Cryptocurrency and Freedom from Government-Run Fiat Currencies
As the global pandemic crisis paved the way for our new-normal way of living (and coping), a currency crisis is developing. Governments have long been trying to maintain their monopoly of power with citizens losing faith in the government’s money resulting in economic collapse. On the verge of these types of crises, throughout history, people have looked for alternatives to government-run money.
We have heard of cryptocurrency, sometimes in the context of criminal activities, and the government’s fear of its decentralized system. Skeptics doubt cryptocurrency’s ability to overcome hurdles on its widespread adoption. Yet, more and more people are embracing Cryptocurrency despite its perceived reputation. What is Cryptocurrency in layman’s terms? How does it benefit ordinary people like you and me, and why is the government scared of it?
Fiat and Government Control
“The central bank must be trusted not to debase the currency, but the history of fiat currencies is full of breaches of that trust. Banks must be trusted to hold our money and transfer it electronically, but they lend it out in waves of credit bubbles with barely a fraction in reserve.” – Satoshi Nakamoto, Bitcoin’s pseudonymous creator
Currencies run by the government are collectively termed Fiat. The word “fiat” means “let it be done” or “it shall be” in Latin. Thus, Fiat currencies have no specific value on their own. Their value is derived from a government decree. The government decides and declares that a printed paper, like yen or dollar, to be money. Government decrees mandate that this Fiat money be used for economic activities like payments for goods and services, debt settlement, and taxes.
Central banks play a significant part in what’s called Monetary Policy. They can disseminate or eradicate money to exercise economic leverage. Dictating rules on fiat transfers enable the government to trail movement, collect taxes and track criminal action.
The United States, being the world’s most extensive financial system, obligates that all parties use its legal tender, the dollar, on all economic activities. This status gives the piece of paper, which is the dollar, its value. Without the decree, a dollar bill would be another piece of printed paper.
The government ensures that the circulating money is not easy to imitate and formulates deterrence through criminal retribution. They also see that Fiat money is adequately scarce to maintain value yet sufficient to stimulate economic movement. Control over Fiat money significantly impacts spending and investment stimulation. It creates jobs in the business environment, deters inflation and recession, and helps in the government’s endeavors on crime management. All these controls can be lost if non-government currencies arise.
In China and India, governments are reducing the use of cash in their economy. China is implementing digital alternatives powered by its central banks to keep a keen eye on people’s spending. India, on the other hand, took out some high denomination notes from their circulation as an attempt to take down counterfeiting.
Cryptocurrency and Freedom from Financial Oppression
Last year, the brutal actions of a police force unit called SARS (Special Anti-Robbery Squad) led to protests against the government in Nigeria and Lagos. In a matter of days, the government froze the bank accounts of all groups supporting the movement, which led them to turn to Bitcoin.
HRF (Human Rights Foundation) Chief strategy officer Alex Gladstein identified China, Myanmar, Belarus, and Russia as governments who silence their dissidents through their banking system. In Belarus, protesters against dictator Alexander Lukashenko received over $2 Million in Bitcoin raised by a nonprofit fund, BYSOL, to support their movement.
The Central Bank of Nigeria (CBN) saw Bitcoin as a threat and tried creating a crypto ban, which is being debated in their Senate. Nigeria’s bright and young Bitcoin users weren’t discouraged by the sanction; it just made them all the more resilient. A Nigerian senator even stated that Cryptocurrency is the next level, and it’s not something that they can run away from.
Cryptocurrency is the exact opposite of government control. Decentralized, it is a network powered by users and doesn’t need a trusted intermediary in between transfers. It doesn’t need lawyers, private banks, or even a central bank. Cryptocurrency is censorship-resistant; it is open to everyone, especially those who don’t have bank accounts or don’t have the basic requirements to open a bank account. Thus, the government doesn’t have the means to control and track the movement of Cryptocurrencies. And unlike bank transactions and remittances with high fees, Cryptocurrency’s peer-to-peer transactions can have zero fees. Ultimately, if the government can quickly freeze or switch off your access to your assets in the bank, it can never happen with Cryptocurrency.
The Future of Money: Cryptocurrency vs. Stable Coins
Money, whether Fiat or Crypto, exists because of its economic goal – promoting the exchange of goods and services. Without money, we’d still be trading our goods and services under a barter economy, which is impractical and time-consuming in this day and age of fast-paced technology.
