The Risk of Decentralization

Many bankers are deeply concerned about the decentralized nature of cryptocurrency. Traditional currencies, like the Euro, Yuan, and Dollar, are typically within the government’s control. This allows governments to implement fiscal and monetary policies at will. They can collect taxes and monitor money flow throughout the economy.

With traditional methods of monetary regulation, authorities can track illegal monetary transactions. As a result, governments can influence economies through monetary policies and by encouraging certain financial practices.

Cryptocurrencies operate on decentralized trust. Rather than relying on a central authority to validate transactions, cryptocurrencies use decentralized consensus. A blockchain is a public ledger shared among users, keeping track of financial transactions in a series of growing digital blocks. Traditionally, financial institutions such as lenders and central banks kept separate ledgers for each client.

The decentralized nature of cryptocurrency means governments lose control when individuals use it. Blockchain technology ensures that no entity can control or govern the creation or transfer of this digital currency. This shift of power to the people is the opposite of what central banks thrive on—centralized control and top-down authority.

The Link Between Criminal Activity and Cryptocurrencies

This is a legitimate concern expressed by governments and bankers, and it has some merit. Cryptocurrency is designed to operate without central oversight. Through cryptography and distributed ledger technology, blockchain creates an immutable public record of transactions. Because this database lacks personal identifiers, it’s difficult to trace the parties involved in a cryptocurrency transaction in the real world. In theory, this makes cryptocurrency attractive for criminals engaging in illegal activities.

Moreover, some people have lost significant amounts of money due to hacks on crypto exchanges. Criminal organizations have exploited the anonymity of cryptocurrency to facilitate illegal activities, such as distributing illicit drugs. There are also claims that terrorist groups have used cryptocurrencies to fund weapon purchases. However, compared to cash, crypto is actually much more traceable because everything is recorded on the blockchain. Some exceptions exist, such as with anonymous networks like Monero.

Central Banks’ Financial and Business Policies

Governments can influence their economies and budgets thanks to central banks. However, if Bitcoin or a similar alternative currency becomes widely adopted, central banks would become largely obsolete. In the long term, this would negatively impact governments as well. For this reason, governments and central banks tend to oppose cryptocurrency.

The decentralized network based on blockchain is another core aspect of cryptocurrency that complicates governments’ ability to implement tax regulations and monetary policies. Thus, governments worry about the complexity of tax rules if cryptocurrencies become widely adopted. Some argue that their concern is primarily about losing power and control.

Cryptocurrency as a New Concept

Cryptocurrencies present an alternative form of currency. However, due to their volatile value, they are difficult to use in everyday commerce. Perhaps this is why some countries have not considered or adopted cryptocurrencies as legal tender. Some people are skeptical about the reliability of cryptography, which poses a challenge. Nevertheless, many crypto experts believe it’s only a matter of time before this new form of transaction becomes universally accepted.

Challenging Central Banks’ Credit Monopoly

This may be the most genuine reason why central banks are worried. Cryptocurrencies could undermine the credit system and economic model of central banks. Credit is the backbone of modern banking, and cryptocurrency reveals the flaws within this economic system.

With fractional reserve lending, banks can legally create vast amounts of new credit “out of thin air,” earning interest on debt that is impossible to repay once a fiat currency is tied to that debt. While this is a clever business model, it’s not necessarily in the best interest of the average person. Cryptocurrencies, which cannot be counterfeited, cannot be used as collateral for loans. Cryptocurrencies are decentralized and distributed, making them difficult to counterfeit. This makes the scarcity of coins, like Bitcoin, a primary driver of value and profit.

Editor’s note: the views expressed in this piece are the author’s own and do not necessarily reflect those of Criptochipy.com