Central Banks in some parts of the world have banned cryptocurrency from their financial institutions.
The Central Bank of Nigeria, for example in 2021, revealed in a statement the ban of these digital assets in all financial institutions. This led to the use of peer-to-peer platforms to perform crypto transactions.
The decentralized system in Cryptocurrency has made it possible to bypass government or Central Banks authority.
It is important to know that the central bank through its policymaking played a key role in manufacturing the 2008 financial crisis. Cryptocurrency however came to be as a result of this as Bitcoin was created in 2008.
Bitcoin has been said to have the potential to dismantle a banking system. As it has been seen as a future currency, it is, therefore, important to ask if it can kill central banks.
What are the roles of central banks in an economy?
Central banks play an important role in the economy of a nation. Its policymaking always underpin the global financial system. The roles of a central bank are listed below-
1. Central banks make use of the monetary policy to achieve their mandate. This can be used to manipulate the money supply and interest rates.
2. This apex bank have an effect on imports, exports, and overseas investment. For example, its interest rates can make or mar investment of a nation with foreign entities.
3. Central banks also use a network of banks to distribute money in an economic system. In that regard, they coordinate the affairs of all financial infrastructure.
How does cryptocurrency differs from financial system dominated by central banks?
Cryptocurrency such as Bitcoin is seen as an alternative to central banks based on economics and technology. It is also seen as a way of solving the problem with central banks which are listed below.
1. Cryptocurrency helps to eliminate the problem of double spending. Each BTC is unique and cryptographically secured so can’t be hacked or replicated. You cannot spend a crypto coin twice like you do to a physical money issued by central banks.
2. Even though cryptocurrency is decentralized, it still a trustworthy system. Its trust is based on the network with which it is made. For example, transaction of Bitcoin’s network have to be approved by nodes spread across the world to be included in its ledger. Even a single disagreement by a node can make the transaction ineligible for inclusion in BTC’s ledger.
3. A crypto’s network makes it impossible to make use of a centralized infrastructure. This is done by streamlining the process to produce and distribute the currency.
What are the issues with use of cryptocurrency with central banks?
The economic independence promised by cryptocurrency comes with several issues. They are listed below.
1. Crypto status as a medium of transaction is not fully accepted. Crypto assets have gained notoriety as a favorite for fraud as an instrument for speculation.
2. Crypto’s status as a medium of legal transfers is yet to be ascertain. Only El Salvador has made Bitcoin a legal tender while several other nations of the world have cracked down on its infrastructure and users.
3. Cryptocurrencies volatility has also been a major concern. As for BTC, it is limited in supply as 21 million coins will only be mined. The scarcity therefore make it an attractive asset for speculation.
Can Cryptocurrency really kill central banks?
Cryptocurrency has one way or the other influenced central banks. Central banks have adopted elements of the cryptocurrency to design their own digital currencies e.g eNaira designed by the Central bank of Nigeria.
This adoption of elements of crypto by the central bank shows that it can bend to be at the helm of the modern global infrastructure. Majority of countries around the world use central banks to manage their economies which seems to be unchanged.
The issues with cryptocurrency such as adoption rate and legal status still make it behind financial systems controlled by the central banks.
The fact that central banks have co-opted element’s of crypto design and technology to explore the case of a cryptocurrency has made it a giant in the financial industry.