Emergence of Cryptocurrency in global financial system

One of the most astonishing and perhaps most controversial additions of the 21st century's technological revolution is 'Cryptocurrency.' The concept that began with the emergence of Bitcoin in 2009 has now grown into a massive phenomenon.

It is not merely a new asset class; rather, it has emerged as a powerful catalyst poised to fundamentally alter the conventional framework of the global financial system. The Dollar-centric international economy, the unchallenged authority of central banks, and the long-established rules of the conventional banking system are now facing new challenges from this 21st-century digital currency.

The current structure of the international economy is primarily built upon the post-World War II Bretton Woods System, which evolved over time to establish the US Dollar as the world's principal reserve currency. Today, international trade, foreign exchange reserves, and nearly all global transactions are conducted through the SWIFT (Society for Worldwide Interbank Financial Telecommunication) system and are dependent on the Dollar. While this system is functional, it is also slow, expensive, and highly geopolitically sensitive.

Cryptocurrency targets these very weaknesses. This decentralized monetary system, built on blockchain technology, is not controlled by any single country, government, or central bank. Consequently, it has initiated a groundbreaking transformation in international transactions.

First, remittances, or money sent by expatriates. According to the World Bank, remittance flows to low- and middle-income countries are one of their primary sources of foreign income. However, the high fees and time required to send this money through traditional banking channels are a significant burden for expatriates. Cryptocurrencies, particularly stablecoins (whose value is pegged to a specific currency), can complete these transactions almost instantly and at a negligible cost. This is causing a silent revolution at the grassroots level of the international economy.

Second, Financial Inclusion. Billions of people worldwide still remain outside the formal banking system. However, many of them have access to smartphones and the internet. Cryptocurrency offers this 'unbanked' population direct entry into the global financial system. This new sector, known as Decentralized Finance (DeFi), allows people to borrow, invest, and save without the need for banks or intermediaries, posing a major challenge to the conventional economy.

Perhaps the most significant impact of cryptocurrency on the transformation of the international economy is geopolitical. The hegemony of the US Dollar is being directly challenged by this digital currency. When a country faces international sanctions, the primary weapon to isolate it from global trade is to exclude it from the SWIFT system and halt its Dollar transactions. In recent times, countries like Russia, Iran, and North Korea have been attempting to use cryptocurrency as an alternative transaction system to evade these sanctions. This is altering the very calculus of international relations. Nations are realizing that over-dependence on the Dollar is a threat to their economic sovereignty.

In this new reality, the world's central banks are not sitting idle. They are introducing their own digital currencies-'Central Bank Digital Currencies' (CBDCs)-to challenge the decentralized nature of cryptocurrency. China's digital Yuan (e-CNY) is already in wide circulation, the European Union is working on a digital Euro, and India has also launched the digital Rupee. This is essentially an attempt to leverage the technology of cryptocurrency while retaining control in the hands of the central bank. In the future, these CBDCs could be used as alternatives to the Dollar in international trade, steering the global power structure toward a 'multipolar' financial world.

Of course, this path of transformation is not a bed of roses. The primary weakness of cryptocurrency is its extreme price volatility. The dramatic fluctuations in Bitcoin's value hinder its establishment as a reliable medium of exchange. Secondly, there are security risks. Its use in illicit activities such as hacking, fraud, and money laundering has made cryptocurrency an object of suspicion among policymakers worldwide. Furthermore, the amount of electricity consumed to mine certain cryptocurrencies like Bitcoin (which operate on a 'Proof-of-Work' system) has become a significant cause for concern for environmentalists.

A vast debate is underway globally on how to regulate this new technology. Some countries (like El Salvador) have adopted it as legal tender, while others (like China) have banned it entirely. Meanwhile, economic powers like the United States and the European Union are attempting to bring it under a strict regulatory framework. The nature of this regulation will determine its ultimate role in the international economy.

The cryptocurrency 'genie' is already out of the bottle. The challenge it has posed to the established rules of the international economy is irreversible. It can erode the dominance of the Dollar, lower the cost of remittances, and bring billions of people into the fold of financial services. However, its risks cannot be ignored. The world now stands at a crossroads. The coming decade will determine whether this digital currency will dismantle the conventional system to create something new, or whether both systems will integrate to give birth to a hybrid global economy. What is certain, however, is that by converging at the intersection of technology, economics, and geopolitics, cryptocurrency has begun a new chapter in the international economy.