At the time of its inception, Satoshi Nakamoto was looking to create a decentralised currency that was to act as an alternative to traditional fiat currencies. While traditional currencies have worked well in the past, they have had some challenges. One of these is their centralised nature. With the government, through central banks, controlling supply and demand, value is left in the hands of a few individuals. It means the whole country would go into an economic catastrophe from the mistake of these few individuals. Some point to the current money printing and inflation fears as the most recent example of this.
With cryptocurrencies, it is all about the market default nature of supply and demand.
So far, cryptocurrencies have done well and have continued to grow their network of users. They not only work as a medium of exchange but also as a store of value. Cryptocurrencies have edged traditional stocks as the asset of choice for the younger generation.
With such top operational success, there have been calls to replace the US dollar with Bitcoin as the world’s global reserve currency.
What is the issue with the current global reserve currency?
The US dollar has for the longest time served as the world’s global reserve currency. This stems from its place as the world economic superpower. Therefore, most of the world’s trade volumes and transactions are measured in the form of USD. Even most of the currency conversions come from the point of USD. At the same time, any country whose currency becomes compromised due to lost value tends to resort to USD as the best alternative.
While USD as the global reserve currency has come with stability, there have been various concerns. One of these issues is the ripple effects of the American currency losing its value. For example, since the start of the Coronavirus, the USD has not performed the best. Instead, it has struggled as the economy almost came to a standstill. The dollar was only rescued following various government intervention. This even meant printing more dollars.
However, these were only temporary measures. The current US economy is still in a slump with the government staring at a possible shutdown unless it raises the debt ceiling.
With the American economy suffering, the whole world is likely to take a hit given the dollar’s place as the global reserve currency. It doesn’t matter whether the individual jurisdiction economies are doing well or not. Also, all this time when USD has been struggling, Bitcoin has been performing its best. The coin has risen in value from the lows of around $4000 at the start of the Covid pandemic in early 2020 to hit highs of over $64,000 by mid-2021. Even though it had dropped to around $30,000 in August, it has already recovered and is currently trading at around $43,000.
The other concern with USD as the world reserve currency is the power it gives the US. It allows the US the economic sanction powers that it can use on any country that doesn’t meet some provisions. This means various countries have to follow the US’ rules or risk economic downfall from sanctions, which is akin to a dictatorship. Already some countries have been sanctioned by the US for various reasons.
With no risk of sanction or control, Bitcoin as the global reserve currency seems the only way out.
Why Bitcoin can serve as a global reserve currency
After establishing the failures of USD as the global reserve currency, it is crucial to understand why Bitcoin as a reserve currency seems like a viable idea.
Bitcoin comes with various functionalities that make it ideal as a global reserve currency. These include:
-
Acts as a hedge against inflation
Inflation is one of the top results following the economic crisis. Various economies are currently struggling with inflation following the coronavirus pandemic. Some countries are experiencing hyperinflation with the Nigerian Naira losing more than 50% of its value within the past few years. It is likely to get worse as the country also struggles with increased unemployment and other economic issues.
While Naira has been losing value, Bitcoin has been increasing in value. This is similar to several other countries. Instead of keeping the fiat currency that is losing value, they can opt for Bitcoin. Already some workers prefer to get paid in crypto due to inflation concerns. If such trends continue then Bitcoin as a reserve currency could become a reality.
-
Elimination of currency conversion
With every country having its unique currency, cross-border transactions and remission have been an issue. Traders who depend on cross-border transactions have to convert currencies that are costly and time-consuming. Also, those sending money back to their countries of origin lose money through conversions.
Bitcoin being a global currency, there is no need for conversion. It is an instant transaction without losing any bit to other third parties.
-
Decentralisation
Unlike the USD that has the American government calling the shots and directing all the other nations, Bitcoin has no controlling authority. Instead, it is a network made of various nodes and users. Any changes must be approved by the community and no single person can control the value or stop other countries from using it due to nonconformity to some rules.
With Bitcoin as a global reserve currency, all countries get an equal chance at trading opportunities. This can mean more economic growth as countries don’t have to deal with economic control and limitations from the US or other superpowers.
The case against Bitcoin as a reserve currency
While there are various reasons why Bitcoin would be ideal as a global reserve, there are also some shortcomings. These include;
-
Volatility
The volatile nature of bitcoin is one of its main undoings. One of the reasons why the USD has excelled for the longest time as the reserve currency is stability. While most assets and other currencies have been undergoing massive changes, the USD has remained as the benchmark from which they can use as a focal point. It only takes a massive economic meltdown like the 2008 economic crisis or the coronavirus pandemic to unsettle the dollar.
The same stability cannot be said of Bitcoin. Its value changes so much that you are never sure of your portfolio value. As a growing currency, these values will keep on changing for the foreseeable future. This means not everyone will be on board with using BTC.
-
Security
The other concern with Bitcoin is the limited security. The USD is such a secure currency due to the vibrant US financial system. The regulatory authority manages everything in the financial sector to ensure the security of consumers. Bitcoin on the other hand is a decentralised currency without a single authority. It, therefore, comes with the risk of use for illicit transactions.
Having gained mainstream acceptance, Bitcoin’s regulatory framework has been increasing. Various countries already treat it as a recognised asset and medium of exchange. In the US, the Securities and Exchange Commission (SEC) claims that exchanges providing BTC services must follow the traditional stock exchange guidelines. Still, these are not enough, as Bitcoin use in various jurisdictions remains unregulated.
-
The rise of the CBDCs
The other issue that makes it hard for Bitcoin to go through as a reserve currency is the emergence of the central bank-backed digital currencies (CBDCs). These are the digital versions of fiat currencies.
As most people embrace digital currencies, the CBDCs eliminate the stability concerns that BTC comes with. At the same time, users can experience the instant cross-border transactions that come with blockchain technology. Already, various countries are in the advanced stages of testing their CBDCs. When they become viable, some countries might even ban Bitcoin. There are indications that China’s crypto crackdown was fueled by the need to launch the digital Chinese Yuan.
Bitcoin’s case as a global reserve currency FAQs
What is the current state of Bitcoin as a reserve currency?
So far, Bitcoin’s place as a global reserve is not assured. To become a global reserve currency, Bitcoin must be recognised as a national currency by multiple countries. It should also be recognised by various trade blocks like the European Union. For now, only El Salvador has recognised Bitcoin as a national currency. However, it is still experiencing challenges in the implementation. The other countries using Bitcoin are predominantly trying to evade sanctions.
Will Bitcoin become the global reserve currency?
All the above discussion all boils down to one question, will Bitcoin be a global currency? Given crypto’s status is still developing, it’s hard to tell. At one point it seemed like it was only a matter of time before Bitcoin became a global reserve currency. This was when the traditional economy was struggling while the crypto was booming. It seemed as though digital currencies were the only viable future. However, all this changed with the introduction of CBDCs. They come with current fiat currencies, stability, and the features of the cryptocurrencies. Therefore, it’s unclear if Bitcoin will become a global reserve currency.
