Why are countries reluctant to officially adopt cryptocurrencies? » ABC of science
Developed countries are skeptical about adopting cryptocurrency because they are unstable and controlled by private authorities. It also poses a challenge to the policy-making role of central banks in controlling the flow of currency into the economy.
Cryptocurrencies like Bitcoin, Dogecoin, and Ethereum have taken the economy by storm, but central banks around the world are skeptical of their adoption. Some have categorized it outright as gambling. Let’s dive in to understand why central banks are skeptical of cryptocurrency.
How does something become money?
We have often seen in shows and movies that inmates use commodities as a medium of exchange for goods. This system was also present during the barter age, where one commodity was exchanged for another, as long as both parties had use of the other’s commodities. However, looking for someone who wants the same product you want to give up and who would offer a product you need in return is impractical.
Here is the currency.
Currencies value the same good in monetary terms, eliminating the tedious process of finding a buyer willing to offer what you need. Assurance of its face value is also instilled by the country’s central banks. Individuals trust the central bank of their country, which is why they trade in currencies.
No one will use currencies as a medium of exchange if they are volatile; in other words, what a dollar buys me today will be the same as it buys me tomorrow. Granted, in 10 years it probably won’t buy me the same amount of goods, but year on year the value remains fairly stable as central banks keep a close eye on their respective currencies. The whole world cannot adopt a currency because their role of political intervention would be hindered.
The mechanics of cryptocurrency
Cryptocurrency is touted as the most significant fintech innovation in recent history. Whenever a transaction is committed using a cryptocurrency, each transaction binds to a block; therefore, you can record a coin’s entire journey by viewing its transaction history, with timestamps recorded in a ledger called blockchain (more on blockchain here).
The blockchain records only the path of a coin; it does not disclose the purpose of the transaction or the counterparties involved, thus ensuring confidentiality. The process of recording the journey of each cryptocurrency coin is to ensure that each in circulation is unique. This recording is then broadcast to all computers on the network. Therefore, it does not need any financial or social institution to control its authenticity.
If no institution monitors a currency, it overcomes all biases and policies in the system. On the other hand, we have seen that for a currency to be used as a medium of exchange, it must first be universally accepted. Second, it must represent stability before it is widely adopted for transaction mediation. However, some outlets accept Bitcoin as payment for goods/services offered. However, the problem is the whole stability aspect.
Let’s look at the numbers for Bitcoin – $47,733 was the value of 1 Bitcoin at the start of this year, but it stands at $18,931 as of September 25 of this year. The value has fallen by more than 50%, making the currency very unstable. These fluctuations are the result of a combination of factors ranging from demand and supply to government regulation and investor sentiment.
How are cryptocurrencies created?
Just as central banks mint coins and print their respective currencies, cryptocurrencies are also “mined”. Mining is where the term cryptocurrency came into the picture, as it is the process by which miners solve cryptographic puzzles that require high-speed supercomputers and consume huge amounts of electricity . Once the puzzle is solved, a coin is added to the supply, which belongs to the miner and is also part of the global circulation.
Mining is a very expensive business! From a certain perspective, the volume of electricity consumed for mining is so massive that China recently banned cryptocurrency just because of its electricity consumption, as it posed a threat to the availability of mining. electricity for other industries!
Position of central banks on cryptocurrencies
Countries like El Salvador and the Central African Republic have adopted Bitcoin as legal tender because their currency is volatile, and for other geopolitical reasons, which we won’t go into.
However, no other country has adopted it or is currently planning to do so. Moreover, allowing the diffusion of private currencies would give rise to a parallel economy that would threaten the social fabric, because it would make the impact of political decisions superfluous.
Policymaking is an integral part of a central bank, as it regulates the flow of credit in the economy, thereby controlling interest rates. If this essential functionality is removed, the entire system is at risk.
The role of monetary policy carried out by central banks is to ensure price stability (control inflation) and to promote the growth of an economy by managing economic fluctuations. This management is done by regulating the supply of money, which is impossible with cryptocurrency, because anyone can mine it.
So, if a centralized agency does not monitor the supply of money to some degree, how can we ensure that its value is stable?
Additionally, the cost of heavy electricity consumption for mining often tends to be higher than the face value of the currency. This is bad, because the face value is lower than the cost price of holding the currency! Finally, it is also a security threat because cryptocurrencies, if used to fund illegal business, can never trace the counterparties involved. Although this threat exists with cash, if cryptocurrency is widely adopted, illegal cross-border transactions will be even easier.
Similarly, suppose that some cryptocurrencies are widely adopted, despite these consequences; in this case, there will always be someone who manages this currency. In this case, the manager/entity would practically control the national economy. This poses a huge risk, as this entity will not be held accountable for acting in the best interests of a country, unlike a central banking institution.
All of this draws our attention to the direction of the cryptocurrency. If it cannot be a store of value due to its fluctuations and it has no intrinsic value like gold, then it is just another speculative instrument that has taken the world by storm. world. Ultimately, if the majority of people decide to stop using Bitcoin, its value will plummet.
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