Bitcoin claims that “it is the first decentralized peer-to-peer payment network that works with its users without a central authority or intermediaries.” That lack of central authority is the main reason governments fear cryptocurrency. To understand this fear, it is important to know a little about governments and conventional currencies.
- Over the past decade, bitcoin has gained the attention, not only of ordinary people, but also of governments around the world.
- Some governments fear that bitcoin could be used to circumvent capital controls, could be used for money laundering or illegal purchases, and could be risky for investors.
- Still, others have expressed more systemic concerns about the potential for decentralized cryptocurrency to destabilize or undermine the authority or control of central banks.
What do we trust?
Fiat is a term used to describe the conventional currencies that governments issue. Fiat currencies have value because governments say they do. For an increasing number of people, that promise means nothing. After all, fiat currencies are not backed by any tangible assets.
You cannot return the currency to the government in exchange for a gold or silver bar, a can of beans, a pack of cigarettes, or any other item that may be of value to you. Fiat currencies are backed by the full faith 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 that owns the item you want.
Why is control important?
Governments control fiat currencies. They use central banks to issue or destroy money out of thin air, using what is known as monetary policy to exert economic influence. They also dictate how fiat currencies can be transferred, allowing them to track the movement of the currency, dictate who benefits from that movement, collect taxes, and track criminal activity. All this control is lost when non-governmental organizations create their own currencies.
Control over the currency has many downstream impacts, perhaps most notably on a nation’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 description is sufficient to provide an idea of the general concept.
While the potential for crime captures the public’s attention, the role that currency plays in a nation’s monetary policy has the potential to have a much greater impact. Since governments intentionally increase or restrict the amount of money that circulates in an economy to stimulate investment and spending, create jobs, or avoid runaway inflation and a recession, controlling the currency is a major concern. It is also an extraordinarily complex subject.
The Bitcoin business
Bitcoin users do not need the existing banking system. 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.
Your reward is a payment in cyber currency, which is stored digitally and passed between buyers and sellers without the need for an intermediary. On a smaller scale, airlines similarly reward the miles feature, allowing travelers to purchase airline tickets, hotel rooms, and other items using airline miles as virtual currency.
If bitcoin or another cryptocurrency is widely adopted, the entire banking system could become irrelevant. While this may seem like a wonderful concept in light of the recent behavior of the banking industry, there are two sides to every story. Without banks, who would you call when your mortgage payment was hacked? How will you earn interest on your savings? Who will help when an asset transfer fails or a technical problem occurs?
While the financial crisis gave bankers 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 record-keeping. There is also the question of the fees that banks charge for the services they provide. Those fees generate a lot of income and many jobs in the global banking industry.
Without the banks, those jobs disappear, as do the tax revenue those banks generate and the paychecks of their employees. The money transfer business would also disappear into a virtual world. Nobody needs a Western Union or its competitors if they all use bitcoins.
So much has been written about virtual currency and crime that it is enough to recap the subject by stating that untraceable financial transactions facilitate 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 one such example. Its founder credits Bitcoin for its success.
The other side of Bitcoin
Aside from the headline-grabbing fact that virtual currencies can and are used to engage in a wide range of illicit activities (it should be noted that cash is used for many of these same transactions), there is a legitimate theoretical argument in favor of its use. It is based on the reality that central bank manipulation of the money supply has induced recessions, exacerbated unemployment, and led to a global banking system based on speculation and corruption.
We need to look only at the mortgage market shenanigans that underpinned the 2009 financial crisis to understand why disgruntled consumers around the world would support the efforts of anonymous programmers to subvert a system that has done them no favors. These ideas are not new. The Austrian School, a school of economic thought founded in 1871, holds among its fundamental principles the idea that economic manipulation by central banks is not beneficial.
Before converting your national currency to bitcoin, you need to consider a few additional facts. Bitcoin was created by an anonymous computer programmer or programmers (There is no consensus on this and the identities are not yet confirmed).
Mount Gox, the largest exchange service that converts dollars to bitcoins, failed in spectacular fashion when hackers allegedly stole bitcoins valued at hundreds of millions of dollars. An earlier alleged hack generated $ 8.75 million. Other bitcoin exchanges have also blamed hackers for the losses.
The currency is digital, so there is nothing you can touch or hold. Its value fluctuates in a very volatile manner. It is created by anonymous programmers through a methodology that is too complex for most people to understand, much less participate.
Since bitcoins are often stored on users’ computers, “users face the risk of losing their money if they do not implement proper anti-virus and backup measures” according to Virtual Currency Schemes, a research paper published by the Central Bank. European.
Hardware failures aside, throwing an old computer in the trash without removing its bitcoins first is also an easy way to lose your digital fortune.
In short, if you use bitcoin, you are entrusting your money to a complex system that you don’t understand, people you know nothing about, and an environment where you have limited legal resources.
In the traditional world of investing, this would generate 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 1600 digital currencies that are now in circulation around the world.10 As of July 2021, there are almost 11,000 cryptocurrencies and 384 cryptocurrency exchanges.
Even if Bitcoin ultimately fails or is relegated to a minor role on the world stage, one of its successors could radically alter the way the world thinks of the currency.
A Bitcoin for your thoughts
So what does the future hold for bitcoin and other virtual currencies? It’s safe to say they are here to stay. You can use virtual currency to make purchases in a wide variety of Videogames and in some retailers like 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 with retailers that integrate with digital payment networks like Baked Y Flexa. “
Note that El Salvador (in June 2021) became the first country in the world to accept bitcoin as legal tender.
And based on regulatory and compliance actions by major governments, including the United States, China and Russia, that status is unlikely to change anytime soon.