How do the different countries react to cryptocurrencies?

bitcoin China

It has been recently published the decision by the Central Bank of China of forbidding all the activities related with the cryptocurrencies. This decision affects not only the common transactions, but also the mining services and other activities. China has been fighting against these assets almost since their conception, but this time the ban was quite wider. Other countries such as Turkey or India are thinking about similar decisions against the cryptocurrencies. However, the case of El Salvador is quite the opposite. Let’s see the reason for these differences and how and why do countries react to cryptocurrencies the way they do.

Decision elements

First of all, we must analyse the economic context of every country. There are several elements to be taken into account in order to understand the governments and their decisions. Moreover, we will analyse the approach of two of the main players in the world policy, as USA and the Eurozone. Lastly, we will see what to expect from those economies where there is no regulation for cryptocurrencies. Let’s start by defining the basic elements which define the side of each country:

bitcoin

Official currency

The official currency of each country defines the official payment method for every transaction within its economy. It also defines the currency in which the salaries, prices and other variables are determined. The Central Bank of each country is who defines and controls the issuance and the interest rates. In some countries, the official currency belongs to a foreign Central Bank, in which case the local Central Bank has no control over it. The exchange rate of the currency will determine the price of imports and exports of the country regarding other countries.

In the case of El Salvador, the official currency (we do not count with Bitcoin, which was officially recognized one year ago) is the american dollar. This implies that the local authorities cannot decide any monetary policy, which depends on the Federal Reserve. However, China has the total control over its currency, the yuan, through the People’s Bank of China. This is also the case for the Eurozone and USA, who control the euro and the american dollar respectively.

The lack of control of the official money by the local authorities is a key element to understand the role of Bitcoin. Bitcoin was born with the clear goal to become a currency with neither public nor private control. If any country has no control over its currency and the monetary policy depends on a foreign Central Bank, then it is valid to think in the cryptocurrencies as an alternative. With cryptocurrencies, the control over the money remains far from public institutions, but there is a protocol which defines the issuance, the number of units, etc. Therefore, the behavior of the cryptocurrencies is more predictable for the economy and for the users.

Inflation

The sustained increase of prices in any economy is another element which determines its monetary situation. The inflation (positive inter annual increase of prices) implies a reduction in the purchasing power of the citizens. Over the time, the same money has lower value, which means that does not allow to purchase the same amount of goods and services. Thus, the higher the inflation gets, the more important will be to intervene in that economy.

In this case, El Salvador has an inflation rate over 7% in this year, while China is around 2% in 2022. Given the fact that El Salvador has no control over their official currency, the importance of controlling the inflation rate is even higher. In USA and the Eurozone, the inflation is over 8% and 10% respectively, which talks about the huge impact of the energy crisis and the military conflict in Ukraine. Both economies have a firm commitment to maintain the inflation rate around 2% in the long term, which is why they are applying severe increases to their interest rates.

inflation rate

Regarding the cryptocurrencies, the inflation is one of the reasons for their conception, so it is not so weird that countries with such a inflationary economy look for safer alternatives such as Bitcoin.

Economic development

The level of economic development is the last of the elements we should consider as determinant. There are several indicators to measure this element, and all of them are quite comparable among different countries. Let’s take, as an example, the per capita GDP. El Salvador is in the low part of the world records with 3.326€ in 2020. China, however, has a record of 9.211€ which almost triples the previous record. It is important to have in mind the size of China population, over 1.500 millions of people. The Eurozone and USA are also two of the strongest financial systems in the world.

When any financial system is sufficiently developed, several payment methods are able to coexist. If the level of digitization and financial inclusion is good enough, the cryptocurrencies will be compatible with cash money, credit cards, and any other form of private payment method. In this context, there will be no need of changing the official payment methods.

However, if the economic environment is not mature enough, the necessity for alternative methods such as Bitcoin increases. This is due to the fact that the cryptocurrencies are meant to be low cost, independent from economic policies and easily accessible by users. Theoretically, it seems the perfect alternative, but we will see that there are some disadvantages to be aware of. In fact, the general first reaction from most of the countries has been far from positive.

