Does bitcoin serve as a threat to fiat and central banks?

27 June, 2014

Is bitcoin a threat to fiat and central banks around the world? That is question being asked by many as the digital currency continues to gain in popularity and moves toward becoming more mainstream.

As an alternative to the more traditional, state-sanctioned banking systems around the world, many people believe that bitcoin could very well serve as a threat to those systems. Others has postulated that while bitcoin is certainly gaining in popularity, the very existence of the virtual currency could force the Fed and other central banks to become more disciplined and administer more responsible policies out of concern that if they do not, consumers will make the switch.

Whether bitcoin serves as an actual threat or merely an incentive for central banks to operate more responsibly, the entire question comes down to competition among currencies. While many have yet to acknowledge bitcoin and other digital currencies as 'legitimate' money, the fact remains that around the world, cryptocurrencies are being used to pay for everything from products to services.

In many countries around the world, currency controls are very much a reality. As Business Insider 1 reports, the purpose of such controls is to create demand for domestic currency. Historically, it has been much easier to impose bans on foreign currencies due to the proliferation of paper notes. That is no longer the case. The Internet and mobile digital devices have forever changed the way in which currencies are traded. While it remains unlikely that the U.S. government and other democratic nations would impose severe restrictions and punishments for use of a non-domestic currency, that is not the case in many other parts of the world.

Even less restrictive countries are taking measures to warn citizens about the risks of using bitcoin and other virtual currencies. Reuters 2 reported that the Bank of France has issued warnings regarding the risks associated with digital currencies, and that country is certainly not alone. Clearly, a precedent of concern is being established as central banks around the world sit up and take notice of the increasing popularity and usage of bitcoin and other forms of unregulated, digital currencies. The Chinese central bank has been particularly vocal regarding warnings related to trading bitcoin, as the digital currency has proven to be particularly popular among Chinese citizens.

In February, Digital Journal 3 reported that Russia has issued a ban on bitcoin altogether. The move reportedly came about amidst concerns related to the use of the digital currency in financing terrorism and money laundering.

Despite recent attempts to put the brakes on bitcoin, the currency continues to gain steam, adding validity to the argument that it very well could pose a threat to central banks around the world. Unlike domestic currencies, bitcoin is not subject to the policies and regulations of any banking authority. Although many speculate that such a transition is at least a decade away, the fact remains that bitcoin could eventually make domestic currencies obsolete.

Almost every nation around the world today uses what is known as a fiat currency. This means that the domestic currency retains value based only on the belief among citizens that the currency is worth something. Gone are the days in which national currencies are backed by silver or gold, as was the standard at one time. Today, bank notes are no more than sophisticated slips of paper.

The argument certainly exists that bitcoin serves as a fiat currency as well and only holds so much value as those who use it believe that it carries. This is true, to a degree. The primary difference that exists between bitcoin and domestic or fiat currencies is that while the value of fiat currencies is determined by a central bank, the value of digital currencies, such as bitcoin, is determined by individual users.

Bitcoin's primary threats posed to central banks, including the Fed, are that bitcoin could potentially have a significant affect regarding the amount of money that is in circulation. The demand for dollars, or other domestic currencies in the case of other countries, could also be reduced substantially. In the event that an increasing number of consumers began to exchange bitcoins rather than their respective domestic currency, that currency would lose value. In such an event, it might become necessary for the relevant central bank to implement monetary policy restrictions in order to impact the value of domestic currency.

Whether bitcoin will eventually evolve into a new global monetary standard remains to be seen. Ultimately; however, it cannot be denied that domestic currencies around the world are in trouble. By association, so are central banks. In a digital, globalized age in which consumers now have access to far more options, if a domestic currency no longer meets the needs of consumers and a viable alternative is available, central banks very well could see consumers turn toward such alternatives in droves.


1) Meet The Central Bank Official Who Has Become A Hero To Bitcoin Fans.

2) French central bank warns over bitcoin risks

3) Bitcoin, a threat to the central banks, banned in Russia