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Cryptocurrency: financial revolution or flash in the pan?

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Touted as the future by some and a fleeting trend by others, what’s behind the rollercoaster-like value and popularity of cryptocurrency?  Director of Curtin’s Blockchain Research and Development Lab Associate Professor Vidy Potdar and former head of Curtin’s School of Accounting Professor Saurav Dutta explain.

Stacks of gold and silver cryptocurrency coins

While the concept of cryptocurrency is little more than a decade old, blockchain, the technology behind it, was developed in the early 1990s.

“Blockchain is a digital database that stores data in ‘blocks’ that connect together. Once data enters a block, it’s time-stamped and cannot be edited or deleted. Rather than storing this data in single location, such as a bank, it is processed, verified and recorded by a network of computers, ” says Associate Professor Potdar.

Likewise, Professor Saurav Dutta says blockchain gives cryptocurrency a number of critical advantages over traditional currency and banking transactions.

“When financial records are kept by a single custodian, they can easily be lost. With blockchain, the same record is kept at hundreds of locations and is updated in real time. If one of these locations were to go down, there would still be plenty of others operating, ensuring records are always maintained. And if you were to attempt to change or tamper with a record, you would need to go all of the locations where the record is kept and change it simultaneously.

“Blockchain near-on eliminates the possibility of fraud.”

A bubble set to burst

Cryptocurrencies may have initially gained popularity for their bank-free transactions and security but today they’re most valued for their investment potential.

In this year alone, the price of Bitcoin has increased dramatically, soaring to more than $80,000 AUD in April 2021 before plummeting by 30% a month later. As of August 2021, Bitcoin’s price has risen again, yet regulators and financial commentators continue to label its value as a short term ‘bubble’, including Potdar.

“Cryptocurrencies are inherently risky investment vehicles. People have lost a lot of money due to their volatility. I would invest only what you can afford to lose. This is not the time to go overboard and invest all your life savings,” he says.

Resist or adopt?

While some investors may be capitalising on the rise cryptocurrencies, governments and regulators are grappling with it.

“Regulating cryptocurrencies creates challenges for governments and policymakers” says Dutta. “Governments typically levy taxes on transactions, such as sales tax, however cryptocurrency enables transactions to occur outside of government oversight, making it difficult to tax.”

Some governments, such as China and Russia have put up a resistance, placing stringent restrictions on using or providing services related to cryptocurrency transactions.

Yet some, particularly smaller economies, have embraced the new technology, such as Dubai, which has introduced its own cryptocurrency, emCash, and El Salvador, which became the first country to make Bitcoin legal tender in June 2021.

Banks and financial institutions have also struggled with their stance towards cryptocurrencies.

“Banks make money by acting as the middleman in financial transactions. Blockchain allows individuals and businesses to trade with each other directly, taking the power and profit away from banks,” says Dutta.

“However, they can only resist for so long. When a technology becomes powerful enough, people have to adapt and adopt it into their business models.

“An example of this is Jamie Dimon, the CEO of JPMorgan Chase, the largest bank in the US. In 2017, he warned his traders they would be fired if they were found trading in any kind of digital currency.

“But by 2019, JPMorgan Chase had released JPM Coin, its own form of cryptocurrency and by 2020 the bank began rolling out blockchain technology in its own banking system.”

The cryptocurrency landscape in Australia

In Australia, investors, banks, and governments are slowly warming to the idea of cryptocurrency. The Australian Taxation Office has reported an increase in trading with more than 600,000 taxpayers now reporting crypto-asset investments.

In 2020, the Reserve Bank of Australia commenced a project to explore the use of cryptocurrency and blockchain technology and the Australian Government released its National Blockchain Roadmap.

As a member of the National Blockchain Roadmap Steering Committee working group, Potdar says the roadmap is a significant step forward by the government.

“Beyond cryptocurrency, we’re looking at how blockchain technology can transform Australia’s government and industry sectors, from regulation and cyber security to education and supply chains.”

People are investing not spending

While blockchain is making strong inroads with governments and the financial sector, Potdar believes widespread use of cryptocurrency is still a long way off.

“More companies are accepting cryptocurrencies as payment, but they’re unlikely to replace traditional currency, particularly if people continue to buy them as investments,” he says.

“If I’ve invested in Bitcoin or another popular cryptocurrency, I’m unlikely to use it to pay for something. I would hold on to it in case it increases in value. This mentality and the volatility of their value will have to change before we see a complete adoption of cryptocurrencies.”

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Associate Professor Vidy Potdar is the Director of the Blockchain Research and Development Lab at Curtin University. His research focuses on blockchain and distributed ledgers, energy management, internet of things, data analytics and cyber security. Over his career, he has formed strong industry and government partnerships, working on projects with Natsoft Corporation, Main Roads, StatoilHydro, Fleetwood Corp and Chartered Accountants AusNZ.

Professor Saurav Dutta was Head of Curtin’s School of Accounting from 2017 to 2020. Throughout his 25-year academic career, he has engaged in high-impact research that has informed industry and public policy, including the Wall Street reforms in the US following the 2008 global financial crisis. He has recently moved to the US, where he is continuing his academic career.

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