Since its debut in a 2008 whitepaper, Bitcoin (BTCUSD) has generated a lot of attention and news. The cryptocurrency’s supporters see it as the dawning of a new and just monetary system. Critics highlight the crypto’s involvement in criminal activities and the lack of legal standing as evidence that it is “rat poison squared.” The truth probably falls somewhere in between.
Meanwhile, governments worldwide are keeping an eye on Bitcoin’s rise. Some countries, such as El Salvador, have chosen to utilize it as a currency. However, major economies like the United States refuse to acknowledge it as legal money. They have solid reasons for doing so.
Bitcoin is a form of cryptocurrency that has several revolutionary and controversial qualities. Bitcoin enables people to subvert their national governments’ power by evading capital controls imposed on them. It also aids criminals in avoiding detection by providing them with an easy method to do so. Finally, because it eliminates intermediaries, Bitcoin may jeopardize the existing financial infrastructure system and cause it to collapse.
Why are governments so gun-shy about Bitcoin? It all has to do with the role that fiat currencies play in a country’s economy. “Fiat” refers to regular old government issued currency. This money is backed by the good name of the government, meaning that if somebody can’t repay what they borrowed, the government will make it right.
The U.S. government partially relies on the Federal Reserve, a central bank that prints or creates money for economies, to handle its currency needs.
The Federal Reserve, who acts as the lender of last resort, is an important part of the economy as they are trusted by borrowers, lenders and consumers.
Bitcoin advocates argue that the Federal Reserve creates money out of thin air, which means that the currency is not backed by tangible assets. They state that by manipulating the supply of money in the US economy, the central bank also manufactures asset bubbles and crises.
The government can control the central banks to some extent, but not entirely. They need to work together in order for an economy to function properly. The main aim of the government is to ensure that money is distributed evenly and efficiently throughout society so that everyone has access to it when they need it. This includes setting up systems like taxation, which help them raise revenue while also ensuring that people have enough money available to cover their basic needs.
Bitcoin’s decentralized system has the potential to change traditional systems. Its network does away with intermediaries, making it independent from government intervention.
Because Bitcoin can be produced by anyone running a full node, there is no longer a need for a central bank. Also, because peer-to-peer transfers between two parties are possible on Bitcoin’s network, third-party intermediaries are no longer necessary to facilitate transactions.
The current financial system’s chain of trust is converted into an algorithmic construction in Bitcoin’s network. A transaction is not recorded on the central ledger until it has been approved by all full nodes. Even a minor disagreement or mistake in a transaction entry might lead to its rejection.
The idea is that, by making it easier for people and businesses to work together on Bitcoin’s blockchain, we can upgrade the existing system. For example, because the financial infrastructure is decentralized and nobody has exclusive control over increasing or decreasing the currency supply, governments may become unnecessary in their current role of managing economic policy through intermediaries.
The question of whether or not Bitcoin’s stateless future comes to pass is still unanswered. Meanwhile, regulators throughout the world are attempting to assess the influence that bitcoin will have on their economies in the next several years. They are concerned with three issues posed by Bitcoin in its current form:
Capital controls are often instituted by governments to prevent currency outflows which could debase the value of their exports. For some, this is another form of government control over economic and fiscal policy. In such instances, bitcoin’s state-less nature becomes helpful in circumventing capital controls and exporting wealth.
Since Bitcoin’s inception, there have been several well-known instances of capital flight using the cryptocurrency. In China, for example, citizens are only allowed to purchase $50,000 worth of foreign currency per year. However, a report by Chainalysis – a crypto forensics firm – found that more than $50 billion was transferred from China-based bitcoin wallets to wallets in other countries in 2020. This suggests that Chinese citizens may be converting their local currency into Bitcoin and transferring it across borders in order to avoid government regulation.
Bypassing existing financial infrastructure for a country is beneficial to criminals, who may use it to conceal their involvement in such activities. Because Bitcoin’s network is pseudonymous, users are identified only by the addresses on the network. It’s difficult to track a transaction’s origin or identify an individual or organization behind an address because of this. Furthermore, Bitcoin’s network generates algorithmic trust, eliminating the need for trusted intermediaries at both ends of an unlawful deal.
It is no shock that Bitcoin launders the money of lawbreakers due to the cryptocurrency’s transactional anonymity. A well-known example of a felony carried out utilizing bitcoin was the Silk Road occurrence. To sum it up, Silk Road was a Dark Web site that acted as a market for guns and narcotics, among other contraband items. The website only accepted payment in bitcoins in order to maintain user privacy. The cryptocurrency was held in escrow until the buyer confirmed receipt of goods. It was difficult for law enforcement to trace parties involved in the transaction because they only had blockchain addresses as identification; however, eventually, the FBI took down the marketplace and seized 174 BTC.
In recent years, infecting popular applications with ransomware and demanding payment in bitcoin has become quite fashionable among cybercriminals. The 2021 Colonial Pipeline hack, which caused power outages in several states, illustrated the degree to which such assaults might escalate into national security concerns.
More than 10 years after Bitcoin was first available to the public, various world governments are still trying to find ways to manage cryptocurrency. There are many different aspects of regulating bitcoin.
As an example, Bitcoin’s utility changing narratives has complicated the appropriate government agency to oversee cryptocurrency questions, definitions for lawmaking uses, and even the approach to formulating laws.
There is still much debate surrounding Bitcoin- whether it should be used as primarily a store of value or currency in day-to-day transactions. Because there is no central authority governing Bitcoin, many investors feel unsafe trusting it with their money during unstable economic times. However, even the supposed experts cannot come to a consensus about what exactly Bitcoin is or how it should be used.
The use of Bitcoin in investing products like futures points to its attractiveness to traders. However, the underlying markets for such derivatives are unregulated because none of the major cryptocurrency exchanges, used to set Bitcoin’s price for futures markets, are registered with the Securities and Exchange Commission (SEC).
The cryptocurrency’s inability to scale and centralization concerns are just a few of the issues it is facing. Bitcoin has the ability to revolutionize the existing financial system, but it is plagued by several problems. Fears about bitcoin have partly to do with fear, and partly to its lack of transparency regarding its ecosystem. Those latter worries are not unjustified.
It is unclear how global developments impact the price of Bitcoin.
The SEC warned about several red flags associated with cryptocurrency exchanges in a 2018 letter, including lack of transparency and the presence of bitcoin whales. These are important considerations given the volatile price swings of cryptocurrencies like Bitcoin. Unfortunately, scams have also been common in this developing asset class.
Controversy has followed Bitcoin since its inception in the wake of the 2008 financial crisis. Governments have been critical of cryptocurrency, but also intrigued by its potential uses for their own agendas.
Because it has the potential to upend the centralized financial system, Bitcoin is currently surrounded by scandals and criminals. However, as its ecosystem matures and a use case for it is found, distrust and criticism from established authorities will subside.