Bitcoin’s significant growth in value and popularity might have profound effects on central banks and financial systems. Some people argue that fiat money could eventually be obsolete. According to some individuals, Bitcoin will ultimately replace conventional currencies like the Euro, dollar, or yen.
So, is Bitcoin something to cause alarm in central banks? Could cryptocurrencies and blockchain present opportunities that central banks should exploit? What are the risks of embracing Bitcoin for central banks? This article highlights the top Bitcoin implications for central banks.
Most People Spend Money Electronically
The physical currency remains relevant in the contemporary world. Ideally, people use fiat money almost every day to purchase items and services. It’s only in Sweden where the country is experiencing a rapid shrinking of cash usage. However, consumers across the world transact with physical currencies. Others use mobile phones and credit cards to complete transactions. Additionally, the money that central banks reserve exists in electronic form. That means digital cash is not entirely new.
People have also used electronic platforms to send and receive money for years. The only difference is that Bitcoin acts as money and a financial system. Perhaps, this innovation explains why more people don’t hesitate to convert their fiat money to Bitcoin.
Bitcoin Might Not Replace Government-Backed Money Soon
Bitcoin is undoubtedly popular. However, some people don’t trust this virtual currency the way they trust fiat money. Perhaps, this explains why countries like China have decided to develop a crypto-based currency. Today, people can access this currency via ethereum code website and use it the same way they spend fiat money.
However, this doesn’t mean that cryptocurrencies will soon replace government-issued and backed currencies. While people have eroded confidence in most government institutions, they prefer central bank-backed money. And this might not change quickly.
Perhaps, that is because the Bitcoin network still handles limited transactions. Additionally, Bitcoin remains a volatile digital asset. That means you can lose a significant amount of money when dealing with this virtual currency.
Bitcoin Can Change the Financial System
Innovations like Bitcoin and their role in the traditional financial system can have notable impacts. For instance, Bitcoin transactions are more convenient than bank transfers. Consequently, people can use Bitcoin due to its ability to speed up cross-border transactions. Additionally, the elimination of intermediaries reduces Bitcoin transaction costs. And this can broaden financial system access to rural households and poor people.
Bitcoin and blockchain present new technologies that enable people to access funds with ease regardless of their locations. That’s because all you need is a mobile phone and internet connection to send and receive funds in real-time.
Bitcoin Has Challenges to Overcome
Bitcoin and related technologies could reduce transaction time and costs. That means they could enhance efficiency while reducing the cost of acquiring capital. And this is good for unstable financial markets. It can also intensify contagion between markets. However, these technologies could undermine the current business models as established by conventional banks. They can also interfere with the role of the existing systems, thereby preventing central banks from operating correctly and maintaining financial stability. How traditional banks will look like, and their role in money creation broadly remains a critical issue.
Central Banks Could Issue Digital Currencies
Some central banks are already thinking about creating and issuing digital currencies like Bitcoin. That means people could have electronic deposits with their central banks. However, many cryptocurrencies that emerged after Bitcoin are yet to beat it. That’s because Bitcoin was the pioneer cryptocurrency with the largest market capitalization. Thus, introducing new virtual currencies might not interfere with its prominence and increasing value.
What’s more, introducing digital currencies can reduce the traditional banks’ role as lenders and intermediaries and pose problems during an economic crisis. That’s because depositors could pull funds out of the conventional banks and deposit in other central banks if they consider them safer.
These are possible Bitcoin implications for central banks. But how things will turn out is only a matter of wait-and-see.