For something to be considered as Money, it has to have these three functionalities:
- A medium of exchange – it has to be agreed by parties using it to have a particular value, thus it can be traded with goods or services
- A unit of account – it has to be something that can be measured equally
- A store of value – its worth should not change whether you decide to trade it today or keep it and trade it on some other day
Expanding Cryptocurrencies like Bitcoin are more than just a seasoned investment these days. As money becomes digital now, cryptocurrencies are becoming a leading participant in the future of money. It has proved to be a unit of account and a store of value as its exchange rate goes up and sometimes down like the stock market. It is also now a medium of exchange as more and more payment companies accept Bitcoin like Visa, PayPal, and Square. Moreover, Bitcoin is now being accepted by public companies as a cash alternative. With Bitcoin, you can now purchase video games, buy or reload your Dunkin’ Donuts, AMC Theaters, and Home Depot gift cards. Last June of this year, El Salvador declared its acceptance of Bitcoin as legal tender. It is the first country to do so.
As this financial crisis that we are in has put bankers in a more awful stature than they already have, if Cryptocurrency becomes widely accepted, the undisputed banking network could become irrelevant.
Moreover, Bitcoin became a store of value and money pool for people in some countries. In Sudan, Bitcoin lets the Sudanese bypass their highly ruled government and transact freely internationally. Hyperinflation in Zimbabwe has led its citizens to prefer the relatively volatile Bitcoin to be more valuable and reliable. Frustrated with their government’s control over their fiat money, Argentines utilized Bitcoin over their sovereign money.
There are 1,600 digital currencies in circulation reported in 2018, according to the European Central Bank. Moreover, as of July this year, there are 11,000 cryptocurrencies, and for crypto exchanges, 384. In case Bitcoin fails, it has a whole group of successors that can step up and radically alter how the world feels about cryptocurrency.
Governments have explored tons of ways to get rid of cryptocurrency in their system. In the case of Nigeria, banning crypto did little to no effect as Bitcoin continues to rise in value over the Nigerian Naira. Thus, the emergence of stable coins or what is now called CBDCs or Central Bank Digital Currencies. To veer citizens away from using cryptocurrencies, governments are creating their own digital currencies.
CBDCs assure that, unlike cryptocurrency’s decentralized system, government-issued digital currencies are backed by their reliable national institution. A survey as of April this year states that 86% of central banks in the world are studying CBDC possibilities. The US’s E-dollar, England’s Britcoin, and Sweden’s E-krona are all in the experimental phase. The Bahamas has already piloted its own digital currency, the Sand Dollar, in 2019.
Meanwhile, China’s E-yuan targets to go beyond stable coins and generate a digital currency to be used in cross-border transactions like the US Dollar. Although this seems like a great plan, going digital’s main pitfall is that some governments might not like the idea of their citizens installing a Feds digital wallet because that will weaken their capital controls. Without control, central banks will be powerless. Lending institutions might not be needed anymore, or new forms of lending will have to be created.
Could they co-exist?
The answer is a significant and short No. ‘Big Short’ fame hedge fund manager Michael Blurry predicted that governments who refuse to tolerate alternate sources like Bitcoin would make efforts to crush the currency competition. According to Blurry, an inflationary crisis will have central banks scrambling with monetary policy to resolve the situation.
SEC commissioner Hester Peirce agreed that the future of Cryptocurrency and CBDCs side by side is doubtful. Central banks are desperately trying to overthrow Cryptocurrency in a race that they will eventually lose. Peirce adds that Cryptocurrency is now getting much attention, and every day, more institutions are opening up to engage with it, acquiring further legitimacy.
Arising markets formerly opposing crypto are now slowly opening up to its possibilities. With over one million cryptocurrency users, Vietnam commissioned a research group to investigate how crypto can be regulated. The Russian government now also explores financial services related to crypto. In Nigeria, the crypto ban has seemed to relax as more cryptocurrency transactions are made every day.
Why does this matter to me?
Cryptocurrency, whether we invest in it or not, will continue to rise. It has shifted an international trend on digital currency that hastened since the Covid-19 pandemic has hit, as it became a challenge for governments to reach monetary relief to the poor population who don’t have bank accounts or credit cards.
There will always be a demand for non-government currency, as it also serves as a disciplinary check on the inflation tendencies of government monetary policies. As long as selfish governments persist, cryptocurrencies will exist. Observers say that Cryptocurrency awareness growth has been propelled lately and might steer to their extensive adoption. We might not be interested in it for now, but we might arrive in a position where we won’t have a choice. We might as well be educated, prepared, and keep an open mind on the possibilities of cryptocurrency in the near future.
Note: We are irresponsibly long crypto. This is not financial advice.