The 21st century came with a lot of changes in the monetary system. However, none of the changes have been as significant as the introduction of bitcoin. It became a competitor of the standardized monetary system in every aspect. This led to speculations on whether bitcoin will replace the real money or whether the block chain technology will come to replace central banks.
A good number of experts have pointed out that there is a possibility of radical changes in the monetary system as a result of cryptocurrencies. Others have maintained that bitcoin does not meet the criteria for money; therefore, it lacks the capacity to replace real money. Both arguments hold weight and it is wise to weigh both possibilities in order to arrive at a comprehensive conclusion. This can only be done by analyzing both the current monetary system and the cryptocurrency system. This can tell the impact bitcoin will have on the monetary system and whether it can replace real money.
How Does The Monetary System Operate?
The monetary system is a network of institutions by which the government supplies money in an economy. These institutions include:
- Central banks
- Commercial banks
All countries use fiat money; therefore, it is the government that defines the intrinsic value of the currency through the central bank. Fiat money exists as stored data, such as: records of debit/credit card transactions and bank balances. Money supply is regulated through the fractional reserve system. This is where banks are allowed to make loans or accept deposit as long as they have reserves. The bank reserve is usually less than their deposit liabilities and this makes money supply to exceed the base money. The central banks are usually charged with the responsibility of regulating the process of money supply. This will always ensure that banks have sufficient funds for withdrawal.
How Does Bitcoin Work?
Bitcoin is a decentralized system; therefore, it lacks an institution which is responsible for its creation and supply. It is created through digital mining process which uses a specialized software. The software solves mathematical tasks and receives bitcoins as a reward. Every transaction of bitcoin is added to a public ledger known as block chain. A block chain is a list of bitcoin transaction records which are connected and secured by cryptography. The supply of bitcoin is controlled by algorithms which dictate how the currency will be created in the future. It is set to cease after the creation of 21 million bitcoins and the reward of bitcoin is halved after every 210,000 blocks. Bitcoins system does not have institutions, but instead has various components:
- Block chain
Will Bitcoin Create A Global Financial Currency?
Fiat money has been in use ever since 1000AD and its influence extend beyond the banking system. It is the global, standardized means of payment and receives a total backup of governments. The confidence of the user is protected by the government machines that monitor the regulation of creation and supply of paper money. Business institutions and banks transact with money because central banks guarantee their security.
The economy usually progresses normally even in instances where there has been regime change. This has proven that paper money is reliable despite the fact that it has no intrinsic value. Bitcoin on the other hand has no back up from any entity and operates through computer processes. Just like paper money it has no intrinsic value, thus doubling the risks of working with it. Nevertheless, it offers privacy and it's more secure than paper money.
In order for bitcoin to substitute paper money, it needs to uproot the undue influence of paper money in politics and social- economy of the world. This means that it has to be accepted by the governments as the main means of payment, banking sector and ordinary people. There is no limit on the amount of paper money that should be printed.
Theoretically, the supply of money is supposed to reflect the productivity of the economy. When the number of goods and services increases, there will be a need for money to pay for them. This will increase the money supply and the central banks will step in to make sure that it controls inflation. This system has continued for a considerable time and it has assured governments and shareholders that it can sustain itself. Bitcoin is only efficient in its operation, but there are certain area of concerns it does not address:
1). If bitcoin remains to be a virtual currency how will it service the analog part of the world?
2). If bitcoin has a controlled supply what will happen if productivity increases?
3). If the maximum number of bitcoin is set 21 million how will it service over 7 billion people?
In as much as it's convenient for online merchants, it does not hold the capacity to replace paper money. Different countries respond differently to the use of bitcoin; therefore, the effect of bitcoin will be different in different countries. It can only manage to become a new digital asset as it is evident in the announcement of the release of bitcoin futures, but not a new medium of exchange. However, if the whole world including the developed countries switch to digital, bitcoin might pose a threat to paper money. That is unlikely to happen in the recent future.
In fact, there has been an effort by various central banks, such as the European Central Bank to regulate it. The current economic system has shareholders who benefit from the established monetary system. Their interests are protected by their respective governments through different arms, such as the military and central banks. Even in developed countries where the central banks are not interfered by politics, they still provide a conducive economic environment on behalf of the government.
Will Bitcoin Substitute Real Money Conclusion
Bitcoins and other cryptocurrencies can only replace real money in the online platform only to a certain degree. However, since paper money has the backup of the governments, it is unlikely that cryptocurrencies will substitute paper money.