The Impact of Bitcoins on Central Banks

The primary role of central banks in different countries is to control inflation, maintain maximum sustainable employment, and control the flow of fiat currencies. Bitcoin on the other hand is a decentralized cryptocurrency and the central bank does not play any role in its activities. This is the reason some experts believe that Bitcoins pose a threat to the existence of central banks and can replace many tasks that they do. However, the reality is far more complicated. The impact of Bitcoin on central banks, therefore, needs to be discussed in detail and deserves critical attention.

Multifaceted Impact of Bitcoins

According to crypto experts, Bitcoins can emerge as a viable alternative to central banks. Cryptocurrencies such as Bitcoin allow payments to be made without the involvement of any bank or financial institution. Therefore, a natural question arises as to whether Bitcoin can indeed render central banks outdated. As of now, there are two arguments, one supports the notion and the other opposes it. 

The arguments opposing the notion are invariably stronger. Firstly, users will have to understand the public iteration of cryptocurrencies. This needs command lines and advanced programming skills, which commoners cannot acquire. Cryptocurrencies need wallets. Though wallets have top-class security, they lack liquidity like cash. Bitcoin is a convertible currency and can be used in every jurisdiction bypassing geographical limitations. However, the central banks still control the exchange rates of fiats and therefore fiats are not entirely replaceable with cryptocurrencies. 

The limited supply of Bitcoin also dispels the notion comprehensively that these can ever challenge the existence of central banks. However, it can effectively challenge the monopoly of these banks is undoubtedly true. Entire replacement currently seems unlikely because replacing central currencies would require government approval. As of now, only a few countries such as El Salvador have given national recognition to Bitcoin. 

CBDC and Bitcoin

Bitcoins cannot replace the role of central banks and do not pose an existential threat to the credibility of central banks. However, central banks have formulated a plan to maintain their monopoly over international finance by issuing central bank digital currencies (CBDCs). Crypto enthusiasts claim that the issuance of CBDC is a response to the rising popularity of cryptocurrencies. CBDCs do not require conversion into cash, because they are “legally” equivalent to cash. Bitcoins on the other hand require conversion into respective fiat currencies and for greater liquidity require direct cash conversions. Therefore, the strategy to thwart the growth of cryptocurrencies may be successful. 

Also Read- Bitcoin Payments Can Lead To Widespread Adoption

Bottom Line

Central banks continue to rule the global financial market. They continue to play the role of being the legitimate issuer of fiat currencies in every country. These banks continue to monitor the functioning of all commercial banks and monitor the interest rates. However, in many regions, they have failed to address the question of growing economic inequality and persistent economic crisis. In the backdrop of these failures, cryptocurrencies such as Bitcoin are rapidly emerging as a viable alternative to fiat currencies.