Explain how a small country’s banking industry and monetary policy might be affected

by crowdfunding and virtual currency such as Bitcoin. In the discussion, consider

whether crowdfunding and Bitcoin are free markets that are not government regulated.

Introduction

This discussion focuses on the effects of virtual currency on the banking industry and
the monetary policy of a small country. Dabrowski and Janikowski (2018, p. 8) content that
“Virtual currency is a contemporary form of private money,” crowdfunding, according to
Lawton and Marom (2010, p. 8), is "…the cooperation, attention, and trust by people who
network and pool their money and other resources together, usually via the Internet, to
support efforts initiated by other people or organizations." The diversity of crowdfunding
incorporates a variety of niches and shares a lot of social networking energy. Crowdfunding
is evident in soliciting donations, creating a fan base, pre-selling copies of a book, and
financing a start-up in return for equity. As a complex topic, Bitcoin covers cryptography,
software engineering, and economics. Franco (2015), in his book Understanding bitcoin,
ensures that Bitcoin is a digital currency that is just a computer program. A Bitcoin is an idea
or a procedure (algorithm) with characteristics of an open-source project, a distributed peer-
to-peer digital currency, or a distributed transaction database. A Bitcoin is not a currency
issued by an institution, not a Ponzi scheme, not a physical currency, and it is not a currency
backed by gold or silver. A Bitcoin's main feature is decentralized, and the currency derived
from it is called bitcoin. Any formal institution does not control both crowdfunding and
Bitcoin.

Crowdfunding

Crowdfunding has been known as crowdsourcing as used in open-source soft-wares.

“Human nature has long since driven people to seek others with common interests, and
commune in those areas, as embodied in the proverbial “birds of a feather, flock together,”
says Lawton and Marom (2010, p. 12). Using the more than 2 billion internet users, it
demonstrates the potential funding available in using crowdfunding. Examples of sources of
funding resulting from the crowd are church donations, the construction of the statue of
liberty, the state lottery, and others. A collaboration of bitcoin and crowdfunding produces a
strong system whose future appears to be bright. Gandhi once said that "First they ignore you,
then they laugh at you, then they attack you, then you win," emphasizing the value of
working with others. A wave of increasing connectivity is fueling crowdfunding. Google
feeds on crowdsourced information; Kiva is popular with crowdsourced micro-lending to
entrepreneurs worldwide to reduce poverty. There are crowdsourcing activities as much as
there are crowd conferences and crowd consortiums.
Bitcoin

Bitcoin is a digital currency technology that is open source. This technology lends
itself to crowdsourcing and is open to further development by anyone to produce one's
program utterly different from the original. One can make a new digital currency that has to
battle for recognition against other currencies. Currency has value because of social
convention. Bitcoins can purchase anything as companies will accept them in different parts
of the world today. There are processes that bitcoins can do that sovereign currency cannot—
things like crowdfunding which can easily be achieved through Bitcoin transactions. With the
advent of improved technology, cars can read their ownership change from the cloud, paid for
through a bitcoin transaction, and updated in Bitcoin’s database. Bitcoin technology allows
for currency, transfer of value securely, and decentralized, with the potential for developing
many more applications.

Effects of crowdfunding and virtual currency on the banking industry and monetary
policy of a small country

Virtual currencies “remain unlikely to challenge the dominant position of sovereign

currencies and central banks, especially those in major currency areas…but they pose a
challenge to financial regulators…because of their anonymity and trans-border character,”
express Dabrowski and Janikowski (2018, p. 8). The central bank's purpose is to establish full
employment and stable prices, ensure the safety and soundness of the nation's banking and
financial system, and stabilize the financial system in times of crisis, among other functions.
The central bank's tools include regulating interest rates and the flow of sovereign currency.
Virtual currency subjects the central bank to challenges that affect sustainability, such as the
high environmental cost of electricity and maintenance in its generation, as stated by Alonso
et al. (2017) quoting Retamal et al. (2014) who pointed, “…in 2014 the mining of Bitcoin
consumed as much electrical energy as Ireland.”

With Bitcoin, there is a possible increase in crime. Payments in Bitcoin can be

anonymous as there is no adequate legislation. Bitcoin users can evade tax. Money launders
can use Bitcoin transactions. Criminals can use Bitcoin because it can be quasi-anonymous in
use and due to the speed of transacting, which may be very quick.

When the central bank uses its own central bank-backed digital currency (CBDC),
blocklisted Bitcoins will be hard to spend. By using private virtual currency, it is clear that
there will be reduced interest rates, lower inflation, macroeconomic stability, and other
advantages, though there will be loss of seignior-age and difficulty in dealing with external
shocks. In Zimbabwe use of cryptocurrency offshoot, mobile money fueled inflationary
pressures until the government caped the maximum transaction.

Conclusion

Virtual currencies, as claimed, have numerous advantages in either case of central

bank-backed digital currency or private virtual currencies like bitcoin. There is a need to do
more research to determine the viability and sustainability of virtual currencies, although
claims of stability in the economy are rife. Virtual currencies may promote money laundering
and finance illegal activities. In addition, there will be lower operating costs, as there will not
be any money printed or minted, and consumer protection. Bitcoin is highly volatile
compared to CBDC. The virtual currency would be more helpful in developing countries;
Israel and Denmark said, "We have not found an advantage that a CBDC presents compared
to current payment systems (card, and others). Alonso et al. (2020) emphasize that "In any
case, in this new world where private digital currencies exist, the creation of CBDCs is only a
matter of time.”

References

Alonso, S.L.N., Fernandez, M.A.E., Bas, D.S., Kaczmarek, J., (2020). Reasons fostering or
discouraging the implementation of central bank-backed digital currency: A review.
The Catholic University of Avila. Economies, 8(2), 41.
https://doi.org/10.3390/economies8020041

Dabrowski, M. and Janikowski, L. 2018, p. 8). Virtual currencies and their potential impact
on financial markets and monetary policy. No 495. CASE reports.
http://www.europarl.europa.eu/committees/en/econ/monetary-dialogue.html

Lawton, K., and Marom, D. (2010). The crowdfunding revolution. Social networking meets
venture financing.

Slattery, T. (2014). Taking a bit out of crime. Bitcoin and cross-border tax evasion. Brooklyn
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