Centralized and decentralized economies are the primary talking points of many business and economic enthusiasts. As the debate over which one is better continues to rage, this article takes a look at both types of economies and the emerging influence of cryptocurrencies on traditional banking.
Centralized Economy
A centralized economy is an economic system in which a central authority, such as the government, takes economic decisions on product manufacturing and distribution. Centralized economies differ from market economies, where enterprises and consumers generally make such decisions.
In centralized economies, state-owned enterprises, or government-owned businesses, are frequently used to produce goods and services. Prices are controlled by bureaucrats in centrally planned economies, which are often known as “command economies.”
The majority of developed countries have mixed economies, which blend elements of state planning with free market systems advocated by classical and neoclassical economists. The bulk of these systems favour free markets, with government intervention limited to enforcing certain trade barriers and coordinating certain public services.
Advocates of centrally planned economies claim that by more effectively tackling egalitarianism, environmentalism, anti-corruption, anti-consumerism, and other challenges, central authorities may better accomplish social and national objectives. These proponents believe that the government can set pricing for commodities, select the number of objects produced, and make labour and resource decisions without relying on private capital.
Economic Decentralization
As part of a critique of present market-economy systems, the decentralized economy emerges. Contrary to centralized economies, financial decentralization is made feasible by virtual currencies, which surely has an impact on the economy. According to some of its experts, this sort of economy is used to cut costs and boost efficiency, resulting in fewer product surpluses and shortages, allowing individuals to pick what to make and consume, take use of time and knowledge, and so on.
Governments play no significant role in this economic system, as utopian as it may appear, primarily because it is devoid of any form of subordination. In this approach, we can define a decentralized economy as a system in which private enterprises control a substantial portion of the goods and services, with limited government intervention in the market. Because the offer influences the demand for goods and services in this form of economy, higher quality and lower pricing may emerge.
It is critical to understand the role of governments as representatives of citizen opinion and lax economic regulators, asserting justice and equal opportunity with coercive power while maintaining a distance from certain sectors that will autoregulate with the passage of time and release centralized power to institutional policy.
The knowledge of those in charge of private firms that aim to handle parcels of the power of these types of systems is fully exploited, and while many central banks criticize their operation, it is undeniable that they are on a huge tour each time.
How Cryptocurrencies Are Putting Banks to the Test
Of course, speaking of a decentralized economy is not the same as talking about cryptocurrencies, but we can put them on the same level because of their contribution to it. Such institutions exist in Spain, Switzerland, and the United States, and virtual currencies have already made their way there. As a result, we’re seeing how central banks are reacting, with a strong aversion to their use and expansion as more and more people can buy Cardano, Bitcoin, Ethereum or any of the many that are in the crypto market.
As you may be aware, cryptocurrencies can be exchanged and operated in the same way as any other traditional currency, but they are outside the ownership domain of governments and financial institutions that are considered “public,” as many of the major institutions that deal with exchange values are private funds reserves, such as the US Federal Reserve.
We refer to them as part of the decentralized economy, since they are assets that allow society to control its money without the involvement of a third party. Making personal loans or any other transactions is no longer a chore that must be completed through a bank. These virtual currencies enable you to make low-cost, quick payments from anywhere at any time. All of these are unavailable with traditional banks.
The volatility of cryptocurrency has always been a major concern for bankers. Since they cannot control the price, they always find it hard to get hold of the market. And this lack of control has largely made them weak when it comes to penetrating or controlling the market size, the market participants, and the liquidity alike. The grossly unstable characteristics has also raised the fear of partaking in the investment vehicle.
Huxley had reported that between 2015 and 2016, more than 600 bank branches in the United Kingdom closed down. The report also referred to a report by HSBC, that there has been over 40% decrease in the number of bank visitors as at that time. These events were later traced to the massive involvement in crypto banking by bank customers, a situation that has created a large comparative advantage, thus filling the vacuum the traditional banking system has created. The banks now fear that should this trend continue, the physical style of banking might go extinct.
The constant increase in the value of bitcoin has caused banks to lose and keep losing their market share. Not just bitcoin, in one way or the other, other coins have deprived the banks of some part of their market share. The banks had noticed this, hence, their latest involvement in the cryptocurrency industry. To preserve their already established momentum, some banks had taken to creating their coin to avoid losing themselves to the trend.
Conclusions
Cryptocurrencies are so promising that the central banks see them as a real threat. They do offer the many eases and conveniences that people usually crave from traditional banks. In addition, the value of various cryptocurrencies is not only determined by the performance of a specific economy. As a result, it’s worth is determined by the global commitment of users to maintain its price, which is another reason why it threatens to give traditional banks a run for their money.
