Divided Views on Virtual Currency

written by 20409 Park Seo Yeon

Virtual currency was born in 2008 amid the financial crisis.

At that time, complex derivatives, reckless credit approvals and the subprime mortgage crisis pushed the existing banking and monetary systems to their limits. The government and central banks opted for quantitative easing, which would print more money, but this would lead to a decline in the value of the money on the market.

Overcoming the crisis through quantitative easing eventually led to a bigger crisis. 

Virtual currency emerged with voices of concern that the problems of the existing floating exchange rate system should be solved. The value of the method of breaking the framework of the existing financial system has been in the spotlight.

It is a currency used in a virtual space without real things, such as bills and coins. In the existing financial system, only certain people with credit could access it. But virtual currency is accessible to everyone, and they can see the content.

After that, the value of money was preserved as people who encrypted the contents so that they could not be modified.

As real estate and stock prices soared in the face of the economic crisis caused by COVID-19, the digital coin investment frenzy among young people in their twenties and thirties who did not have assets hit Korea.

The government has come up with measures to regulate digital coins for fear of future investor damage. There are many conflicts over these regulations.

For Virtual Currency

Nowadays, there are more people who don’t carry a wallet or cash to pay, most of the time they rely on cards.

Even some places only take cards as a way of paying titled “No Bill Zone,” which means that paper currencies are losing their worth and starting to get useless. As an alternative to this, we can take “virtual currency” as an option.

It can replace the existing currency. Credit delinquents in existing financial institutions or those who cannot make bank account transactions will also be able to trade virtual currency, and the economy will be active.

It helps countries with unstable economic conditions and currency values. It could be a reliable payment method in those countries.

It can be an efficient medium of exchange. If virtual currency is commercialized, it will be a more efficient transaction method than legal currency.

Looking at the recent increase in online transactions, most third parties, such as banks, mediate transactions. Transaction costs such as fees incurred have been a major restriction on transactions. However, transactions through virtual currency are free because they are direct transactions.

Also, commissions rarely occur. In addition, in trade transactions, there is no need to consider costs and exchange fees due to exchange rate uncertainty, so various constraints in transactions between countries can be overcome.

Freedom from control arises. Unlike conventional currencies, virtual currency does not have a central institution that controls the supply. That is why there is little risk of values being manipulated by the political interests of control agencies such as central banks or governments.

A few are concerned that this lack of central control will cripple monetary policy for economic stabilization. However, even if the virtual currency is an extreme case of replacing all the main currencies, there is no need to worry too much about the incapacitation of monetary policy, as the currency volume control is still possible.

Against Virtual Currency

Investment in virtual currency is very risky. First of all, a system related to virtual currency is not properly stable because it’s still developing. There is no reason to compensate for the damage caused by virtual currency.

According to the Korean government, compensation for user damage caused by the system failure of virtual asset operators (virtual currency exchanges) is difficult.

Most virtual currency is used for financial reasons in a short period. Recently, accidents using these sentiments have increased crime.

For example in New York, two people were arrested in 2016 on charges of infiltrating  the trading system of Bitfinex, a virtual currency exchange, and conspiring to launder Bitcoin. But no one was responsible. The reason is that there is no institutional framework.

Unverified companies use loopholes in the system to turn the virtual currency market into a speculative market which damages the financial industry and society. There are concerns that if left unchecked, a bigger financial accident could occur.

Speculative activities should be refrained because it is safe to pursue traditional assets like savings and deposits.

It has been nine years since Bitcoin, the first virtual currency, was launched in the market. Hundreds of virtual currencies have been released one after another, but unfortunately, it is rare for people to properly understand and invest in the functions of each coin.

Charles Hoskinson, who developed ADA (Aqua Design Amano), also called the third-generation coin, said, “People are making money too easily from virtual currency speculation.”

He expressed concerns about the market situation in which a wave of selling is occurring quickly to gain profits. 

Scalability, sustainability and interaction are the problems of virtual currency. Among them, the problem that most experts pay attention to is stability. They argue that the market is showing extreme volatility because there are no regulations on existing virtual currencies.

The U.S. investment information site The Motley Fool cited problems such as the emergence of a large number of profit-making sales, the continued emergence of speculative forces and a serious hacking incident that exploited virtual currency.

In My Opinion…

Due to the various disadvantages of virtual currency, virtual currency can put users at risk. Therefore, I think there is a limit to replacing the existing currency.

Most of these side effects are due to high price volatility. Therefore, it is necessary to stabilize price volatility in order to solve the side effects of such virtual currency.

In addition, laws and regulations on illegal activities such as virtual currency-related fraud and market price manipulation should be prepared, and various protective devices should be operated.

Through this, I think it will be a beneficial monetary tool for investors by utilizing his strengths while protecting the shortcomings of virtual currency.