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Why governments are wary of Bitcoin
Since its introduction in a 2008 white paper, Bitcoin (BTCUSD) has generated controversy and news. Enthusiasts herald its launch as the advent of a new fair monetary system. Critics point out the cryptocurrencythe role of in criminal activity and the lack of legal recognition as proof that it is “rat poison squared”. The reality probably lies somewhere in between.
Meanwhile, governments around the world are interested in Bitcoin and are taking action whenever they can. Some, like El Salvador, have adopted it as currency. Others refuse to recognize it as legal tender, treat it as a commodity or property, or even ban it altogether. In 2023, the European Union adopted a framework to regulate cryptocurrencies.
Among other things, Bitcoin can allow citizens of a country to undermine government authority by circumventing government-imposed capital controls. It also facilitates nefarious activities by helping criminals evade detection. Finally, by removing intermediaries, Bitcoin has the potential to undermine and destabilize the existing financial infrastructure system.
Key takeaways
- Governments around the world are watching Bitcoin with suspicion because it has the potential to upend the existing financial system and undermine their role in it.
- In its current form, Bitcoin presents three challenges to government authority: it cannot be regulated, criminals use it, and it can help citizens circumvent capital controls.
- Bitcoin and cryptocurrencies will continue to be viewed with suspicion by established authorities until they can monitor and control them more effectively.
Bitcoin cannot be regulated
To understand why governments are cautious about Bitcoin, it is important to understand the role fiat currencies play in a country’s economy. Fiat refers to conventional currencies issued by governments. Fiat money is supported by the full faith and credit of a Government. This means that governments promise to repay the foreign currency borrower in the event of default.
The U.S. government relies on the Federal Reserve, a central bank over which Congress has only partial authority, to manage the circulating supply of money. The transaction cycle in the U.S. economy – which involves borrowers, lenders and consumers – relies on a chain of trust between the parties to the transaction. The Federal Reserve, the lender of last resort, is the last link in this chain, lending only to depository institutions.
Bitcoin proponents accuse the Fed of creating money out of thin air (i.e., the currency is not backed by tangible assets). By manipulating the money supply in the U.S. economy, they say, the central bank also manufactures asset bubbles and crises.
Proponents also argue that, through a series of intermediaries, such as banks and financial institutions, governments distribute and regulate the flow and use of money in an economy. Thus, they can dictate how it is transferred, the sectors in which it is distributed, trace its usefulness and tax the income of individuals and businesses to obtain revenue.
Bitcoin undermines the trust cycle
Fans of Bitcoin’s decentralized system claim that it has the potential to dismantle the system described above. Its network is meant to remove middlemen and, by extension, elements of the government system.
Proponents believe that if cryptocurrency were adopted, a central bank would no longer be necessary. This is because crypto can be produced by anyone run a full node. Additionally, automated peer-to-peer transfers between two parties on the Bitcoin network this would mean that intermediaries would no longer be required to manage and distribute currencies.
The chain of trust that underpins today’s financial infrastructure becomes an algorithmic construct in the Bitcoin network. A transaction is generally not included in the central ledger unless a specified majority of nodes approve it.
Theoretically, streamlining operations between individuals and different players in the Bitcoin blockchain network can reorganize the current system. The financial infrastructure is decentralized and the power to increase or decrease the supply of currencies is not assigned to a single or group of authorities. Thus, in the new configuration, the role of governments in managing and regulating economic policy through intermediaries may become redundant.
Bitcoin can bypass government-imposed capital controls
Governments often institute capital controls to prevent foreign currency outflows, because exports could devalue the value of their currency. For some, it is another form of control that governments exercise over entities within their jurisdiction. In such cases, the stateless nature of Bitcoin proves useful for circumventing capital controls and exporting wealth.
One of the most well-known cases of capital flight using Bitcoin occurred in China. Citizens of the country have an annual limit of $50,000 to purchase foreign currencies. A report from Chainalysis, a crypto investigation firm, found that more than $50 billion was moved from East Asia-based Bitcoin wallets to wallets in other countries in 2020, meaning citizens Chinese may have converted their local currency into Bitcoin and transferred it across borders to bypass borders. government regulations. Not all of the $50 billion is believed to have come from China or capital flight, but it does show an increase in capital movements in the form of cryptocurrency compared to previous years.
Bitcoin is used in illicit activities
The ability to circumvent a country’s existing financial infrastructure is a blessing in disguise for criminals, as it allows them to camouflage their involvement in such activities. The Bitcoin network is pseudonymous, meaning users are identified only by their addresses on the network.
It is not easy to trace the origin of a transaction or the identity of an individual or organization behind the address. Additionally, the algorithmic trust engendered by the Bitcoin network obviates the need for trusted contacts on both ends of an illegal transaction.
It’s no surprise that bitcoin is a favored channel for criminals to conduct financial transactions: many criminal trends in bitcoin usage have been observed over the years. Most recently, in its analysis of crypto crime trends in 2023, Chainalysis found that ransomware, darknet activity, and sanctioned entity transactions were the most significant illicit activities.
Why is Bitcoin a threat to the government?
Many believe that Bitcoin has the potential to disrupt financial systems set up by governments. However, it has not yet been adopted globally enough to threaten financial systems.
What is the US government’s Bitcoin balance?
It’s difficult to determine how many the U.S. government holds, but rumor has it the number could be as high as 200,000.
How much Bitcoin does the DOJ hold?
In fiscal year 2023, the U.S. Department of Justice collected 212 digital assets and had a ending balance of 136. The top digital assets seized by the department were Wave, Bitcoin, and Monero. The Department disposes of these assets by selling them at auction, transferring them to other agencies for use, or through other means.
The essential
Bitcoin has become a touchstone of controversy since its introduction to the world in the aftermath of the financial crisis. Some governments are wary of Bitcoin and have alternated between criticizing the cryptocurrency and investigating its use for their own purposes.
Even though Bitcoin has the potential to change, or even improve, existing financial infrastructure, the cryptocurrency ecosystem is still rife with abuse, scandals, and criminals, just like existing systems.
Government positions on issues change over time, and if the more tolerant legislative attitudes of recent years continue, Bitcoin could become more integrated into global society.
The comments, opinions and analyzes expressed on Investopedia are for online information purposes. Read our warranty and exclusion of liability for more information. As of the writing of this article, the author does not own any cryptocurrency.