Central banks, according to supporters, are critical to the economy because they assist maintain employment, stabilize prices, and keep the financial system running in times of crisis. Central banks, according to critics, have a negative impact on consumers and the economy and are to blame for crippling recessions. While Bitcoin has the potential to replace central banks, it has a number of flaws, including a finite quantity and a lack of legal status in most countries. #TWN
Central banks were instrumental in the creation of the 2008 financial crisis through their policymaking. Bitcoin was one of the reactions to the crisis (BTCUSD). Bitcoin can demolish a banking system in which central authority is accountable for decisions that influence the economic fortunes of entire countries, thanks to its decentralized system and peer-to-peer technology. However, the cryptocurrency has its own set of disadvantages, making a case for a decentralized system based on the cryptocurrency challenge.
Bitcoin solves three concerns in the context of a central bank-dominated financial infrastructure system:
In the first place, it eliminates the problem of double-spending. Each bitcoin is unique and cryptographically safeguarded, making it impossible to copy or hack. As a result, spending or counterfeiting bitcoin twice is impossible. Second, while being decentralized, Bitcoin's network is a dependable system. In this case, trust is an algorithmic construct. Transactions must be approved by nodes all around the world to be included in the Bitcoin network's ledger. A transaction can be disqualified from being recorded in Bitcoin's ledger even if only one node disagrees. Third, by expediting the process of producing and distributing the currency, Bitcoin's network eliminates the need for centralized infrastructure. Bitcoin may be generated at home by anyone with a complete node. Peer-to-peer transfers between two Bitcoin addresses on the blockchain do not involve the use of intermediaries. As a result, distributing cryptocurrency does not necessitate a network of banks chartered by a central authority.
However, Bitcoin's promise of economic independence comes with several caveats:
The first is the use of bitcoin as a transactional medium. There has been very few legally recorded bitcoin uses since it was made available to the general public. The cryptocurrency has garnered recognition as a preferred method of illegal activity and a speculative instrument. Second, Bitcoin's legitimacy as a payment method is unknown. Even though El Salvador has made Bitcoin legal tender, it remains the only country that accepts it as payment. Other countries, including the United States and China, have taken action against Bitcoin's infrastructure and users.
Finally, Bitcoin is a finite-supply, volatile currency. There will only be 21 million bitcoins mined. The use of bitcoin is severely restricted by a limit on the number of bitcoins in circulation. Cryptocurrency has become a popular speculative asset due to its scarcity. Its value changes dramatically, making it unusable in ordinary transactions.
Conclusion
Under the current economic system, central banks are in control of the modern global financial infrastructure. Central banks are used by the vast majority of governments around the world to control their economies. While a centralized system like this has some advantages, it also puts the power in the hands of a single authority and has resulted in severe economic downturns. Bitcoin's technology is based on algorithmic trust, and its decentralized approach makes it a viable alternative to the current system. On the other hand, cryptocurrency has a very low acceptance rate, and its legal status is unknown. Meanwhile, central banks have studied the possibility of releasing a digital currency using elements of Bitcoin's architecture and technology.
Central banks are more than likely to start introducing their digital currencies at this time (CBDCs). Many countries are studying CBCD potential developing CBDC pilot programs, and some are about to launch their official CBDC as of 2021. The Central Bank of Venezuela, for example, wants to establish its CBDC utilizing an SMS-based exchange in October 2021.
Bitcoin as of now will run parallel to central banks. With the introduction of bank-owned digital currencies, bitcoin has some competition to deal with. Let's see who stands victorious.