There has been speculation around the Government banning private cryptocurrencies. This thread will detail the real reason why the Govt and Central Banks are keen on banning it- threat to their sovereignty to formulate monetary policy & control money. Let’s dive into it. https://twitter.com/TierneyFC_/status/1362622569614962689

Before we discuss how it affects, it is important to understand the history of money, how central banks have misused the monopoly of money and how it affects us. A simple definition of money is anything that acts as a store of value, medium of exchange and is a unit of account.

Store of Value: Anything that stores value. It means that any good, which has value and which does not constantly depreciate over time is a store of value. Can it retain value for my future generation? If yes, it has a store of value. Gold is a classic example here.

Medium of exchange: Capable of being used as an intermediary to effect purchase and sale of goods. Can it efficiently effect transfer of goods and services? If yes, then it is a medium of exchange. INR is one, because we can freely buy & sell goods using our currency

Unit of account: Unit of account means measurability of a particular good/services in accordance with a commonly accepted good. For example, INR is a unit of account because it helps measure all goods and services in monetary terms. INR is also commonly accepted to measure

History of money:For as long as the history of mankind, humans have specialised in making one particular type of good. But, survival requires more than just one good. For this, the farmer will go to a shoe seller, for instance and exchange his grains for shoes. Barter system 101!

This system had two main issues. Indivisibility- one can’t use divisions of shoes to buy something; a shoe becomes worthless if it is divided. Coincidence of wants problem: what if the person from whom I want shoes, doesn’t need the grains I produce? This makes barter ineffective

Naturally, people then converged upon things which were precious, divisible and could solve the indivisibility and coincidence of wants problem. Things like salt, butter, milk etc. and even seashells. These were used to exchange and trade and that's commerce prospered

However, people realised that things like salt, butter, milk etc are perishable. These things do not have the store of value as described above. This made people converge to precious metals like gold, silver etc (particularly gold) to be used as a medium of exchange.

Gold was divisible (it can be melted and used in any quantity as wanted), has store of value and things could be measured in terms of Gold (on ounce for a loaf of bread etc.)

However, gold had a disadvantage in terms of it is costly to transport gold from its mines to places around the world. Currency and money has high velocity i.e. it changes hands quickly and for ensuring gold has such velocity was expensive.

What does the Government do? It stores gold at its “central warehouse” from where people deposit gold and obtain a receipt. This receipt is now traded in place of gold coz it gives a proof to the seller that the person who has the receipt had the gold currency. Sounds familiar?

Replace “central warehouse” with “Central Bank” (eg: RBI) and the receipts with the currency notes and we reach the next stage of monetary system- gold backed currency! Here, the amount of paper currencies that can exist is equal to the amount of gold the Central Banks hold.

This system existed till around the 1970s when the USA stopped the gold standard system. This led to a new system called fiat currency- it is called fiat because the currency has the backing of the Government. Other countries followed suit and now no country follows gold standard

This system gave Govt the autonomy to print as much money to finance their spending which increases money supply. An increase in supply=fall in the value of money= more units of money required to buy a good. Result? Price rise. This is how inflation works!

Look at the decrease in purchasing power here. Things have become costly over time and the money supply has increased. By virtue of laws, only the RBI in India can print currency and only the INR issued by RBI is the legal tender- can be used as money. Anything else is prohibited

Now let us see how private crypto currencies like Bitcoin will threaten the sovereignty of Central Banks in the future. Bitcoin is a digital asset developed in 2008. For more basic understanding, here’s a link. https://www.swanbitcoin.com/what-is-bitcoin 

Bitcoin’s supply is fixed by the software to 21 million bitcoins. The fixed supply gives it a massive advantage- it is not permanently inflationary i.e. unlike the fiat currency, it’s value cannot diminish forever because of its fixed supply.

To conclude, Bitcoin has a store of value (supply being fixed, it’s value will not diminish constantly) and can be used as a medium of exchange (once it gains popular adaptability) because just like a bank transfer, one can transfer one’s bitcoin in one’s wallet to another.

All in all, bitcoin is going to be better money if the central banks and governments are reckless. Check this out how citizens of Venezuela have rejected their currency for more stable currencies and also Bitcoins. https://www.bbc.com/news/business-47553048

The manner in which Central Banks have printed money has only increased income inequality. How? Increase in money makes the essentials costlier and drives the asset prices higher, as I explained above. The rich are rich not because they have money, but because they have assets

The assets are in the form of shares, bonds, real estate, gold etc. With increase in asset prices, their wealth increases. Meanwhile, the poor can afford to buy less of what he can yesterday and does not own assets. Hence more money supply = more inequality

The fiat currency simply does not have any store of value! This can be easily changed by Bitcoins in the future.
As we have seen in Venezuela, if situation goes out of hand, people will shun the state currency and exchange it for bitcoin or stable currency.

People shunning a currency is a direct threat to Govt and Central Banks .It will give reasons like Bitcoin is very volatile, it is used to finance illegal activities, scams etc. As if nothing of this sort happened prior to 2008!

So folks, these are just the reasons the Central Banks will come up with, but the underlying reason, as I explained is that Bitcoin and other cryptocurrencies will simply threaten the sovereignty of the Central Banks and Government.