Bitcoin, the first and most well-known cryptocurrency, has been a topic of global interest since its creation in 2009. With its ability to offer decentralization, transparency, and potential for significant return on investment, it has attracted a wide range of investors, from individuals to multinational corporations. However, investing in Bitcoin also comes with significant risks due to its volatile nature and regulatory uncertainty. Let’s explore the government’s view of Bitcoin in many countries, and the people’s perspective.
How the Government Sees Bitcoin
Although Bitcoin is commonly used to buy goods and services, there is still a lack of consistent global laws governing its use. Countries such as the United States, Canada, and the United Kingdom permit the use of Bitcoin. However, a number of countries, such as China, Saudi Arabia, and Qatar have outlawed its use. Moreover, many countries that do permit its use have initiated rules about cryptocurrencies and exchanges. This further confuses users and creates volatility. Here are reasons why government entities might attempt to restrict or regulate Bitcoin and other cryptocurrencies.
- Financial Stability Concerns: The volatility of Bitcoin and other cryptocurrencies can lead to significant financial instability. Rapid increases in value can create economic bubbles that can have severe consequences when they burst.
- Monetary Control: Bitcoin operates independently of central banks, which traditionally regulate the supply of money in an economy to control inflation and maintain economic stability. If Bitcoin becomes a widely accepted form of payment, it could potentially undermine the control that central banks have over the economy. Nonetheless, governments are creating their own versions of cryptocurrencies to replace the decentralized ones. This would help them retain control. Digital dollars may be a game changer for governments but that’s a discussion for another day.
- Tax Evasion and Illegal Activities: The pseudonymous nature of Bitcoin transactions can make it difficult for governments to track financial activity. This could potentially facilitate tax evasion, money laundering, and other illegal activities. While blockchain technology does record all transactions publicly, associating these transactions with individuals can be challenging.
- Consumer Protection: The lack of a central authority and regulation in the Bitcoin market can put consumers at risk. If an individual loses access to their Bitcoin wallet, for example, they have no recourse to recover their assets. Similarly, consumers could fall victim to fraudulent schemes or cyber attacks.
- National Security: Cryptocurrencies like Bitcoin could be used to fund illicit activities that pose a threat to national security, such as terrorism.
- Legal Tender Laws: In many jurisdictions, only the country’s government-issued currency is recognized as legal tender for settling debts. This legal status would not apply to Bitcoin, which might cause legal issues if Bitcoin were to become widely used.
Remember, while these are potential reasons, not all governments are seeking to suppress Bitcoin or other cryptocurrencies. Some are embracing the technology, seeing the potential benefits in areas like cross-border transactions and financial inclusion, and are instead focusing on mitigating the risks through effective regulation.
Why are governments afraid of Bitcoin and other cryptocurrencies?
The simplest and most direct answer is that the government and banks fear losing control of the people. They don’t want people living their best life and accumulating wealth using financial methods that they aren’t aware of, in control of, or can’t limit in some way (such as through taxation).
Alternative Money Formats in the U.S.
There have been many attempts at alternative money formats over the past few decades.
The U.S. Constitution (Article 1, Section 10) expressly forbids states from issuing their own currency: “No state shall…coin money; emit bills of credit; [or] make anything but gold and silver coin a tender in payment of debts.”
That said, there have been various local and regional alternative currency systems implemented within states, such as:
- Ithaca Hours in Ithaca, New York
- BerkShares in the Berkshire region of Massachusetts
These are usually intended to stimulate local economies and are not official state currencies. Even if smaller local alternatives take off to some degree, they are eventually crushed if they become too popular.
Cryptocurrencies have also been the subject of interest at the state level. For example, Wyoming has passed several blockchain-friendly laws to attract cryptocurrency businesses, but it has not attempted to create its own cryptocurrency.
Gold & Silver
While individual states in the U.S. cannot issue their own currencies, there have been moves in some states to recognize gold and silver as legal tender alongside the U.S. dollar, essentially returning to a form of the gold standard.
As an example, the state of Utah passed the Utah Legal Tender Act in 2011, which recognized certain types of gold and silver coins — those issued by the U.S. Mint — as legal tender within the state. Other states, such as Arizona and Wyoming, have passed similar legislation.
However, these laws do not create a separate currency system. Rather, they allow citizens the option to use gold and silver coins as money. The practical effect of such laws is often limited, since most everyday transactions continue to be carried out in U.S. dollars, and the value of gold and silver coins is typically much higher than their face value as currency. This is a sad part of reality as the country went off the gold standard in 1971 and the average person now has no idea about the value of gold or silver, or other precious metals, where they can buy them, even what to do with them. It is believed that this is by design. Although countries around the world still consider gold and silver to be highly prized items. In movies and TV, gold is understood to be valuable but if you ask watcher why, the rarely know the answer.
While gold and silver can be used as money in some circumstances and in some states, they do not constitute a separate currency system. The U.S. dollar remains the official currency of the United States.
Alternative Financial Systems in Canada
As per the Constitution Act of 1867 in Canada, the right to issue currency is an exclusive power of the federal government. Section 91 of the Constitution Act specifies that the issuing of money and regulation of commerce is a responsibility of the Parliament of Canada. Therefore, individual provinces do not have the authority to implement their own currency systems.
Canada has one official currency, the Canadian dollar (CAD), which is issued by the Bank of Canada, the nation’s central bank. Like many other countries, Canada also does have local currencies used in specific communities to stimulate local economies, but these are not official provincial currencies.
