Bitcoin claims that “it is the first decentralized peer-to-peer payment network powered by its users with no central authority or intermediaries.” That lack of central authority is the main reason why governments fear the cryptocurrency. To understand this fear, it is important to know something about governments and conventional currencies.
Key learning points
- Over the past decade, bitcoin has gained attention not only from ordinary individuals, but also from governments around the world.
- Some governments fear that bitcoin could be used to evade capital controls, be used for money laundering or illegal purchases, and could be risky for investors.
- Still, others have expressed more systemic concerns about the decentralized cryptocurrency’s potential to destabilize or undermine the authority or control of central banks.
What do we trust?
Fiat is a term used to describe the conventional currency issued by governments. Fiat currencies have value because governments say they do. For more and more people, that promise means nothing. After all, fiat currencies are not backed by tangible assets.
You cannot return the currency to the government in exchange for a bar of gold or silver, a can of beans, a pack of cigarettes or other items that may have value to you. Fiat currencies are backed by the full trust and credit of the government that issued them and nothing more. If you want gold, silver, beans, or smoke, you must exchange your fiat currency with a person or entity who owns the item you want.
Why control is important
Governments control fiat currencies. They use central banks to spend or destroy money out of thin air, and use so-called monetary policy to exert economic influence. They also dictate how fiat currencies can be transferred, allowing them to track currency movements, dictate who profits from that movement, collect taxes on it, and track down criminal activity. All this control is lost when non-governmental bodies create their own currency.
Control over currency has many downstream effects, perhaps particularly on a country’s fiscal policy, business environment and efforts to control crime. While each of these topics is broad and deep enough to fill volumes, a brief overview will suffice to provide insight into the overall concept.
While the potential for crime grabs the public’s attention, the role that currency plays in a country’s monetary policy has the potential to have a much greater impact. Since governments intentionally increase or limit the amount of money circulating in an economy to stimulate investment and spending, create jobs, or prevent spiraling inflation and recession, control over currency is a huge concern. It is also an extraordinarily complex subject.
Bitcoin users do not need the existing banking system. The currency is created in cyberspace when so-called “miners” use the power of their computers to solve complex algorithms that serve as verification for bitcoin transactions.
Their reward is a cyber-currency payment, which is stored digitally and passed between buyers and sellers without the need for an intermediary. On a smaller scale, airlines similarly reward miles, allowing travelers to purchase airline tickets, hotel rooms, and other items using airline miles as their virtual currency.
If bitcoin or any other cryptocurrency is widely used, the entire banking system can become irrelevant. While this may sound like a wonderful concept in light of the recent behavior of the banking industry, there are two sides to every story. Who do you call without banks if your mortgage payment is hacked? How do you get interest on your savings? Who helps in the event of an asset transfer failure or technical failure?
While the financial crisis left bankers with an even worse reputation than they already had, there is something to be said for institutions that oversee timely, effective and reliable asset transfers and associated administration. There is also the issue of the fees banks earn for the services they provide. Those fees generate a lot of income and many jobs in the global banking industry.
Without banks, those jobs will disappear, as will the tax revenues generated by those banks and the wages of their employees. Money transfer activities would also disappear in a virtual world. Nobody needs a Western Union or its competitors if everyone uses bitcoin.
So much has been written about virtual currencies and crime that it is enough to sum up the issue by stating that untraceable financial transactions promote crime. Drug trafficking, prostitution, terrorism, money laundering, tax evasion and other illegal and subversive activities all benefit from the ability to move money in untraceable ways. The now-defunct Silk Road online drug market is a prime example of this. The founder credits bitcoin for its success.
The other side of Bitcoin
Aside from the fact that virtual currencies can and are used to carry out a wide variety of illegal activities (it should be noted that cash is used for many of these same transactions), there is a legitimate theoretical argument in favor of their use. It is based on the reality that the central bank’s tinkering with the money supply has caused recessions, exacerbated unemployment and led to a global banking system based on profit and corruption.
We need only look at the hypocrisy in the mortgage market underlying the 2009 financial crisis to understand why disgruntled consumers everywhere would support the efforts of anonymous programmers to undermine a system that does them no favors. proven. These ideas are not new. The Austrian school, a school of economic thought founded in 1871, has as its core principles the idea that economic manipulation by central banks is not beneficial.
Before you register
Before converting your national currency to bitcoin, you’ll want to consider a few additional facts. Bitcoin was created by an anonymous computer programmer or programmers (there is no consensus on this and identities are still unconfirmed).
Berg Gox, the largest exchange service that converts dollars into bitcoins, failed spectacularly when hackers reportedly stole bitcoins worth hundreds of millions of dollars. A previous alleged hacking yielded $8.75 million. Other bitcoin exchanges have also blamed hackers for losses.
The currency is digital, so there is nothing you can touch or hold. The value fluctuates in a very volatile manner. It was created by anonymous programmers through a methodology that is too complex for most people to understand, much less to participate in.
Since bitcoins are often stored on users’ computers, “users risk losing their money if they don’t implement adequate antivirus and backup measures,” according to Virtual Currency Schemes, a research paper released by the European Central Bank.
Aside from hardware failure, throwing an old computer in the trash without deleting your bitcoin is also an easy way to lose your digital fortune.
In summary, when you use bitcoin, you are entrusting your money to a complex system that you do not understand, people you know nothing about, and an environment where you have limited legal options.
In the traditional world of investing, this would raise enough red flags to make it a bad idea. On the other hand, the European Central Bank reported in 2018 that bitcoin was just one of more than 1,600 digital currencies now in circulation around the world.10 As of July 2021, there are nearly 11,000 cryptocurrencies and 384 crypto exchanges.
Even if bitcoin eventually fails or is relegated to a minor role on the global stage, one of its successors could radically change the way the world thinks about currency.
A Bitcoin for your thoughts
So what does the future hold for bitcoin and other virtual currencies? It’s safe to say they’re here to stay. You can use the virtual currency to make purchases in a wide range of Computer Games and at some retailers such as overstock.com.
You can also use bitcoin to buy and reload gift cards for hundreds of businesses like Home Depot, Dunkin Donuts and AMC Theaters on sites like eGifter or make purchases from retailers that integrate with digital payment networks like Fried and Flexa.”
Note that (in June 2021) El Salvador became the first country in the world to accept bitcoin as legal tender.
And based on the regulatory and enforcement actions of major governments, including the United States, China and Russia, that status is unlikely to change any time soon.