If people use bitcoins, instead of the state currency, the government can not "tax" them or give a "value" through the inflation "tax"
The key to its success is something called the blockchain. The blockchain is a means of solving the double-spending problem: which is that because the currency is digital it is open to being copied and spent more than once - something banks stop with physical currency.
However, the blockchain acts as a digital ledger, whereby every single transaction (called a block) is securely linked together using cryptography and encryption. It's verifiable, available to everyone who owns Bitcoin and is immune to fraud and hacking - unlike centralised banks.
It enables one digital wallet (that can be stored on a phone) to directly connect with another securely and process a transaction.
If virtual currencies are so good, why are so many governments with the flea behind their ears? The Chinese government is embarking on a crusade against bitcoin. In India, the situation is not much different. There are other examples. Because?
The potential benefits of crypto-coins are real. Governments around the world are full of debt. Many of them will hardly be paid. Brazil( My country) is not an isolated case. Europe has a very serious social security problem. Governments promised worlds and funds. But their populations are aging. And, at the same time, fertility is falling. The account will not close.
What does a government do when it does not have the money to pay? Sell tomorrow's lunch to pay for today's dinner. Some governments have been able to play this game for decades. So the scheme is so attractive.
For governments that manage to issue debt in their own currency, gambling is even more interesting. If or when investors are unwilling to hold public debt securities in the portfolio until their maturity, these governments that take debt in their own currency may call for creative mechanisms to "monetize" debt.
To "monetize" public debt, the key is to give liquidity and certainty attributes that equate government bonds with monetary instruments. For example, governments do this with funds from the Money Market. The key is always to find ways to get people to use government bonds as "money."
But there comes a time when lenders lose confidence and stop rolling over debt. What's up?
Here governments can issue money directly. They can finance their debt with monetary printing. It's a default of a different kind. The trick is inflation. Today, you have $ 100 in your wallet. With that money, buy ten packets of a wafer. If the price of the wafer package doubles, you will still have $ 100 in the wallet. But your buying power will fall by half.
What if you have a government debt bond instead of a $ 100 bill (or deposit)? In developed countries, government debt is not indexed. So inflation works, solve the problem of the Treasury.
But in others (as in Brazil), there may be indexation. Then the government bond will pay inflation for the period + x%. How to pay off this debt? It is only passing a law changing the rule of correction of the titles. Or make a compulsory loan. Or freeze deposits. Or make a board. There will always be a cunning economist and a good talk advocate to wrap the fish. And it's not just in Brazil!
This is where the magic of cryptos begins to function. If people use bitcoins, instead of the state currency, the government can not "tax" them or give a "default" through the inflation "tax". State tricks do not work with bitcoin.
This is the first reason why having crypto-coins may be a good idea: it is insurance against government insolvency. Since the world is a world, governments break down periodically (especially after losing a war - more on the subject, below). Having crypto (especially a bitcoin type crypto), as well as having physical gold, is insurance against state insolvency.
But the advantages of cryptos exist not only for moments of catastrophe or crisis. Cryptos have advantages also in times of normality. They are, in principle, safer and cheaper than other forms of payment.
Crypto operations cannot be undone. You are not at risk of having your credit card cloned. The transactions are settled immediately in the blockchain. There are no fees. And it is possible to implement smart contracts schemes that better lubricate human collaboration. Wonderful!
There is more: today there are more than 2 billion people with access to the internet or smartphones. And the number just grows. The advantages of crypto-coins are then extended to all this sea of people! And it is possible to include - banking, bring into the 21st century - an even larger contingent of people. Is not it great?
In the view of governments, it may not be. There are four main challenges: monetary policy, taxation, exchange, and systemic risk.
Monetary policy. Without a national currency, in times of crisis, the government can not finance its debt via monetary printing. Imagine a farm minister from a country where the money is lacking for everything. If things get too tight, there's only one way: to get the mint gang to work ... But if people's savings are in bitcoin, that old technique will not work!
In case of war, the impossibility of using monetary printing can have a dramatic dimension. Historically, warring governments have had to print money because it is never possible to raise taxation too quickly in too short a time. It is good to sow peace in the world. But from the point of view of national states, monetary printing has always been seen as a dimension of national sovereignty to deal with external aggression.
Taxation. Modern governments are brutal spenders. You may think this is good - after all, the state of social well-being is expensive but it delivers health, education, transportation ... Well, in Brazil it's not quite like that. In international comparison, our state spends a lot, and it spends very badly. But let us leave this Brazilian "detail" aside. The fact is that governments of social welfare are expensive.
Well, how to pay the bill? A party may eventually be thrown into the lap of future generations via state indebtedness. But the bulk has to come from today's taxation. It is here that the crypto-coins put the rulers of hairs on their feet. Crypto-coins can make it difficult for state taxation. Mainly because they can be used to launder money.
Some say that this type of problem can be remedied with measures such as those recently adopted by the Federal Revenue Service. Globally, the Libra of Facebook, when it comes to work, will have to facilitate the tracking of the identity of the holders of Libras. Will it work? Can be. Time will tell. But the fact is that governments are animals hungry for people's resources. It's hard to hold them.
Exchange. The exchange rate, after the basic interest, is the main price in an economy. To value it, devalue it, revalue it, this is the breadwinner of many government economists around the world. (A joke says that the exchange was invented to humiliate economists because controlling it and predicting its fluctuations is so difficult.) But the fact is that the implementation of all these challenging activities is easier as long as the state currency is used by all. What if she is not?
Notice that in Brazil we have exchange controls. It is no longer the madness of the military time, when even to buy dollars to go to Bariloche with the family on vacation the Brazilian citizen had to make guts to buy the rationed currency ... And everyone ended up in a doleiro. Things have changed. But there are still various controls and barriers. Will, the government gives them up?
Systemic risk. This problem is more subtle and the analysis depends on the type of cryptocurrency. Think of the Libra (in the case of bitcoin the analysis would be quite different). This is a stable coin managed by Facebook. From what has been announced, the Pound will work with full ballast. That is, Facebook will create a Pound only when it receives the corresponding state currency. Very good.
But the problem is that the settlement of Libras operations will have to be done through digital wallets. Will these digital wallets work like banks? Will they resolve to give credit based on the floating of deposits received? If this happens, the systemic risk focus that is on banks today will simply migrate to digital wallets. What if digital wallets break: who will bail them out? The Seventh Cavalry?