Cryptocurrencies around the world

China

China is, probably, the country with the most severe objections to the use of cryptocurrencies. From some years ago the authorities have been banning all the mining activities, and their last measure was to forbid the usual transactions among users. Despite these prohibitions, China is the second country in the world with the highest mining industry in Bitcoin. The have a good economic development, the inflation rate is under control and their own official currency is stable. With this context, it does not seem to be the ideal country where the cryptocurrencies can grow as the official payment method. However, the ban seems disproportionate. Then, what are the reasons that lead China to take this decision?

bitcoin China
  1. Electricity consumption – we already know how expensive is the mining process of Bitcoin in terms of energetic consumption. Given the fact that the energy is subsidized in China, Bitcoin mining means too much money for the government.
  2. Criminal activities – Authorities from China claim that Bitcoin is badly related to criminal activities and money laundering. Therefore, it is not difficult to guess why they want to ban it.
  3. Competition against the digital yuan – China is probably the country with the highest level of development for the project of their own CBDC, the digital yuan. On the other side, Bitcoin is perceived as a direct rival, so the authorities prefer to ban it.
  4. Social control – the previous arguments confirm two conclusions. On one side, China perceives the cryptocurrencies (and specially Bitcoin) as a costly asset for the government. On the other side, the cryptocurrencies make more difficult to maintain the control of the authorities over the economic flows.

El Salvador

El Salvador has a very different starting point than China. The official currency is the american dollar, the economic development is really low, and the inflation rate is significantly higher than 2%. Additionally, there is a key element for their economy, which is the dependency on the remittance from other countries. A cheap and fast payment method which allows to transfer and receive money could be very helpful. Thus, it is not strange than Bitcoin has become the new official payment method in the country, despite the opposite recommendations from several authorities all over the world.

bitcoin salvador

Additionally, the adoption of Bitcoin as a payment method can increase the level of digitization of the society. The cryptocurrencies require just one device with Internet access, which is more feasible in a country where only 30% of the population has a banking account. This implies a low degree of financial inclusion, which is the perfect context for alternatives such as Bitcoin.

On the other side, the fact that the current official currency is the american dollar does not imply any threat for Bitcoin. Neither the dollar nor Bitcoin are controlled by the local authorities, so the change implications will be minimum. Regarding the prices control, the government has claimed the creation of one fund to finance the interchange between both. This is meant to absorb the volatility of the exchange rate. However, it could be rebounded to the population as an increase of the tax pressure.

Eurozone

The Eurozone, with the European Central Bank in the first place, is one of the biggest financial system which still has not regulated against the cryptocurrencies. It is true that the authorities have alerted several times about their risks, but it was not until last year when the European Comission published the first draft of regulation. This regulation is MiCA, the draft of regulation for markets and cryptoassets issuance.

This regulation establishes the requirements for issuers and cryptoassets service providers. However, this is far away from adopting cryptocurrencies as payment method. In fact, it is almost impossible that this finally happens. The Eurozone has one of the stablest currencies in the world, and a high grade of economic development. Additionally, the inflation rate has been historically under control by the European Central Bank.

This means that the cryptocurrencies are not desirable for the authorities, and neither essential for the population. In fact, the European Central Bank is thinking about the possibility of issuing its own digital euro. This would imply the appearance of a new payment method which would make even more difficult the integration of the cryptocurrencies.However, the draft of the regulation will probably allow a growing use of them as part of the whole financial system.

United States of America

In USA, the economic context is quite similar to the one in the Eurozone. They are already studying the possibility of issuing their own digital dollar through the Federal Reserve. However, in terms of regulation, it was not until some months ago when they took the first step. The “Responsible Financial Innovation Act” tries to define the relation between USA and the cryptocurrencies, as well as to create a regulatory frame for digital assets.

Other

Apart from the mentioned above, most of the countries in the world have treated the cryptocurrencies with skepticism since their conception. They value their technology, but the idea of having a currency they cannot control is not attractive for them. Several of them are developing their own CBDC, although non of these projects are real yet.

Some other countries such as Turkey or India have banned the cryptocurrencies to protect their own currency. Some other are still waiting, as these assets are still in a very early stage. The truth is that the different reactions depend a lot on the economic context of every country. When you have your own stable currency, the cryptos are not essential, but there are a lot of countries in the opposite situation.

Conclusion

From all the above we can conclude that the reaction to the cryptocurrencies depends on several factors. Not only the attitude of the country, but also its economic context and the relation with other countries. The higher is your economic development, the lower your likelihood to adopt cryptocurrencies as payment method. However, cryptocurrencies may be allowed in all the countries as part of the new worldwide economic ecosystem.

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