Fiat currency or money issued by governments has been the core of economic and geopolitical power for centuries. Enter the digital age and a new form of currency – cryptocurrency. bloomberg.com speaks of Bitcoin’s white paper and says, “Bitcoin, the first cryptocurrency is a system of electronic cash that would operate outside established channels and dispense with the need to trust any central authority or institution. A computer protocol would create new digital tokens. And a voluntary network of processing nodes would maintain a dispersed public ledger known as a blockchain, employing high-powered cryptography to ensure accuracy, security and anonymity. Instead of handling paper bills or transmitting deposits, people would make payments using private alphanumeric keys establishing ownership of their Bitcoin.”
Crypto has not replaced fiat, but it seems that banks and governments are intimidated by it. China has banned the use of Bitcoin and other cryptocurrencies as well as crypto mining. What is it about crypto that banks and governments seem to be nervous about?
Decentralization Means Losing Control
Governments have the power to control fiat and this control gives governments the ability to influence the economy and make monetary policies including taxes. With decentralization at the core of crypto, governments lose this power.
Issues About Criminal Activities
Because of decentralization and anonymity, crypto has gained notoriety of being the preferred currency of criminals. Governments and law enforcement agencies are unable to track illegal activities for the same reason.
Complicated Fiscal Treatment
Governments find it difficult to create monetary policy and tax regulations because of the decentralized network that is blockchain technology. Crypto users utilize cryptocurrency to pay for goods and services as well as an investment tools. Governments right now have yet to define how to classify cryptocurrency and how to tax those who use it.
A Danger to Banks’ Business
Financial crises such as the one in 2008 have cause people to lose confidence in banks. Some have turned to crypto as an alternative way to complete monetary transactions in a quicker and less expensive way as compared to traditional banks. As more people turn to crypto, this will mean less bank customers.
Crypto, however, is steadily becoming more mainstream and the establishment is slowly coming to terms in dealing with it. In October 18, 2021, Interactive Brokers Group is now allowing Registered Investment Advisors across the US to offer crypto to their clients. Morgan Stanley and Goldman Sachs were among the first banks to offer Bitcoin funds to its clients. Companies like Pavilion Hotels and Resorts, AXA Insurance in Switzerland, Microsoft, and Sotheby’s accept crypto as payment. El Salvador has adopted Bitcoin as legal tender while Panama lawmakers are planning to create crypto-friendly laws.
Innovation cannot be stifled and governments and banks should give room for crypto to prove its worth before throwing at them regulations that are based on studies that only weigh the cons and not the pros of crypto as an alternative currency.
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