Sunday, June 20, 2021

Cryptocurrency – Why do Governments fear them?

Cryptocurrency should be declared word of the decade – I mean even non-saving groups are all praises about this form of “currency” (or not? Let’s call it crypto rather than currency for now)

Now, why do almighty Governments of various countries fear crypto?

That lack of central authority is the primary reason governments are afraid of cryptocurrency. To understand this fear, it is important to know a little bit about governments and their conventional currencies.

In What Do We Trust?

Fiat currency - Conventional currencies that are issued by governments. Fiat currencies have value because governments say that they do. To an increasing number of people, that promise means nothing.

You can’t return the currency to the government in exchange for a bar of gold or silver, a pack of cigarettes, or any other items that might have value to you. Fiat currencies are backed by the government's full faith and credit that issued them and nothing more. If you want gold, silver or smokes you need to exchange your fiat currency with a person or entity that possesses the item you want.

Why Control Matters?

Governments control fiat currencies. They use central banks to issue or destroy money out of thin air, using what is known as monetary policies to exert economic influence. They also dictate how fiat currencies can be transferred, enabling them to track currency movement, dictate who profits from that movement, collect taxes on it, and trace criminal activity. All of this control is lost when non-government bodies create their own currencies.

Control over currency has many downstream impacts, perhaps most notably to a nation’s fiscal policy, business environment, and efforts to control crime. While the above topics are deep, broad, and complex, I have tried to explain them in short below:

Fiscal Policy

While the potential for crime captures the public’s attention, the role currency plays in a nation’s monetary policy has the potential to have a far greater impact. Since governments intentionally increase or restrict the amount of money circulating in an economy to stimulate investment and spending, generate jobs, or avoid out-of-control inflation and recession, control over currency is an enormous concern. It’s also an extraordinarily complex topic.

Crime Concerns

So much has been written about virtual currency and crime, that it is enough to recap the issue by stating that untraceable financial transactions facilitate crime. Drug trafficking, prostitution, terrorism, money laundering, tax evasion, and other illegal activities all benefit from the ability to move money in untraceable ways.

The Business of Bitcoin/Crypto

Bitcoin users don’t 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 payment with cyber currency, stored digitally and passed between buyers and sellers, without the need for an intermediary.

If bitcoin or another cryptocurrency becomes widely adopted, the entire banking system could 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. Without banks, who will you call when your mortgage payment gets hacked? How will you earn interest on your savings? Who will assist when a transfer of assets fails or a technical glitch occurs?

While the financial crisis gave bankers an even worse reputation than they already had, institutions that oversee timely, effective, and trustworthy asset transfers and their associated record keeping have something to be said. There’s also the issue of the fees banks earn for the services they provide. Those fees generate a lot of revenue and a lot of jobs across the global banking industry.

Without banks, those jobs disappear, as does the tax revenue those banks and their employees’ paychecks generate. Money transfer business would also disappear in a virtual world. Nobody needs a Western Union or its competitors if everybody is using bitcoin.

A Bitcoin for Your Thoughts

So what does the future hold for bitcoin and other virtual currencies? It is safe to say that they are here to stay. You can use virtual currency to make purchases in a wide variety of video games. You can also use bitcoin to safely purchase gift cards for hundreds of businesses. However, the bitcoin website notes that “bitcoin is not a fiat currency with legal tender status in any jurisdiction.”

And based on the regulatory and enforcement actions of major governments, including the United States and Russia, that status is unlikely to change anytime soon.

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