Bitcoin arose as the first peer-to-peer payment system without any central authority or middlemen. In only a few years, it has been followed by a host of other payment networks, now collectively known as cryptocurrencies. They are neither created nor controlled by any government, a fact which concerns many (particularly banks and governments).
But for the ordinary consumer, cryptocurrency can have countless benefits. It allows users to make easy transfers between one another without having to depend on a third party such as a bank. It also comes with minimal processing fees, a fact that allows users to avoid higher fees charged by banks. Finally, it allows a level of privacy that doesn’t come with conventional transactions. While cryptocurrency is not without its issues, it could be a step in the right direction for many in the world. So why are some governments so staunchly critical of this progression? And how exactly is cryptocurrency challenging the way the world operates?
Let’s take a look at the perceived threat of cryptocurrencies, and why governments all over the world are so afraid of them.
The Difference between Crypto and Fiat Currency
The main difference between cryptocurrency and fiat currency (or fiat money) is that one of them is backed by the government, and the other is not.
Fiat currency is backed by a central government, it is considered legal tender, and is the money we typically use to buy goods and services and pay our taxes. Cryptocurrency, on the other hand, is decentralized, which means it is not backed by a central government or bank. While fiat currency varies from country to country, cryptocurrency is global.
Since cryptocurrency does not have a central authority and is not created or supplied by governments, they have no control over it. Some governments claim that the problem with cryptocurrency is how easily it can be used for money laundering and illegal purchases, however, it is important to note that these things have already been done with fiat currency for decades. The real threat goes far beyond that for governments and banks.
The Loss of Control
The value of conventional currencies is, at its core, arbitrary. We believe money to be valuable because we are told that it is, not because it has intrinsic value. Money is not worth anything on its own; it is worth what governments say it is worth and, for many people, this is becoming less and less satisfactory.
By using central banks to issue or destroy money, and by maintaining economic influence through monetary policy, governments essentially control the flow of money. They can intentionally increase or restrict how much money circulates in an economy. Therefore, the existence of independent currencies means a significant loss of control for the government.
Competing for Power
But what are the practical implications of this loss of control? To begin with, if cryptocurrencies were widely adopted, the entire banking system would be rendered obsolete. Many economic theories point to corruption in the banking system and arbitrary government control of currency as the cause of recessions and unemployment. Because of this, a currency that cannot be corrupted or tinkered with for profiteering is a dream-come-true for the ordinary consumer, but a nightmare for governments and banks.
Other theories argue that one of the biggest reasons governments dislike cryptocurrencies is because of their anonymity. Since fiat currencies are controlled by central authorities, they are also a simple means of surveillance. Without the same level of control on crypto, governments aren’t able to track financial transactions made with a cryptocurrency.
The overarching threat that cryptocurrencies pose to governments are their ability to take back control. Simply put, governments fear decentralized currencies because they take power and control away from the government, and put them into the hands of the consumer.