Bitcoin: Opportunity for financial inclusion or door opener for criminals?

Bitcoin as an opportunity for developing countries?

In the year of the financial crisis 2008/2009, the idea of a new currency independent of government regulation came up for the first time. Bitcoin founder Satoshi Nakamoto, who is still anonymous today, laid the foundation for a variety of — more or less successful — cryptocurrencies by creating the first 50 Bitcoins and generating “Block 0”. However, the “mother of cyber currencies”, Bitcoin, in particular, has also been investigated or already used as an alternative to traditional fiat currency for some time. Be it as a payment method at retailers, online shops and restaurants or as an alternative to “conventional” national currencies.

Since June 2021, El Salvador has been the first country in the world to accept the cryptocurrency Bitcoin as an official means of payment. Retailers will be required by law to accept Bitcoin from autumn. Wages or taxes should also be able to be settled in this way soon. In the long term, Bitcoin is intended to reduce dependence on the US dollar, which has been the common means of payment in El Salvador since 2001. Because of the US dollar, the country is dependent on the monetary policy of the US Federal Reserve. In addition, around 70% of El Salvador's approximately six million residents have no access to traditional financial services such as bank accounts. Many depend on money transfers from their relatives in the USA, but some of them are subject to high fees. The Bank of America reports that cross-border transfers are around 24% of El Salvador's gross domestic product (GDP) turn off. The Bank for International Settlements (BIS) estimates that the average cost of such transfers is over 10%. That adds up to hundreds of millions of dollars a year that residents of El Salvador could save by using Bitcoin or spend with local companies.

However, the argument of financial inclusion is controversial. It is true that people without a bank account could also make payments with Bitcoin. However, Bitcoin, which is extremely volatile, does not provide access to secure savings options or other assets for meaningful, long-term wealth accumulation.

The decision to establish Bitcoin as legal tender in El Salvador was also met with harsh criticism from the International Monetary Fund (IMF) and the United Nations Economic Commission. They argued that Bitcoin was purely a means of speculation and not a suitable means of payment.

Bitcoin as an alternative to fiat currencies?

According to the IMF, there are several reasons for this: On the one hand, the Bitcoin price is subject to strong fluctuations. In 2021 alone, the cyber currency started at around 29,000 dollars, climbed to almost 50,000 dollars at the beginning of September, fell back to 41,000 dollars a month later and was trading at 67,000 dollars again at the beginning of November. This high, purely market-driven volatility, over which politicians have no influence, makes the cryptocurrency an unsuitable tool for macroeconomic stabilization in the country — according to the IMF.

On the other hand, consumers and companies would have to spend a lot of time and resources deciding on a currency if the prices for goods and services are given both in US dollars and in Bitcoin.

Speculators who regard Bitcoin as play money or even as an alternative to the “crisis currency gold” should not worry about the sometimes severe fluctuations in the Bitcoin exchange rate. But for Salvadorans and smaller, local companies, price declines can threaten the existence of them.

In contrast to fiat currencies, Bitcoin is likely to remain a speculative currency, as it is not suitable as a preserver of value and stability. This is because “money” in the traditional sense must fulfill certain functions so that it can be used as a means of payment. The three most important functions of money are the medium of exchange function, the function as a unit of calculation and the value storage function:

Die Exchange medium function requires that money can be reliably exchanged for other goods or services — which is not the case with Bitcoin due to acceptance problems and price fluctuations. Just as little as the Monetary stability, i.e. maintaining the purchasing power of money and the Unit of calculation function or the ability to measure and compare the value of goods and services in monetary units.

The dark side of Bitcoin

Experts also warn that cryptocurrencies such as Bitcoin could be misused for money laundering and other criminal transactions. For this and other reasons, China already has all Cryptocurrency-related transactions prohibited, with moderate success. Since cyber foreign exchange was born from the idea of withdrawing financial transactions from the state and its regulation, it is also losing its supervisory function. It is true that Bitcoin is often associated with transactions on the dark web and money laundering. However, crypto payments in Bitcoin are not as anonymous as is often assumed. Since the complete, historical cash book of transactions in the blockchain is publicly available, the people behind it can be traced back using complex payment transaction analyses.

Criminals are also using the pseudo-anonymity of Bitcoin to extort money. The advantage is obvious: Bitcoin is the most popular and accessible digital currency, which is why victims of extortion (ransomware attacks) can meet the demands of extortion relatively easily — all they need is a digital wallet in which the transaction is stored. The crux of this, however, is the exchange for a fiat currency: If a cryptocurrency is exchanged for real money, there are good access opportunities for investigators.

Crypto regulation and money laundering prevention

An important step towards decriminalizing Bitcoin took place at the beginning of 2020: In order to prevent money laundering with cryptocurrencies, the 5th EU Money Laundering Directive requires wallet providers and operators of crypto trading platforms to clarify the origin of the money. As a result of improved traceability and EU regulation, the Share of transactions with a criminal background The total transaction volume of all cryptocurrencies fell to just 0.34 percent last year, which corresponds to around ten billion US dollars. A year earlier, the figure was still 2.1 percent.

Bitcoin in its current form cannot currently be considered as alternative means of payment enforce. Unregulated cryptocurrencies lack the trust and substance due to their proximity to the criminal milieu, pronounced volatility and lack of acceptance.

Blockchain optimization potential

It has also been shown in the past that Bitcoin had to deal with scaling problems during the hype phase at the end of 2017. Based on Bitcoinblockchain The Lightning Network was therefore further developed as a protocol to improve scaling. Bitcoin has already developed more frequently to meet the requirements of a global mass-market means of payment.

The rapid development of software is not untypical, but a necessary and positive process: As with operating systems, smartphones or other digital devices, security gaps are closed and practicality or efficiency improved. Only when Bitcoin meets all requirements for a global alternative means of payment will the question of regulation continue to arise.

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Photo credit: Immediate Edge

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