Several regulators have increasingly warned crypto could undermine the USD’s reserve currency status. Find out the reasons behind those claims.
Bitcoin has experienced meteoric growth over the last few years to become the most prominent cryptocurrency. Its value has soared to all-time highs as people discover it can serve many real-world uses. Bitcoin primarily serves as an alternative transaction currency, but it is also a lucrative store of value, with better resilience to inflation.
Bitcoin’s steady rise and global mass adoption have got many government regulators worried it could destabilize national currencies and even eventually replace the US dollar as the world’s reserve currency. They have called for nations worldwide to watch cryptocurrencies rise closely to ensure that does not happen.
However, many questions still linger about Bitcoin’s ability to challenge the US dollar’s reserve currency status. Although many investors and crypto enthusiasts have long hailed Bitcoin as a better alternative to fiat currencies, traditional market experts suggest otherwise. They are confident Bitcoin will not outdo the USD to become the next reserve currency.
Why Bitcoin May Not Replace the Dollar
The USD is currently the world’s reserve currency and has been that way for many decades. Various reasons exist why no other money has been able to challenge the USD’s reserve currency status successfully. Here’s why Bitcoin is not likely to become the next reserve currency.
Lower Market Capitalization
Bitcoin undoubtedly possesses the main qualities of money. However, its supply is limited to 21 million tokens only. Miners have currently mined almost 90% of that amount, circulating in the market. That means it won’t take long before miners attain the 21 million Bitcoin market cap. Then, Bitcoin’s price will have spiked through the roof.
Nevertheless, Bitcoin’s market cap is still meager compared to the USD. Even the entire crypto market cap is still tiny compared to the USD. Thus, Bitcoin and crypto cannot effectively function as the world’s reserve currency.
No Central Authority
The world’s reserve currency must have a central authority, like the US Federal Reserve, regulating the USD’s supply and usage in global economies. However, Bitcoin is a decentralized currency without any central entity. Instead, it runs on a decentralized blockchain network that validates transactions and mints new coins based on the Bitcoin protocol.
Bitcoin operates in an unregulated market, making it extremely difficult for government authorities to monitor transactions. Besides, its transactions do not involve intermediaries. Bitcoin operates in a completely different environment, bypassing the barriers in the traditional systems. However, government regulators are pushing back.
For example, the US President, Joe Biden, signed a controversial bill in 2021 that will now require businesses such as Bitlq to disclose customers’ names, addresses, phone numbers, capital gains, and losses to the Internal Revenue Services, 2023. The new bill will also require individuals or companies receiving crypto payments worth more than $10,000 to reveal the sender’s identity to the government.
Bitcoin currently operates in a decentralized ecosystem, but regulatory pressures have been building up over the years. Nevertheless, Bitcoin’s decentralization is why it facilitates seamless, low-cost and secure cross-border money transfers. Introducing regulations would only interfere with Bitcoin’s ecosystem, impacting numerous transactional risks and higher fees.
Relatively Lower Mainstream Adoption
Several corporations, businesses, merchants, and individuals worldwide currently use Bitcoin as payment and an investment asset. However, the adoption has mainly been among medium to small enterprises, with many mainstream institutions still skeptical about crypto. Bitcoin can only function as a reserve currency if the mainstream government and private institutions adopt it. That would take time, based on the current statistics.
Bitcoin has tremendous growth potential, but it has a relatively lower mainstream adoption and faces growing regulatory pressures that make it unfit to serve as a reserve currency.
