In What Do We Trust?
Because of the central role fiat currencies play in a country’s economy, it’s essential to understand why governments are so apprehensive about Bitcoin. Fiat money refers to government-issued coinage. Fiat money is backed by the complete confidence and credit of the government. It is implied that governments will cover the debts of currency borrowers in the event of default.
Governments worldwide rely on central banks like the Federal Reserve to create or manufacture money for their economies.
The transaction cycle in the US economy is founded on a trust chain between transacting parties, which includes borrowers, lenders, and consumers. Lender of last resort refers to the Federal Reserve as the last link in the financial system. How come the government wants to outlaw digital currencies like bitcoins?
Supporters of Bitcoin claim that the Federal Reserve creates money out of thin air, meaning that tangible assets do not back the currency. They assert that the Federal Reserve, by regulating the total amount of money in circulation, is a primary cause of asset booms and busts in the United States.
The job of central banks in an economy is made simpler by governments. Regarding monetary policy, central banks have little control over its implementation. This is a duty that falls on the shoulders of the federal government. Banks and other financial institutions act as go-betweens for governments when distributing and regulating the flow and usage of the currency.
Consequently, they can regulate its movement, distribution, and usage. Taxing the income of individuals and businesses is another way they make money.
Bitcoin Undermines the Cycle of Trust
When it comes to decentralization, Bitcoin is a game-changer. Since there are no intermediaries, the government’s strategy benefits from the network’s decentralization.
There is no longer a need for a central bank as Bitcoin may be produced by anybody with access to a fully functional node. The Bitcoin network’s peer-to-peer transactions remove the need for intermediaries to manage and distribute funds because the government believes that bitcoin threatens national security.
Read more: Can Bitcoin Be Hacked By Quantum Computers?
The trust chain underlying Bitcoin’s network has become an algorithmic construct in today’s financial system. The central ledger does not include a transaction until all nodes have approved it. A transaction may be denied if there is any disagreement or error.
Simplifying transactions between individuals and organizations on Bitcoin’s blockchain might alter the current system. It is not a single or a group of laws that determines the amount of money that may be created or withdrawn from circulation. Consequently, under the new system, governments may lose their ability to drive and control economic policy via intermediaries.
Why does the government want to ban cryptocurrency?
Governments typically impose capital controls to keep the value of a currency from declining because of exports. Some like this may see another government influence over economic and budgetary policies. The statelessness of Bitcoin makes it easier to circumvent capital controls and move money abroad.
Bitcoin-based wealth emigration from China has been widely publicized. Foreign currency purchases are limited to $50,000 annually for nationals of the country. How come the government wants to outlaw digital currencies like bitcoins?
Chinese individuals may have converted local currency to Bitcoin and transferred it across borders to evade government monitoring, as shown by Chainalysis’s estimate of $50 billion in bitcoin transactions in 2020.
Bitcoin ties to illegal activity
A criminal’s ability to evade a country’s established financial system is a gift in disguise since it enables them to hide their involvement in such crimes from the public.
In the Bitcoin network, users can only be identified by their network addresses, making them anonymous. When a transaction is made, it is difficult to find where it came from or the identity of the person behind the address. Because of Bitcoin’s algorithmic trust, there is no need for trusted connections on either side of an illegal transaction.
Thieves like Bitcoin because it makes it easier to steal money. Most people know about Silk Road because of its connection to bitcoin. For the most part, Silk Road served as a Dark Web marketplace for illegal goods, including guns and drugs.
Bitcoins are a possible payment method for specific customers. Once the purchaser confirmed receipt of the goods, the bitcoin was held in escrow. Law enforcement could not identify anybody involved in the transaction since they only had their blockchain addresses. FBI ultimately took down the site and seized 174,000 BTC from the criminals.
Ransomware has lately been a target for hackers who want to infect popular software and demand payment in bitcoins. The Colonial Pipeline breach of 2021, which resulted in power disruptions in many states, demonstrated the dangers posed by such intrusions.
Bitcoin is not regulated. ( Why does the government want to ban cryptocurrency? )
Even after over a decade, governments worldwide are still trying to figure out how to regulate Bitcoin. There are several facets to the subject of bitcoin regulation.
Shifting narratives about Bitcoin’s utility, for example, have compounded issues with the best government entity to supervise the cryptocurrency, vocabulary used in lawmaking, and even the method of creating laws. How come the government wants to outlaw digital currencies like bitcoins?
Is Bitcoin primarily intended to be used as a store of wealth for long-term investments, or can it be used for daily transactions? How safe is Bitcoin at a time of global economic turmoil? Both the so-called Bitcoin specialist as well as the typical Bitcoin investor seem to be unaware of this.
One can argue that using Bitcoin in financial instruments like futures shows its attraction to traders. Despite this, the underlying markets for these derivatives remain unregulated since none of the major cryptocurrency exchanges that set the price of Bitcoin for futures markets are registered with the Securities and Exchange Commission (SEC).