Does Bitcoin Threaten The Dollar?

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There has been talk about whether or not Bitcoin will become a threat to the US dollar at some point and whether or not the government will ban it or make using it as difficult as to have just has well have banned it.

I found an article on CNBC where the head of the St. Louis Federal Reserved President James Bullard expresses his views on the matter.

Let's hear it from the horse's mouth:

“I just think for Fed policy, it’s going to be a dollar economy as far as the eye can see — a dollar global economy really as far as the eye can see — and whether the gold price goes up or down, or the bitcoin price goes up or down, doesn’t really affect that,” Bullard said on “Squawk Box.”

The role the US dollar plays in international trade and as a reserve currency is so huge that we're a very long way off Bitcoin taking on that role even to a small degree.

Bullard, who has led the St. Louis Fed since 2008, expressed concerns about widespread transactions using a range of cryptocurrencies that are not issued by governments. “Dollars can be traded electronically already, so I’m not sure that’s really the issue here. The issue is privately issued currency,” he said.

Before the Civil War, it was common for banks to issue their own notes, Bullard said. He likened it to Bank of America, JPMorgan and Wells Fargo all having distinct brands of dollars. “They were all trading around and they traded at different discounts to each other, and people did not like it at all,” he said.

Bullard's concern here is not about the government losing control or anything like that. It's more along the lines of the impracticality of having different currencies being used, which is why I also do not think we're going to see cryptocurrencies being widely accepted as means of payment in everyday economy. None of them are legal tender in the US. Instead, they're being treated as property which means they're subject to capital gains taxes. Accepting cryptocurrency as payment is a big hassle from an accounting perspective for both the merchant and the customer. This is why there exist credit cards issued by cryptocurrency providers like Binance that allow for cryptocurrencies held by the provider on behalf of customers to be used to top up fiat balances on a credit account.

“I think the same thing would occur with bitcoin here,” Bullard said. “You don’t want to go to a nonuniform currency where you’re walking into Starbucks and maybe you’ll pay with ethereum, maybe you’ll pay with ripple, maybe you’ll pay with bitcoin, maybe you’ll pay with a dollar. That isn’t how we do this. We have a uniform currency that came in at the Civil War time.”

I agree with this. Fiat is a very good means of exchange.

When considering whether cryptocurrencies present a threat to the dollar, Bullard stressed there’s nothing new about competition. It’s something that has gone on for centuries, he said. “It is a currency competition, and investors want a safe haven. They want a stable store of value, and then they want to conduct their investments in that currency,” the St. Louis Fed president said.

Bullard also stated that it will be difficult for any currency that is more like gold to successfully outcompete and supplant a currency like the US dollar.

It is important to remember that money has not only plays the role of a means of exchange but the roles of unit of account and store of value. I believe cryptocurrency will mainly be used as a means of exchange and unit of account in the crypto space on blockchain platforms. Some cryptocurrencies, mainly Bitcoin, will be used as a store of value.

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