There are several local currencies that have been or are still in use in Canada. However, these are not official and are typically intended to stimulate local economies or support specific communities. A few examples include:
- Toronto Dollar: Used in Toronto, Ontario, this local currency was active between 1998- 2013. Businesses in the St. Lawrence Market area of Toronto accepted the Toronto Dollar, which was purchased and used at a one-to-one ratio with the Canadian dollar.
- Salt Spring Island Dollar: This is a local currency used on Salt Spring Island in British Columbia. The physical notes are considered collector’s items, and the currency can be used on par with Canadian dollars in local businesses.
- Calgary Dollars: This is a digital local currency used in Calgary, Alberta, which local businesses can choose to accept as part of or for the whole payment.
Remember, these currencies are generally used as a tool to encourage spending within local communities and support local businesses. They are not recognized as official currency and cannot be used outside of their respective communities. And no, Canadian Tire money does not count! That’s a retail store-based loyalty program.
Government Approval of Bitcoin Use
Bitcoin has been adopted as legal tender in only one country: El Salvador. While using Bitcoin as a national currency is not a widespread practice, it can offer several advantages. Why would a country use Bitcoin as a national currency? Here are several reasons.
- Financial Inclusion: In many developing countries, a significant portion of the population lacks access to traditional banking services. Since Bitcoin transactions only require a smartphone and an Internet connection, adopting Bitcoin as a national currency can provide a more accessible financial system.
- Remittances: In countries where a large part of the population works abroad, such as El Salvador, remittances – money sent back home by workers – form a crucial part of the economy. Bitcoin can simplify and reduce the cost of these cross-border transactions.
- Currency Stability: Countries with volatile local currencies might see Bitcoin as a more stable alternative, despite its own significant price fluctuations. In such cases, Bitcoin could serve as a sort of “digital gold” – a store of value to hedge against local currency devaluation.
- Attract Investment: By adopting Bitcoin, countries might hope to attract foreign investment, particularly from the burgeoning crypto and tech industries.
- Promote Technological Innovation: Adoption of Bitcoin could potentially spur technological innovation and development, encouraging growth in sectors like fintech and e-commerce.
It’s important to note that the use of Bitcoin as a national currency also brings significant risks, including price volatility, regulatory challenges, and potential exclusion of those without digital literacy or access to necessary technology. It also poses new challenges for monetary policy since the supply of Bitcoin is not controlled by any central authority.
For these reasons, widespread adoption of Bitcoin as a national currency has not occurred. From the people’s perspective, the lack of regulations is a possible solution to the financial crisis we’re entering when considering that it encompasses direct person to person transactions, without government intrusion.
Bitcoin for the People
It’s crucial to understand the impact on citizens of government attempts to restrict or regulate Bitcoin and other cryptocurrencies. While these actions are usually taken with the aim of protecting the economy and citizens, they can also have downsides from an everyday person’s perspective:
- Limited Financial Autonomy: One of Bitcoin’s core appeals is its decentralization, providing individuals with financial autonomy outside of traditional banking systems. Any government interference might be seen as limiting this personal freedom and control over their own assets.
- Barriers to Potential Profits: Many individuals invest in Bitcoin hoping for high returns due to its volatility. If a government restricts Bitcoin, it could limit these potential investment opportunities and profits.
- Restrictions on Innovation: Cryptocurrencies and the underlying blockchain technology are relatively new innovations with a broad range of potential applications. Excessive government restrictions could stifle this innovation and limit the potential benefits that it could bring to society.
- Loss of Privacy: One of the attractions of Bitcoin is the privacy it offers compared to traditional financial transactions. While not completely anonymous, Bitcoin provides a level of pseudonymity that can protect users’ identities. Increased government regulation could result in a loss of this privacy.
- Reduced Access to Global Markets: Bitcoin and other cryptocurrencies can provide access to global markets, especially for individuals in countries with unstable currencies or limited banking infrastructure. Government restrictions could limit this access and the opportunities it provides.
- Cost of Compliance: For those using Bitcoin in their businesses, increased regulation can result in additional costs and complexities to ensure compliance. These costs could deter some people from using or investing in Bitcoin.
While it’s important to consider these potential drawbacks, it’s equally important to remember that government regulation can also provide significant benefits, such as protecting consumers and maintaining financial stability.
A Deeper Financial Problem
While it’s often highlighted that government regulation can serve substantial advantages like safeguarding consumers and preserving financial stability, it is essential to question these narratives critically. Governments often have deep-rooted relationships with banks and financial institutions, and this may influence their policies and regulations which typically do not favour the average citizen.
Investing in Bitcoin
Maintaining a balance between regulation and financial freedom is a sensitive task, and perspectives on the matter can drastically diverge based on one’s personal experiences and understanding. Many people are still looking to Bitcoin and crypto in general as a way to live outside the system and generate income through Bitcoin investments. Decentralization, in theory, is great but in practice, big money and government still find ways to manipulate the markets. At this point, some speculators anticipate Bitcoin going to several hundred thousand dollars to millions per coin within the next few years, while others see it as a Ponzi scheme that will soon crash back to zero.
However, the overarching idea that one should consider is to maintain a healthy skepticism towards governments’ motives, given their possible ties with banking entities, which usually won’t align with your best interests. Always remember, in the realm of personal finance and investment, you are your best advocate.