What is the Financial System?
The system in language has the meaning as a series consisting of various kinds of elements that are interconnected to facilitate the flow of information, material or energy in order to achieve certain goals.
Financial system means a series consisting of various entities that manage the flow of money for the purpose of using money as a medium of exchange or payment.
The financial system regulates and manages all matters concerning money, from when the money is printed until it is distributed to the public, and includes other rules to enable money to be used effectively, smoothly and safely. Even in a broader scope, such as the use of money on a global scale, these rules also regulate the value of a currency against other currencies and the channels used in exchange transactions between currencies.
The financial system is of course needed, to manage a number of problems related to money. For example, the financial system regulates where money can be stored and which parties have the right to manage the flow of money. These rules are solely to maintain the security and smooth flow of money to and from the public. Imagine if all institutions could collect and distribute money without having to meet certain requirements. Then there will be many “accidents” in the process of collecting and distributing money. So that the flow of money can be hampered and have an impact on the economy.
The financial system is formed and managed by the highest financial institution in a country, usually a central bank. The system is generally the result of adoption of financial systems owned by other countries which are considered to have good performance and can still continue to change according to the needs of keeping pace with the times.
The central bank acts as a regulator in the financial system. His duties in general are to maintain monetary stability by establishing a number of rules or policies and supervising financial service providers operating in the community.
Variety of Financial Systems
The current financial system is divided into two:
1. Centralized financial system
The centralized or centralized financial system is the conventional financial system used by all countries in the world. It is referred to as a centralized system because there is one entity that acts as the control center of the financial system. The entity can be the central bank or the state.
The current centralized financial system is the result of the continuous development of the financial systems that existed in the past. These developments cover many things, ranging from money printing systems, payment systems and others which are now becoming much more effective.
In addition, various new rules were also implemented. Although some clearly contain the interests of one party and harm the other party. An example is the use of the US dollar as a global currency, which certainly benefits the US and harms other countries.
As a result, US monetary policies even greatly affect countries in the world. For example, the policy of raising interest rates by the Fed is currently the cause of the majority of investors diverting their money from other countries to the United States and making the value of almost every currency in the world weaken against the US dollar.
2. Decentralized financial system
A decentralized financial system is a financial system that is not owned and controlled by any entity. This system by no means will be able to run alone. But it is run jointly by many entities located in various parts of the world. So that there is no single entity that dominates and controls the running of the system for political or other interests.
The decentralized financial system has a currency known as cryptocurrency. Cryptocurrency is currency that is printed and run on a blockchain. Blockchain is a distributed database, a place where every transaction of a cryptocurrency user is recorded.
Compared to a centralized financial system, the decentralized financial system was first recognized when Bitcoin was launched in 2009. Over time, as more and more cryptocurrencies have appeared, the decentralized financial system has become very popular and is even predicted to replace the conventional financial system in the future.
Which is better, Centralized or Decentralized Financial System?
The centralized financial system in use today clearly has many drawbacks. However, over time the conventional profit system continues to grow and it is possible that these deficiencies will be successfully overcome in the future.
Meanwhile, the decentralized financial system offers a new system that is not influenced by the interests of certain entities. And claimed to be safer than the existing financial system, which is used today.
However, the decentralized financial system is a new system that has not even been tested by crisis situations or the like. So that absolutely cannot be compared with the current financial system which has gone through various obstacles in a very long period of time.
A decentralized financial system may indeed be better than a centralized, conventional financial system. However, until now there has been no in-depth study on this matter. Many experts even state that cryptocurrency is an asset bubble that is ready to explode at any time, which will instead cause economic chaos on a large scale.
