‘Cryptocurrency’ has gained a lot of in spotlight lately and is widely becoming popular all across the world. Due to its continuous growth and demand, people are getting more and more attracted to it. Since it gained attention in the 2008 whitepaper, Bitcoin has been controversial. Many followers announced the launch of cryptocurrency as the arrival of a new and unbiased transaction system. Monitoring reports point out that cryptocurrency plays a major role in illegal activities and due to the lack of regulation it is considered as the 'Bait for a rat'.
Even though, people and governments around the world are keeping their eyes on the progress activity of Bitcoin, countries like El Salvador have accepted crypto as a normal currency and allowed people to adopt it. But apart from this, the United States along with other major economies countries denied accepting it as a legal tender. Along with these concerns, Bitcoin holds the power to undermine government bodies through the circulation of capital by people around the world. It also facilitates criminal activities by helping them in evading their identity. Also, Bitcoin creates a huge impact on the financial infrastructure system by removing intermediaries and destabilizing it.
Fiat currency plays a vital role in a country’s economy, so it is important to understand its role to understand government concerns over Bitcoin circulation. Fiat currencies can be understood as the conventional currencies which are issued by the governments. The government pays full attention to fiat money as it is backed by the full faith and credit of a government. The U.S. government is dependent upon Federal Reserve, a central bank on which the U.S. Congress has the right to create or print money for its economy.
Bitcoin supports the Fed charges with creating money in an unexpected way that creates currency not recognized as tangible assets. The central bank also creates several crises by controlling the supply of money in the US economy.
Governments promote the role of central banks in an economy. On the other hand, central banks are indulged in making policies regarding money. They do not have such command over the regulation of its uses. Such responsibilities rest with the government. Banks and financial institutions play the role of intermediaries through which governments allocate and regulate the flow of money and its use in an economy. Thus, they can decide how it can be transferred into sectors where it is distributed, and trace its profitability. Through the taxation earning of individuals and corporations, the government also acquires revenue from it.
The decentralized system of Bitcoin has the potential to deconstruct the regulation system of intermediaries such as banks and financial institutions. Due to its decentralized system, people are more concerned about putting their money into it. Lack of regulation creates a clear image that it can be risky for investors to lose their money. Countries like El Salvador, have accepted crypto as a conventional currency and allowed people to adopt it. But regulation of cryptocurrency is completely different from setting it as a digital asset. As cryptocurrency ties a rope with criminal activities, people are skeptical about their investment in it. As discussed, there are no intermediaries who can keep the records of transaction data; thus, it could be risky for people if the transaction occurs with the wrong person.
In near future, whether Bitcoin will become a conventional currency or not is still an open question for everyone. Along with this, governments around the world are focusing on the possible effects of Bitcoin on their economies in the upcoming future. In the following ways, Bitcoin became a threat to the government all around the world:
Bitcoin can disrupt the current capital control system imposed by the government
Governments often establish a capital control system to stop the currency outflows, otherwise, exports could reduce their value. According to some people, it is a different form of control that is imposed by governments on fiscal and economic policy. China has become a well-known example of capital flight by the use of Bitcoin. The annual limit of the country’s citizens to purchase foreign currency is $50,000 (INR 36,96,400). According to a crypto forensics report, China-based bitcoin wallets have seen the transfer worth more than $50 billion to wallets in other countries in 2020. It means that the citizens of China converted their conventional currency into Bitcoin and then transferred it across the borders to avoid government regulation.
Bitcoin clears the path for criminal activities
Bitcoin can prove to be a blessing for criminals as they would be able to hoodwink the existing financial regulators. It allows criminals to conceal their identity in such activities. Bitcoin is based on a pseudonymous network where it is difficult to trace down the transaction records or identity of an individual behind the address.
Moreover, Bitcoin is the most convenient way for criminals to make illegal activities in a financial transaction. One of the most popular examples of Bitcoin’s involvement in illegal activities was the “Silk Road” case. Silk Road is a marketplace for illegal activities such as buying drugs, weapons along with other things. It allowed customers to pay in Bitcoins and due to this, it was difficult for them to trace down the identity of such criminals.