What are the problems with digital currencies?

What are the problems with digital currencies?

From security risks to money laundering – here are the problems with digital currencies and the way forward.

In recent years, digital or virtual currencies have come to the fore, thanks to the rise of cryptocurrency. Basically, digital currency is money that only exists virtually. Arguably the most popular, crypto is not the only digital currency in circulation today. There is also central bank digital currency (CBDC), i.e. currency launched by central banks in countries, and stablecoins. According to a survey by the International Monetary Fund (IMF), over 100 countries out of 159 members are exploring CBDC in the near future.

Digital money can help you save time as well as – fittingly – money. Plus, you don’t need storage space for it, and record keeping is simplified thanks to technology that does it for you. However, virtual currency is subject to risk. Blockchain technology (used for crypto) can be hacked, storage can be quite expensive and the regulatory environment is not so good (as we saw with Sam Bankman-Fried’s FTX fiasco and subsequent imprisonment).

Given that, here’s a look at the biggest risks associated with digital currencies.

1. Security risks

China is ready to adopt CBDCs; it was shocking news given the country’s initial aversion to cryptocurrencies. It is so surprising that people feel that China has an ulterior motive behind its CBDC launch. They feel that China can use its digital currency for domestic surveillance, i.e. to invade citizens’ privacy. Besides China, many other countries have also tried to adopt crypto, with some being criticized.

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Additionally, considering the data breaches that plagued major institutions in 2022, governments’ use of digital currencies raises red flags for citizens who may have to be a part of it to keep up.

2. Misuse of funds

From scams (where people create fake companies to tempt investors and run off with their money) to terrorist financing (where untraceable money is used to finance terrorist activities) – many scams related to crypto have emerged.

Organizations, such as ISIS and Al-Qaeda, have apparently raised over $2 million using crypto. In fact, reports have found that up to 20 percent of terrorist attacks may be funded by crypto. While its autonomy and decentralization are great for ensuring more security and privacy, digital currencies can also be a breeding ground for bold scams.

3. Volatility

Digital currencies have been synonymous with volatility, especially in recent years. Just last year we saw Terra Luna and crypto’s subsequent collapse, FTX and crypto’s subsequent collapse, an Elon Musk tweet, and you guessed it, a crypto’s subsequent collapse (although collapse is a strong word, some called it just a “bruise”) . These are proof that it is difficult to trust digital currencies.

Some people have suffered huge financial losses from their crypto investments with recovery difficult if not impossible. Reports of crypto suicides as a result of these losses also became common news in 2021. Clearly, the volatility of digital currencies stands in the way of their success.

4. Regulatory challenges

Lack of regulation has been crypto’s downfall on many occasions. It can allow fraudsters to get away with wrongdoing without question, leaving investors without security when their money breaks. No one monitors what happens on virtual currency platforms, and while it’s fun and games for a while, it can get chaotic very quickly.

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However, countries are changing that. For example, after Bankman-Fried’s arrest, countries were forced to revise their attitude towards crypto. Canada’s securities regulators Canadian Securities Administrators decided to ban crypto-lending (borrowing money to trade crypto) and margin trading to protect investors in response to the FTX collapse.

That said, the dynamic nature of crypto and its assets makes it quite difficult to regulate.

5. Lack of transparency

A big selling point for digital currencies is that they are anonymous. Great for the layman who doesn’t want to be tracked unnecessarily. Equally good for criminals who need to get away with shady transactions. Lack of transparency is not always a good thing, especially when you consider the latter case. This makes it difficult to find out who is responsible for an accident.

6. Money laundering

In 2021, criminals laundered $8.6 billion from cryptocurrencies. Just last year, in November 2022, US officials arrested 21 people who ran an extensive money laundering scheme that collected $300 million annually. All things considered, this is not a one-off.

Earlier, a Swedish man Roger Nils-Jonas Karlsson was sentenced to 15 years in prison for laundering money from investors through his crypto trading scheme and using it to buy resorts and beautiful homes.

Despite their shortcomings, digital currencies are not all bad. Experts have found that CBDCs have the potential to save both governments and citizens a lot of money. It could reduce debt levels by 25 percent and save billions of dollars. Cryptocurrencies also have advantages, allowing businesses to easily raise money from anywhere in the world.

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With a fine balance between regulation and freedom, digital currencies could be well on their way to transforming the economy as we know it.

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Top image by Pixabay

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