Why are countries reluctant to officially adopt cryptocurrencies? » ABC of science

Developed countries are skeptical of adopting cryptocurrencies as they are unstable and controlled by private authorities. This also poses a challenge to the central banks’ policy-making role of controlling the flow of currency in 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 classified it directly as gambling. Let’s dive deeper to understand why central banks are skeptical about cryptocurrencies.

How does something become currency?

We have often seen in shows and movies that prisoners use commodities as a means of exchanging goods. This system was also present during the barter age, where one commodity was exchanged for another, provided that both parties had a use for the other party’s commodities. However, looking for a person who wants the same good you want to give up and offers you a good you need in return is inconvenient.

An example of a barter system where a basket of tomatoes is exchanged for a goat. (Photo Credit: Kevin_11/Shutterstock)

Here comes the coin.

Currencies value the same good in monetary terms, by eliminating the time-consuming process of searching for a willing buyer to offer what you need. The assurance of its nominal value is also inculcated by the central banks of the country. People trust the central bank of their country, which is why they trade in terms of currencies.

No one will use foreign exchange as a medium of exchange if it is volatile; In other words, what a dollar buys me today will be the same as what it buys me tomorrow. Of course, in 10 years, I probably won’t buy the same amount of goods, but year after year, the value remains fairly stable, as the central banks closely monitor their respective currencies. The whole world cannot adopt a currency because its role of political intervention would be hampered.

The mechanics of cryptocurrency

Cryptocurrency is touted as the most important fintech innovation in recent history. Every time a transaction is made using a cryptocurrency, each transaction links itself to a block; therefore, you can record the entire journey of a coin by looking back at its transaction history, with timestamps recorded in a ledger called a blockchain (More details on blockchain here).

the block chain it only registers the path of a coin; it does not reveal the purpose of the transaction or the counterparties involved, which provides privacy. The process of recording the journey of each cryptocurrency coin is to ensure that each one in circulation is unique. This log is then broadcast to all computers on the network. Therefore, you do not need any financial or social institution to check its authenticity.

How do bitcoins work?

Wonderful, right?

If no institution monitors a currency, it overcomes all system biases and policies. 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 being widely adopted for transaction mediation. However, there are some outlets that accept Bitcoin as payment for the goods/services offered. However, the problem is the whole stability aspect.

buy bitcoins online

Some outlets in select countries accept payments via Bitcoin wallet (Photo Credit: Overearth/Shutterstock)

Let’s look at the Bitcoin figures: $47,733 was the value of 1 Bitcoin at the beginning of this year, but it stands at $18,931 as of September 25 of this year. The value has dropped more than 50%, which makes the coin very unstable. These fluctuations are the result of a combination of factors ranging from supply and demand to government regulation and investor sentiment.

How are cryptocurrencies created?

Just as central banks mint coins and print their respective currencies, cryptocurrencies are “mined” in a similar way. Mining is where the term cryptocurrency came into the picture because it is the process where miners solve crypto puzzles that require high-speed supercomputers and consume massive 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 general circulation.

Mining is a very expensive business! From a certain perspective, the volume of electricity consumed for mining is so great that China recently banned cryptocurrencies solely for their electricity consumption, as it posed a threat to the availability of electricity for other industries!

Central bank stance 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 will not delve into.

However, no other country has adopted it or is currently planning to do so. Furthermore, allowing the diffusion of private currencies would give rise to a parallel economy that would threaten the social fabric, since it would make the impact of policy decisions redundant.

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Major developed and developing economies are not planning to adopt cryptocurrencies. (Photo credit: Bragapictures/Shutterstock)

Policy making is an integral part of a central bank as it regulates the flow of credit in the economy, thereby controlling interest rates. If this critical feature is removed, the entire system is under threat.

The role of monetary policy executed by central banks is to ensure price stability (control inflation) and help the growth of an economy by managing economic fluctuations. This management is done by regulating the currency supply, which is impossible with cryptocurrency, since anyone can mine it.

Therefore, if a centralized agency does not control the money supply to some extent, how can we ensure that its value is stable?

Also, the cost of high electricity consumption for mining often tends to be higher than the face value of the coin. This is bad, as the face value is lower than the cost price of holding the coin! Finally, it is also a security threat because cryptocurrencies, if used to finance illegal affairs, can never trace the counterparties involved. Although this threat exists with cash, if cryptocurrency becomes widely adopted, illegal cross-border transactions will become even easier.

Similarly, suppose some cryptocurrencies are widely adopted, despite these consequences; in that case, there is still going to be someone who handles that currency. In that 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 interest 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 has no intrinsic value like gold, then it is just another speculative instrument that has taken the world by storm. At the end of the day, if most people decide to stop using Bitcoin, its value will plummet to nothing.

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