. 2021. Eswar S. Prasad. The Belknap Press by HArvard University Press.
These days, you’ll be able to’t activate the TV or the radio without hearing an commercial for cryptocurrencies or crypto exchanges. Numerous celebrities are promoting crypto trading platforms, including skilled athletes LeBron James and Tom Brady and actors Matt Damon and Larry David. Are cryptocurrencies the subsequent big investment, a fad or a currency that may change the economic and financial landscape? What are a few of the benefits and drawbacks of digital currencies? Who will profit from these recent currencies?
Eswar S Prasad tries to reply these questions. Prasad, Tolani Senior Professor of Trade Policy at Cornell University and creator of several books on currencies, offers an interesting and insightful account of the changing landscape from traditional paper notes to digital currencies.
Prasad begins his discussion of the long run of cash with a quote from Cecilia Skingsley, deputy governor of the Swedish central bank: “If you extrapolate current trends, the last banknote will be returned to the Riksbank by 2030.” Skingsley will not be the one government official , who sees an incredible future for digital currencies. China is one other country that has moved away from paper currency. In the United States, recognizing the importance of recent digital assets, President Biden signed an executive order in March 2022 to make sure the responsible development of digital assets.
The book is split into 4 parts. Part I, “Laying the Foundation,” looks at the long run and promise of digital currencies and provides an introduction to finance for those with little background knowledge. Part II, “Innovations,” focuses on the history of fintech and the crypto revolution. Part III, “Central Bank Money,” makes the case for central bank digital currencies (CBDCs). Part IV, “Implications,” addresses the potential consequences for the international monetary system.
The “Innovations” section of the book begins with a chapter titled “Will Fintech make the world a better place?” Here the creator takes us through the history of Fintech, which he says is an umbrella term for novel financial technologies. It was first coined in 1993 with the creation of the Financial Services Technology Consortium by Citicorp. However, some innovations, resembling the ATM, have turn into so ubiquitous that we forget that they were once novel technologies. The story includes an interesting have a look at recent innovations resembling M-PESA, which allowed individuals in Kenya to bank via a cell phone, in addition to peer-to-peer lending, crowdfunding and on-demand insurance. Many of those recent services will pose challenges for traditional financial services firms.
Today, fintech is most closely related to cryptocurrencies resembling Bitcoin and Ethereum. However, a discussion about cryptocurrencies cannot begin without understanding blockchain and the way this technology is transforming economics and finance. Blockchain technology is being touted as the long run of finance and various other business sectors, including securing medical records, non-fungible token (NFT) marketplaces, and provide chain and logistics monitoring.
Most investment professionals are accustomed to blockchain and the concept of a decentralized ledger on a peer-to-peer network, but many may not understand the technology thoroughly. Prasad provides an in depth but easy-to-understand explanation of how blockchain works, from its historical origins to the technology underlying the system. The term “blockchain” is related to a wide range of cryptocurrencies. However, the protocols used to validate transactions differ depending on the blockchain. Additionally, each protocol has benefits and weaknesses. Will many various protocols remain or will one turn into the usual for the industry?
Bitcoin uses a “proof-of-work” protocol to validate transactions, which requires block creators, called miners, to resolve a randomly generated cryptographic problem. The approach allows transactions to be validated and not using a trusted third party. However, this method requires significant computing resources, which require large amounts of electricity to power the computers. Another drawback of this approach is that only a comparatively small variety of transactions may be validated at the identical time.
Ethereum uses a “Proof-of-Stake” protocol. Proof of Stake was created to deal with a few of the inefficiencies of the Proof of Work approach. Here, the privilege to validate a block relies on how much has been “staked” by competing nodes. However, as Prasad points out, this less resource-intensive approach will not be without its flaws.
Prasad debunks some myths about cryptocurrencies and other digital currencies. For example, many think about using cryptocurrencies like Bitcoin as a approach to maintain anonymity. The reality is that digital currencies, unlike money, require identifiers to ensure that consumers to receive the products purchased with digital currencies, thereby eliminating anonymity. Blockchain can also be considered a secure technology. Although this technology offers more security than other methods, Prasad highlights ways individuals can hack the assorted protocols.
Like all recent technologies, the Fintech revolution has brought with it a wholly recent language to define the brand new offerings, including Hashing, Security Token Offerings (STOs), Smart Contracts, Initial Coin Offerings (ICOs), Hash Time Locked Contracts (HTLCs), and stablecoins. allows investors to learn the brand new vernacular of this space and consider which innovations could offer the best investment opportunities.
Reading the book is unlikely to supply insights into how cryptocurrencies are valued or how digital currencies like Bitcoin are likely to exchange government-issued money as a store of value, medium of exchange, or unit of account. However, within the chapter “The Case for Central Bank Digital Currencies,” Prasad offers insight into the potential of digital currencies. He claims that CBDCs can improve efficiency on the wholesale side by improving the best way central banks distribute reserves to industrial banks for payment, clearing and settlement. On the retail side, CBDCs can offer several advantages, including providing a alternative payment system, promoting financial inclusion, and improving monetary and monetary policies.
Although these chapters seem like of more interest to monetary economists and central bankers than to investors, Prasad provides some insights that investors might profit from. He summarizes a study that analyzed how measures taken by some European countries to scale back money consumption shrank the informal economy and increased tax revenues. The thoughtful investor might ask which investments will profit from this increased tax revenue. Will the extra revenue be used to finance infrastructure spending? Will countries use the windfall to finance alternative energy projects? Perhaps countries governed by conservative legislatures will decide to return the cash to residents and businesses through tax cuts. If that is the case, which industries are prone to profit?
Innovation creates winners and losers by creating recent opportunities and challenges for established firms. Innovations within the financial industry are not any different. Understanding a few of the current and potential future changes will allow analysts to higher determine which firms and industries are prone to thrive and that are prone to suffer. offers readers an insight into a few of the opportunities and challenges facing the financial sector.
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