on digital transactions, which contribute to their inclusion in the official economic system.
Money laundering: Due to the lack of central control, digital currencies can be used in illegal activities such as money laundering or terrorist financing. Therefore, countries seek to set laws to control these activities and ensure that the use of digital currencies is not misused.
Severe fluctuations in digital currencies and their impact on their spread
Digital currencies are known for their sharp fluctuations, making them less stable compared to traditional financial assets such as paper currencies or bonds. These fluctuations directly affect their use as an investment tool or a savings method.
- Loss of confidence due to fluctuations
Violent fluctuations in digital currency rates lead to a decline in the confidence of users, as the currency that can lose a large part of its value overnight is not a reliable option for payment or long -term investment.
- Impact on economic stability
Acute fluctuations in digital currency markets may cause disturbances in other financial markets.
For example, high interest rates in the United States can lead to a sharp decrease in the value of digital currencies, which creates a state of instability in the market and raises investor concerns.
Causes of low demand for digital currencies
Despite the innovation offered by digital currencies, there are several challenges that hinder their spread in daily life, the most prominent of which are:
- Lack of bodies that accept dealing with: Most stores and companies still refuse to adopt digital currencies as an official payment method. This acceptance of acceptance makes their use limited in daily transactions, and is limited to a few stores and individuals.
- Prices in prices: The economy depends on stability and clarity, which is what digital currencies lack due to sharp changes in their value. These fluctuations make them impractical as a means of payment or long -term investment, as their price cannot be predicted from day to day.
Digital currencies represent an incomplete technological revolution, as they are still in the process of adapting to the global financial system. Despite the tremendous potential it provides, integrating them completely may lead to great challenges to traditional financial sectors, making it difficult to predict their future accurately.
Warnings for investors:
Investors in digital currencies must conduct accurate research on the projects they invest in, and to understand technology, goals and potential challenges.
The promises should not be rushed with rapid returns, as some projects may be transparent or unreliable.
It should be remembered that the digital currency market is still fully organized in many countries, which increases the legal and financial risks associated with it.
Also, the correct investment decision begins with accurate knowledge, so it is necessary to ensure the credibility of the information before taking any financial step.
