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Bitcoin’s Lightning Network has been expanding over time, but that expansion could easily be overestimated and is currently unlikely to replace remittance and small business payments. The network, which has been in the works for years, is still struggling to become a core transaction system in the crypto space.
The Lightning Network appears to ultimately ambition to replace existing payments networks like Visa or Mastercard. Crypto enthusiasts believe Bitcoin can replace the existing financial system, with their most vocal proponent, Michael Saylor, having led business intelligence firm to accumulate 130,000 BTC. Enthusiasts believe that BTC could take over Central Bank Digital Currencies (CBDCs) in the future.
So what are the advantages of Bitcoin over CBDCs and the traditional financial system? Scarcity, time, and energy. While a decentralized system has its advantages and could one day become a secondary, yet tiny layer of the global payments system, fiat currencies haven’t yet exhausted their advantages.
Money has a rather philosophic nature and can be linked to the social structure of civilization. So far, there are centralized governments that rely on monetary authorities with the right to manage monetary policy to control the money supply in an economy.
In the real world, salaries are paid out in fiat currency that is backed by a central bank and relies on banknotes and coins that are deemed legal tender by the government. Goods and services are bought and paid for in these currencies because salaries and taxes are paid in them as well.
Without these controls, the state itself could cease to exist. The same rings true for remittance systems. Even with fiat currency transaction fees being extremely high, the cryptocurrency world has stablecoins that would require users to first exchange them into fiat currency before using them.
This means it’s a very inconvenient way to transfer money, which is poorly understood by most of the population. The Lightning Network may help, but it is still far from being perfect and far from taking over the traditional financial system.
Bitcoin’s Lightning Network is vulnerable to security breaches and dispute money transfers can be frozen for a long time, while banks often allow for these disputes to be quickly resolved. The volatility of the underlying cryptocurrency, Bitcoin, is another big issue, as businesses have to ensure they can cover upcoming costs and make a profit to maintain sustainability.
That being said, cryptocurrencies could still take an essential share of money transfers in some regions in the future. These would likely be regions in which the current financial systems fails to serve the majority of the population, and as such testing new decentralized financial technologies isn’t seen as such a risky move.
It would certainly take significant time and social developments for such a financial system to take off, however. This future is not certain from this point onward.
Iván Marchena, Head of Analytical Department Metadoro
Featured image via Pixabay.