Bitcoin is amazing piece of technology but this post is not about what it is but what it can be and might become. The greatest thing that Bitcoin has pulled off is establishing Trust in an anonymous system, which becomes more and more trustworthy as more people(nodes) become part of the system.
There are two forms of value that economies are driven by – Gold and Currencies, largely. While Gold is standard across the world, the currencies are managed by individual countries. But one myth must be squashed here that value of currency comes out of Gold, no it does not. Lot of currencies today are valued against US Dollars and value of 1 USD is bound to debt which is why it is called Fiat currency. Basically US government can print as many dollars it wants. Gold today is just a reserve that countries keep to increase/decrease the currency availability(liquidity) in the economy.
So, the Gold can now be replaced with anything that can take its place of value and traded. And Bitcoin is exactly solving this part. It is mined like Gold but digitally and its also costly to generate Bitcoin as is the Gold. It gets really interesting with Bitcoin, it can also be used as currency like any other currency, transferring from one wallet to the other. If it would be possible to trade Gold as currency, as it once did, we would still be using Gold but as the population and trades increased it became impossible. Hence, the gold should practically lose its value or it can be said that Gold has value because we believe so. But for all practical purposes, Gold is still traded and governments use it as reserve, built over decades, to control the liquidity.
The Fiat currency enables debt using which growth can be generated in income and economies. Without it, hyper growth is not possible because then the Gold will become the bottleneck or limitation. In the age of Bitcoin, there is practically no use of Gold anymore apart from purposes that any other metal is used for. Bitcoin is much better compared to Gold, it can be tracked and transferred in real-time. Lot of Gold is unaccounted for with people who have controlled it for decades and centuries while Bitcoin is new and digitally available. It can always be tracked but with a possibility of being inaccessible when access to wallet is lost.
Why some governments are worrying about Bitcoin?
What happens to Gold?
One of the thing that could worry governments with vast amount of Gold like in India. Gold could face value problems and for which they can look to block trading. But this is only a short term solution to restrict Bitcoin presence in the country but does nothing to help Gold value. Being decentralized, Bitcoin is run on servers and computers of people around the world. Even if one governments prohibits Bitcoin, their Gold value will see decline because rest of the world is free to exchange Bitcoin. Like anything of economic value, it has both demand and supply. Low demand and high supply results in loss of price and thereby in Gold’s value and this will intensify as Bitcoin starts to stabilize or becomes less volatile.
Wealthy people have not got hold of it, what about them?
Rich people often drive policies in countries irrespective of the government’s political inclination. At the moment, only a few wealthy people have invested in Bitcoin. Lot of them have not invested fearing the volatility of the Bitcoin price in Fiat currencies, it is increasing though. By the time majority will get hold of it, a Bitcoin would be valued at a very high price and they could only own a fraction of they could have in the past. Lot of wealthy people around the world own Gold like the governments and that would be double assault on their wealth.
What happens to currencies?
Governments can release their own crypto currencies but every blockchain is backed by its own crypto currency to make a decentralized blockchain viable and lucrative. Fiat crypto currencies can be used for daily transactions while Bitcoin can be the new Gold and other crypto currencies can work within their boundaries like they do. But there is a possibility that transactions can happen using these other crypto currencies for goods and not Bitcoin.
What about banks?
Banks have to be worried, yes. Unlike money, Bitcoin doesn’t need a bank account. You can keep your Bitcoin in a wallet which could be software or hardware, connects to internet only when you want. Sounds like lot of technicality but it will get better to onboard everyone, like crypto banks, but they will be nothing like today’s banks. They will be useful for personal loans and will have crypto exchanges for quicker exchange and sending them across the world in a second. But most people will not use any bank and definitely won’t give custody to Banks to play with it. They will control their Bitcoin.
The traditional banks will have no use left and most of them will not make it. However, central banks will face a different story and definitely not the one it is used to. Its role is about to be changed.
But should it worry people and governments?
No, unless the governments have something and someones to protect. It doesn’t actually matter in which currency a transaction for good happens. What matters is that if the transaction are taxed properly and with complete visibility. If governments supports this ecosystem and adopts it quickly, it can have upper hand on such transactions and all of it can happen over its own blockchain. Crypto currencies could literally become the heaven for governments around the world to control corruption and it could make wild dream a reality for economists who could run all sorts of models and do studies easily.
Only by enabling transaction within the government using state’s own crypto currency will be enough to detect corruption within the governments. Since, every penny can be accounted for, it can be known how many hands it has exchanged with no grey areas. It doesn’t matter in which cryptocurrency the transactions in the economy happens for goods and services, since every cryptocurrency will be linked and traceable.
But what about Sovereignty?
Sovereignty of a country comes from the fact that it can make its own decisions. Personal finance doesn’t come under that scope but broader general financial system does, the control over INR or USD. It can be solved by creating respective sovereign crypto currencies which governments use in its own ecosystem. And tradable with the other crypto currencies. Just this much interface protects the sovereignty of a country.
Adoption of cryptocurrencies will complete the financial loop between digital and real world. And this will be a game changer, a completely connected decentralised financial system. People could move between digital and real places without having to worry about their money, storage and conversion rates. Yes, 1USD will not be equal to 1INR.
IMO governments will create their own crypto INR, USD and likes, which will be inflatable cryptocurrencies and will be very cheap to transact unlike Bitcoin which will always have a higher transaction cost.
There is Lightening Network which solves for the cost of transaction and speed. It is yet to see the adoption and scale.
All real life goods and services will be available using these sovereign cryptocurrencies, all computer to computer transactions will happen on native cryptocurrencies and all value will be stored in Bitcoin.
What about central banks?
As mentioned, role of central banks are about to be changed and they will be the only standing banks everywhere. Central banks will have no control over Bitcoin unless all the countries come together to overtake mining nodes, which will happen and it will be shared between all the countries. No single central bank will have power to do anything, they will not be able to generate more Bitcoin. It has a hard limit.
The only role then the central banks will have is to manage country’s debt. To grow, a country will still need an inflatable currency which can be fused in the economy to generate more value. Read more on this in my post Two Types of Economies. And all they will have to do is manage this debt and cannot risking the money of the people and other countries. People will keep their money in Bitcoin.
That is how Bitcoin is going to protect people’s money and strengthen democracies. Countries’ economic policies is being influenced by a few which is putting everyone’s monies at risk. With no influence over Bitcoin and with that on people’s money, countries will also have no other choice to put its mind over managing the resources well, managing the debt well. On a blockchain, every things can be traced back and accounted, which means less corruption and transparent reality of policies and their impact.
But that’s a good future projection, watch out for the government policies which undermines this power shift. We can make this a reality if want it.