Why is cryptocurrency so threatening for some governments?
The adoption of Bitcoin as legal tender in El Salvador is a monumental event and many traditional institutions would like to see it fail, writes UNSW Business School's Eric Lim
There has been more than an inkling of rumblings that suggests many people have lost faith and trust in our institutions: institutions upon which traditional society relies to function and interact with one another. At a more fundamental level, this phenomenon stems from the loss of our ability to account for value within society. Because the attribution and accounting of value to every single action and behaviour within our daily lives is so fundamentally crucial to how our economy and society could properly function, this loss has driven individuals to lose their ability to make sense of an increasingly complex and nuanced globalised society.
As a society and driven by the proliferation of social media platforms, we are increasingly attributing hidden values in important decisions that have massive impacts on our lives. If you have ever wondered or questioned how and why a government awards their multimillion-dollar contracts or inject investment to one company and not to another, or to one industrial sector and not to another, you are essentially questioning why a specific organisation or an industrial sector is deemed more valuable than others. The biggest catalyst came from the 2008 financial crisis when the US federal government decided to bail out numerous financial institutions through quantitative easing measures.
Where there exists such a clear path (whether we admit it or not) towards becoming a winner and getting a juicy slice of the pie in such a system by pandering to the wishes or playing to the agenda set by these specific entities, we cannot then blame individuals when they stop trusting their internalised accounting system they have traditionally used to evaluate the decisions made by these institutions.
Don’t get me wrong. The above examples are not a judgment or a morality argument but rather a demonstration of the premises that lead us to the common denominator that lies with the fundamental power of a central government to heavily influence the monetary policy within our society – that leads to its subsequent ability to pick and choose winners through its fiscal policy.
Decentralising fiscal control through cryptocurrencies
Now, how does this relate to cryptocurrencies? The cryptocurrency space poses a fundamental question and a very inconvenient one at that. It asks the question of whether we can remove the power from the government to influence our monetary policy. Can we take the government out of the equation to influence the central bank to decide on when and how much money to print and circulate?
Once you understand the question being asked, you can start to understand what is at stake based on the examples above. You can also understand why there is such an intense level of criticism leveled at the cryptocurrency space and also where these criticisms come from. The existence of cryptocurrencies, especially the original cryptocurrency Bitcoin since 2008, is an antithesis to the current limitations to how we can imagine our society and economy. It removes the stopper or training wheels to our thinking that we need an entity that is infinitely more intelligent to decide for us what is valuable in our society, even when the accounting model stops working. Cryptocurrencies that are built on blockchain technology are built on the premise that a community can decide for itself what is valuable to them.
For instance, Charles Hoskinson, the founder of the Cardano system, offers up the thought experiment about how we could solve our environmental problems. He posits that if we could recreate money that has different time references, such as today-dollars and future-dollars. The former could be used to purchase perishable goods such as groceries and daily essentials that are not luxury in nature and could be earned through conventional means as what we have been doing. Luxury items, however, could only be purchased with the latter and could only be earned if we could create value that would conceivably benefit someone 100 years (or longer) later. He argues that if we could build conditions into such currencies governed by immutable rules, we could align incentives with any kind of human behavior that will have different time references.
Why governments are watching Bitcoin in El Salvador
To pay homage to the coin that started it all, Bitcoin is more than just a technology. It is an ideology and that is the reason why Satoshi Nakamoto refused to reveal his/her identity. A human is flawed and could easily be brought down through human weaknesses. An ideology is enduring and removed from being conflated with human weaknesses. Bitcoin essentially denotes that value comes from pure energy and only through the proof of work and input of energy and electricity, value can be created.
In the fiat world, the effort and time we put into our work to convert into fiat money can simply become worthless when a high enough level of inflation sets in times of loose monetary policy. It unfairly penalises savers who, through no fault of their own, are left with less than what they worked for. Bitcoin has shown since 2008 that it is robust, and its existence is not going away and that a store of value could exist independent of a central entity.
Therefore, the adoption of Bitcoin as the legal tender in El Salvador is such a monumental event and could serve as a trigger for the rest of the dominos to fall. That is why the reaction and criticism and the desire from traditional institutions to see it fail are so strong. Because if El Salvador succeeds, the world and life as we know it could change forever.
Dr. Eric Lim is a Senior Lecturer in the School of Information Systems and Technology Management (ISTM) at UNSW Business School. His research interests focus on exploring the impact of digitalisation on individuals, organisations and the broader society, with a focus on the design and innovation of digital services across a variety of contexts such as crowd platforms, fintech and healthcare.